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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 90404
SANTA MONICA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
(310) 460-0040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference and Part III of this Form 10-K or any amendment to
this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
determined by Exchange Act Rule 12b-2). Yes | | No |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 30, 2003, the last business day of the registrant's most
recently completed quarter was approximately $31,819,000 (based on the closing
sales price of the registrant's common stock on that date), and at February 13,
2004 was approximately $24,432,000.
The registrant had 15,738,442 shares of common stock, par value $.001 per share
outstanding at February 13, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
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Part III of this Form 10-K incorporates by reference information from the
Registrant's Proxy Statement for the 2004 Annual Meeting of Stockholders to be
held within 120 days of the end of the fiscal year ended December 31, 2003.
FORWARD LOOKING INFORMATION
This report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward
looking statements relate to matters such as the Company's future operating
results, the success and longevity of its licensing program with Target in the
United States, Hudson's Bay Company in Canada, and other licensees, the
Company's success with operating its newly acquired Modern Amusement assets, the
Company's ability to meet its liquidity needs, and the outcome of the Company's
legal proceedings. Such forward-looking statements are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. The words "anticipate",
"believe", "may", "estimate", "plan", "expect", "future", "intend", "will",
"should", "continue" and similar expressions, variations of such terms or the
negative of such terms as they relate to the Company or its management when used
in this document, are intended to identify such forward-looking statements. Such
statements are based on management's current expectations and are subject to
certain risks, uncertainties and assumptions, including those described in
"Business - Risk Factors". Should one or more risks or uncertainties
materialize, or should underlying assumptions prove incorrect, the Company's
actual results, performance or achievements could differ materially from those
expressed in, or implied by such forward-looking statements. The Company's
future operations, financial performance, business and share price may be
affected by a number of factors, including a termination or adverse modification
of the Company's license relationships with Target and others, changes in
consumer demands and preferences, competition from other lines, risks generally
associated with product introductions and shifting trends in the overall retail
and apparel retailing markets and the other factors described in "Business-Risk
Factors." Accordingly, undue reliance should not be placed on these
forward-looking statements.
Forward looking statements include known or unknown risks and
uncertainties that may cause our results, performance and stock price to be
materially different from the forward looking statements. In particular, the
forward looking statements in this Form 10-K include, among other things,
statements regarding or expectations about our future revenues and earnings, and
the outcome of our litigation with a third party regarding commissions payable
on revenue derived under the Target agreement.
ITEM 1 - BUSINESS
GENERAL
Mossimo, Inc. (the Company) is a Delaware corporation formed in
November 1995, and presently operates as a designer and licensor of apparel and
related products. A substantial amount of the Company's operations relate to an
agreement with Target Corporation ("Target").
The Company entered into a multi-year licensing and design services
agreement with Target in March 2000 which was subsequently amended in April
2002, and in February and June 2003 (hereinafter 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 branded products sold in the United States. The Company, therefore
can not enter into any other wholesale or retail licensing agreements in the
United States with respect to the Mossimo brand.
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 that varies according to the
volume of sales of merchandise. Target had agreed to pay minimum guaranteed fees
of approximately $9.6 million annually. Target fees are based on net sales
achieved multiplied by a rate, as defined in the Target Agreement. The Company
pays a 15% 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. The next renewal option could be exercised by Target
on or before January 2005, this renewal option could extend the Target Agreement
thru January 2008, if it is exercised by Target.
In addition to the Target Agreement, the Company also licenses its
Mossimo trademarks and provides design services outside of the United States,
and also licenses its Mossimo trademarks for use in collections of eyewear and
women's swimwear and body-wear sold in Target stores in the United States.
2
In May 2002, the Company entered into an exclusive agreement with
Hudson's Bay Company. Under the agreement the Company provides product design
services, and licenses the Mossimo trademark to Hudson's Bay Company for
exclusive use in Canada. The Company receives 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 branded product in mid-March 2003 for distribution through its Zellers
stores in Canada.
In January 2004 the Company acquired substantially all the assets of
Modern Amusement LLC through a wholly owned subsidiary, Modern Amusement, Inc.
("Modern Amusement"). Modern Amusement will design, merchandise, source, market,
sell and distribute wholesale apparel and related accessories for young men and
young women. The "Modern Amusement" registered brand is principally focused on
premium west coast-lifestyle apparel and related accessories. The products are
offered at moderate to upper price points thru traditional specialty store and
better department store distribution channels. This line of business is expected
to diversify the Company's current design and licensing business of its Mossimo
brand product thru mass retail distribution channels.
DESIGN AND MERCHANDISING
The cornerstone of the Company's business is its ability to design
products embodying the image of a contemporary, active, and youthful lifestyle.
The Company's designs are inspired by subtle changes in culture and society
including such areas as music, television, cinema, architecture and other forms
of artistic expression, and appeal to the contemporary consumer. The work of the
Company's design staff reflects the Company's fashion conscious consumer as they
consistently monitor changes in fashion, style, culture and society, and develop
designs that interpret such trends considering the targeted consumer group. The
Company's product design and merchandising services provided to licensees, along
with the right to approve design, advertising, and promotional materials are an
important aspect for continuity of product quality, maintaining and enhancing
the Company's distinctive image and the value of its Mossimo trademark.
PRODUCTS
MEN'S, WOMEN'S AND CHILDREN'S APPAREL AND ACCESSORIES. Mossimo branded
apparel encompass a variety of products, including: knit and woven tops
(including polo shirts and collared, button-down shirts); outerwear, including
sweaters and jackets; denim and related products, including jeans, shirts and
jackets; dresses; pants; screenprinted and embroidered sweatshirts and
tee-shirts; and shorts. These products are designed exclusively for distribution
under the Company's licensing agreements (Target in the United States and
Hudson's Bay Company for distribution through Zellers stores in Canada). The
initial Target licensed product lines were launched in Target's stores in the
Fall of 2000 and through Zellers stores in Spring of 2003. The Company
complements its apparel product lines with footwear and other fashion
accessories such as jewelry, watches, handbags, belts, neckwear and gloves.
HOME PRODUCTS. In Canada the Company has expanded its Mossimo branded
product line to include home products such as towels and sheets, as well as a
complete line of kitchen, bedroom and bath soft good products and accessories.
These products were launched thru Zellers stores in Spring of 2003.
OPTICS LINE. The Company has an exclusive license agreement with the
Marcolin Group for the production and distribution of the Mossimo branded
product line of eyewear, including sunglasses, sport glasses and optical frames.
Marcolin sells Mossimo branded eyewear through specialty retail stores such as
opticians, optical chains and specialty eyeglass and sunglass stores. This
agreement, however, permits Target to sell Mossimo branded eyewear in Target
stores. The license agreement extended through December 31, 2003, and is in the
process of being renewed. Over the past three years, the Company has recognized
annual revenues in the range of $150,000 to $200,000 that might be at risk in
the future if this agreement is not renewed.
WOMEN'S SWIMWEAR AND BODYWEAR. The Mossimo branded product line of
women's swimwear and bodywear is manufactured and distributed through Target
stores in the United States under an exclusive license agreement with The Lunada
Bay Corporation. The high quality swimwear products include one-piece and
two-piece swimsuits which are fashion-oriented and targeted towards
youthful-minded, body-conscious women. The line of women's body wear is a
collection of fashionable fitness active wear which is designed and manufactured
using materials such as lycra, tactel and flexcel nylon that stretch and
compensate for body movements during strenuous exercise. The license agreement
extends through September 30, 2004, and is renewable annually.
MODERN AMUSEMENT BRANDED PRODUCTS. Modern Amusement is focused on
design and distribution of premium branded west coast-lifestyle casual
sportswear apparel and related accessories for young men and young women under
the Modern Amusement trademarked brand.
3
The Company operates in one principal business segment across domestic
and international markets. International sales are primarily made through the
Company's licensees in their respective territories.
SOURCING, MANUFACTURING, AND DISTRIBUTION
Substantially all Mossimo branded products are sold in the United
States through Target. The Target Agreement provides that Target is responsible
for product development, sourcing, manufacturing, quality control, distribution,
and inventory management.
The agreement with Hudson's Bay Company in Canada for Mossimo branded
products includes sourcing, manufacturing, distribution, and inventory
management provisions similar to the Target Agreement.
The Modern Amusement business includes sourcing manufactured products,
distribution, and inventory management of apparel and related accessories under
the Modern Amusement trademarked brand.
MARKETING AND ADVERTISING
The Company has developed a distinctive image of a contemporary,
active, and youthful lifestyle and strives to maintain consistency through the
coordination of product merchandising, advertising, and marketing promotions.
As a result of the Target Agreement, the Company primarily relies on
its licensees to advertise the Mossimo branded product and intends to continue
to promote a positive brand image through licensee-sponsored advertising and
marketing promotions. Under the terms of the Target Agreement, the Company has
approval rights for marketing and advertising materials.
The agreement with Hudson's Bay Company in Canada includes provisions
for licensee-sponsored advertising and marketing promotions of the Mossimo
branded product with Company approval rights similar to the Target Agreement.
The Modern Amusement business includes marketing and advertising of
apparel and related accessories under the Modern Amusement trademarked brand, as
well promoting the Modern Amusement.
LICENSING
Through the Target Agreement, the Company has licensed to Target the
exclusive right to manufacture and distribute substantially all Mossimo branded
products sold in the United States. The original term of the agreement extended
through January 31, 2004, If Target is current with payments of its obligations
under the Target Agreement, Target has the right to renew the Target Agreement,
on the same terms and conditions, for additional terms of two years each. In
January 2003. Target exercised its first renewal option extending the Target
Agreement through January 31, 2006. The next renewal option could be exercised
by Target on or before January 2005, this renewal option could extend the Target
Agreement thru January 2008, if it is exercised by Target.
The Target Agreement is subject to early termination under certain
circumstances, including a material failure by Mossimo Giannulli to perform
certain services or the termination of employment, death or permanent disability
of Mr. Giannulli or a material change in his ownership or control of the Company
which is deemed to materially affect the Company's ability to perform its
obligations under the Target Agreement.
The Company enters into International licensing agreements of its
Mossimo branded products for certain geographical territories when the Company
believes such arrangements provide effective manufacturing, distribution and
marketing of such products. The Company generally maintains substantial control
over the design, quality, advertising, and marketing of its licensed products,
and maintains a policy of evaluating its licensing arrangements to ensure
consistent presentation of the Mossimo brand image.
The Company has licensed the exclusive right to manufacture and
distribute eyewear bearing its Mossimo trademarks through specialty retail
stores such as opticians, optical chains and specialty eyeglass and sunglass
stores pursuant to a license agreement with the Marcolin Group. This agreement
extended through December 31, 2003, and is in the process of being renewed.
The Company has licensed the exclusive right to manufacture and
distribute women's swimwear and bodywear bearing its Mossimo trademarks through
Target stores in the United States pursuant to a license agreement with The
Lunada Bay Corporation. This agreement extends through September 30, 2004, and
is renewable annually.
4
The Company has additional license agreements pursuant to which third
party licensees have the exclusive right to manufacture and distribute certain
products bearing the Company's Mossimo trademarks according to designs furnished
or approved by the Company in specified territories outside of the United
States.
In May 2002, the Company entered into an exclusive agreement with
Hudson's Bay Company. Under the agreement the Company provides product design
services, and licenses the Mossimo trademark to Hudson's Bay Company for
exclusive use in Canada. The Company receives 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 branded product in mid-March 2003 for distribution through its Zellers
stores in Canada.
Under all license agreements, the Company retains approval rights with
respect to the design of products, advertising, and marketing. All payments
under the Target Agreement are due on a quarterly basis and range from one to
four percent of net sales depending on the volume of sales achieved in each
contract year. Under all other license agreements, royalty payments are due
generally on a quarterly basis and range from approximately two to seven percent
of the licensee's net sales.
TRADEMARKS
The Company utilizes a variety of trademarks, including the script
Mossimo (signature), MOSS, MOSSIMO (in block lettering), Baby Moss and Mossimo
Giannulli trademarks. Currently, the Company has 15 registrations and 2 pending
applications for its trademarks in the United States, and approximately 350
trademark registrations and applications in over 70 other countries.
In connection with the Modern Amusement business, the Company acquired
worldwide trademark rights, except for the Asia territory. The current Modern
Amusement trademark portfolio includes 13 registrations and 6 pending
applications in ten nations.
The Company regards its trademarks and other proprietary rights as
valuable assets and believes they have significant value in the sales and
marketing of its products. The Company vigorously protects its trademarks
against infringement by using, among other things, cease-and-desist letters,
administrative proceedings, and applicable legal action.
COMPETITION
Competition in the contemporary apparel and related fashion accessories
industry is extensive. The Company's products are subject to competition from
designer and non-designer lines sold in a wide variety of retail stores,
including Target stores, many of which have increased in recent years the amount
of sportswear and activewear manufactured specifically for them and sold under
their own private labels.
The Company's Mossimo brand products compete based on factors including
brand name appeal, design, style and color selection, quality of garment
construction and price. Such competitors include Cherokee, Sideout, The GAP, Old
Navy, V.F. Corp., Levi Strauss, Quicksilver, among others. Increased competition
by existing and future competitors could result in reductions in retail sales
and reductions in revenues to the Company, or reduction of prices of the
Company's products that could have a material adverse effect on the Company's
revenues, financial condition, and results of operations. The Company's success
is dependant on its licensees' ability to manufacture and sell product bearing
the Mossimo brand and to respond to ever changing consumer demands.
The Company expects that its products will continue to face significant
competition in the future, in particular as other companies with established
trademarks enter into licensing arrangements with retailers.
PERSONNEL
The Company currently employs eighteen full time employees, and also
employs temporary personnel on an as needed basis. A substantial number of the
Company's personnel and resources are dedicated to providing design services.
The Company believes that it is able to recruit and retain the high level of
creative personnel to continue to provide the necessary design services to
maintain the continuity of product quality, the Company's distinctive image, and
the value of its trademarks. None of the Company's employees are covered by
collective bargaining agreements. The Company considers its relations with its
employees to be satisfactory.
5
RISK FACTORS
In addition to the other information contained herein or incorporated
by reference, the risks and uncertainties and other factors described below
could have a material adverse effect on our business, financial condition,
results of operations and share price and could also cause our future business,
financial condition and results of operations to differ materially from the
results contemplated by any forward-looking statement we may make herein, in any
other document we file with the Securities Exchange Commission, or in any press
release or other written or oral statement we may make.
DEPENDENCE ON THE TARGET STORES LICENSE
The Company's revenues under the Target Agreement commenced in November
2000, and represented 88% in 2003, and 92% in 2002 and 2001, of total revenue.
The Company expects that its revenues under the Target Agreement will continue
to represent a significant portion of the Company's total revenues during the
remaining term of the Target Agreement, which has been extended through January
2006, and is subject to future extension. Because the amount of the Company's
revenues under the Target Agreement are dependent on the sales of Mossimo brand
products in Target stores, the Company's revenue potential is impacted by the
number of Target stores and the patronage at these stores. Termination or
non-extension of the Target Agreement, or a material adverse change in the
business of Target stores, could have a material adverse effect on the Company's
business, financial condition, and results of operations. There can be no
assurance that the Company would be able to replace the Target revenue from
other sources. The Target agreement requires a one year advance notice of
extension. In the event that Target does not extend the agreement, the Company
would have the opportunity to enter into one or more license agreements for the
Mossimo brand prior to the expiration of the Target agreement.
CHANGES IN FASHION TRENDS
The apparel industry is subject to rapidly changing consumer demands
and preferences, which may adversely affect companies which misjudge such
demands and preferences. The Company believes that its success depends on its
ability to anticipate, gauge and respond in a timely manner to changing consumer
demands and fashion trends. There can be no assurance that the Company will be
successful in this regard. If fashion trends shift away from the Company's
products, or if the Company otherwise misjudges the market for its product
lines, resulting in a decline in sell-through rates at retail, the Company may
be faced with conditions which could have a material adverse effect on the
Company's financial condition and results of operations. Decisions with respect
to product designs often need to be made several months in advance of the time
when consumer acceptance of such products is known. In addition, any failure by
the Company to identify and respond to changing demands and trends could
adversely affect consumer acceptance of the Mossimo brand name, which may have
an adverse effect on the Company's business and prospects.
NEW PRODUCT INTRODUCTIONS
The Company's success is dependent upon its ability to create and
develop new product designs and new product lines. As is typical with new
products, demand for and market acceptance of new designs and products
introduced by the Company is subject to uncertainty. There can be no assurance
that the Company's efforts will be successful. In addition, the failure of new
product designs or new product lines to gain sufficient market acceptance could
adversely affect the image of the Mossimo brand name and consumers' demand for
other Mossimo branded products.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent on the efforts and
abilities of its design staff, which includes Mossimo Giannulli, the Company's
founder and Chief Executive Officer. The Company has only eighteen employees,
and Mr. Giannulli's leadership and experience in the apparel licensing industry
is critical to the successful implementation of the Company's business and
marketing strategy. The Company has key person life insurance covering Mr.
Giannulli. The Target Agreement is subject to early termination under certain
circumstances, including a material failure by Mr. Giannulli to perform certain
services or the termination of employment, death or permanent disability of Mr.
Giannulli, or a material change in his ownership or control of the Company which
is deemed to materially affect the Company's ability to perform its obligations
under the Target Agreement. During 2003, the Company extended the employment
agreement with Mr. Giannulli thru January 2006 to coincide with the extension of
the Target Agreement. The loss of Mr. Giannulli services could have a material
adverse effect on our business, financial condition, and results of operations.
6
UNCERTAINTIES IN APPAREL RETAILING; GENERAL ECONOMIC CONDITIONS
The apparel industry historically has been subject to substantial
economic cyclical variations. Economic observers have recently commented that
the United States economy may be rebounding. As the economic conditions change
the trends in discretionary consumer spending become unpredictable, and could be
subject to reductions due to uncertainties about the future. When discretionary
spending is reduced, purchases of apparel and related products tend to decline.
Additionally, the continued military responses to current International military
situations, and possible future terrorist attacks on the United States may
exacerbate current economic conditions and lead to a downturn in the economy.
Adverse economic conditions and any related decreases in discretionary spending
by consumers could have a material adverse effect on the Company's results of
operations.
FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS MAY CAUSE ADVERSE
UNEXPECTED OPERATING RESULTS AND AFFECT THE COMPANY'S REPORTED RESULTS OF
OPERATIONS.
A change in accounting standards can have a significant effect on the
Company's reported results and may affect the Company's reporting of
transactions completed before the change is effective. As an example, any
changes requiring that the Company record compensation expense in the statement
of operations for employee stock options using the fair market value method
could have a significant negative effect on our reported results. Changes to
existing rules or the questioning of current practices may adversely affect our
reported financial results.
PROTECTION OF TRADEMARKS
The Company believes that its trademarks and other proprietary rights
are important to its success and its competitive position. Accordingly, the
Company devotes substantial resources to the establishment and protection of its
trademarks on a worldwide basis. There can be no assurance that the actions
taken by the Company to establish and protect its trademarks and other
proprietary rights will be adequate to prevent imitation of its products by
others or to prevent others from seeking to block sales of the Company's
products as violative of the trademarks and proprietary rights of others. No
assurance can be given that others will not assert rights in, and ownership of,
trademarks and other proprietary rights of the Company. In addition, the laws of
certain foreign countries do not protect proprietary rights to the same extent
as do the laws of the United States.
CONTROL BY PRINCIPAL STOCKHOLDERS
Mossimo Giannulli has majority control of the Company and the ability
to control the election of directors and the results of other matters submitted
to a vote of stockholders. Such concentration of ownership, together with the
anti-takeover effects of certain provisions in the Delaware General Corporation
Law and in the Company's Certificate of Incorporation and Bylaws, may have the
effect of delaying or preventing a change in control of the Company.
CERTAIN FEDERAL TAX CONSEQUENCES
In addition to the Company's taxable income being subject to federal,
state and local income taxes, the Company may be classified as a "personal
holding company" from time to time. Personal holding company status results from
more than 50% of the value of outstanding stock being owned directly or
indirectly by five or fewer individuals, and more than 60% of the Company's
income, as defined, being derived from royalties. Personal holding companies are
subject to an additional federal tax at a 15% tax rate on undistributed after
tax earnings.
Over 50% of the value of the Company's outstanding stock is owned by
one stockholder, and in 2002 and 2001, more than 60% of the Company's income, as
defined, was derived from license royalties. Accordingly, the Company was
classified as a personal holding company in 2002 and 2001. However, no personal
holding company tax was due in 2002 because the Company recognized certain
expenses for tax purposes in 2002 that had been recognized in previous years for
financial reporting purposes, and which offset the taxable income subject to
personal holding company tax in 2002. In addition, no personal holding company
taxes were due in 2001 because the Company was able to use its tax operating
loss carry forward to offset the taxable income subject to personal holding
company tax in 2001. In 2003 less than 60 percent of the Company's income, as
defined, was derived from license royalties, accordingly it was not classified
7
as a personal holding company and was not subject to the personal holding
company tax. The Company intends to continue to take appropriate measures to
avoid being classified as a personal holding company in future years. However,
there can be no assurance that the Company will be successful in its efforts to
avoid classification as a personal holding company in the future.
NEW WHOLESALE BUSINESS
In January 2004, the Company acquired Modern Amusement, which is
focused on design and distribution of premium branded west coast-lifestyle
casual sportswear apparel and related accessories for young men and young women
under the Modern Amusement trademarked brand. The Modern Amusement business
includes sourcing manufactured products, wholesale distribution, inventory
management, marketing, promoting, and advertising of apparel and related
accessories under the Modern Amusement trademarked brand. While the acquired
business is relatively small, as the Company expands into the wholesale products
business, it will encounter increased exposure to excess and obsolete
inventories, potential delays and cancellations from sourcing manufactured
products domestically and internationally, and product returns and allowances
from retail customers, as well as marketing, promotion and advertising
expenditures that may not result in successful campaigns.
CODE OF ETHICS
The Company has adopted a Code of Ethics in accordance with the rules
of the Securities and Exchange Commission and NASDAQ. A copy of such a code can
be obtained by written request from:
Chief Financial Officer
Mossimo, Inc.
2016 Broadway
Santa Monica, CA 90404
8
ITEM 2 - PROPERTIES
The Company's current corporate headquarters and design studios are
located in Santa Monica, California and consist of a leased facility totaling
approximately 6,000 square feet of space. In January 2004, the Company expanded
its leased facilities to approximately 9,000 square feet of space to also
accommodate newly acquired Modern Amusement at a near-by but separate facility.
ITEM 3 - LEGAL PROCEEDINGS
In May 2002, the Company made a demand for arbitration in connection
with a claim for overpayment of commissions paid to a third party who assisted
the Company in connection with entering into the initial agreement with Target.
The arbitration hearing was completed in October 2002. In November 2002, the
arbitration hearing panel issued a preliminary award in favor of the third
party, which became final in January 2003 and awarded the third party the
commissions owed, 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 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 demonstrated that the finder's agreement between the Company
and the third party was illegal under certain applicable California law. In
January 2003 the third party filed a petition to confirm the award, including
commissions, the third party's legal fees, and interest. In June 2003, the award
was confirmed and a judgment entered in favor of the third party, and the third
party was awarded additional interest. In June 2003 the Company filed an appeal
to the judgment and in connection therewith deposited with the court
approximately $4,585,000. The deposit secured 150% of the judgment amount. In
January 2004 the appeal decision was rendered in favor of the third party, and
the Company is proceeding with an appeal to the Supreme Court of the State of
California. The Company could be liable for additional legal fees and interest
payable to the third party if the appeal to the Supreme Court of the State of
California is not successful. There can be no assurance that the appeal will be
successful.
At December 31, 2003, the Company had accrued approximately $6.4
million of unpaid commissions, legal fees, and interest potentially payable to
the third party in connection with this matter. The $4,585,000 deposited with
the courts was classified as restricted cash on the Company's balance sheet as
of December 31, 2003. In addition, approximately $1.8 million of cash and cash
equivalents have also been segregated from normal operating funds, and are
liquid and available for payment to the third party if and when those amounts
become payable by court order. If the payment of the $6.4 million is required as
a result of a court order, such a payment is not expected to have a material
impact on the Company's liquidity.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2003.
9
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
The Company's common stock began trading in February 1996 on the New
York Stock Exchange ("NYSE") upon completion of the Company's initial public
offering (trading symbol "MGX"). In May 2000, trading of the Company's common
stock was suspended by the NYSE, the Company's common stock was subsequently
delisted, and the Company's common stock commenced trading on the National
Association of Securities Dealers Over-the-Counter Bulletin Board under the
symbol MGXO.OB. In April 2002 the Company became listed and initiated trading on
NASDAQ Small Cap (trading symbol "MOSS").
On February 13, 2004, the closing sales price of the Company's common
stock reported on NASDAQ was $4.47 per share. The high and low sales prices of
the Company's common stock reported by the applicable quotation system (NASDAQ -
April to December 2003; Over-the-Counter Bulletin Board - January 2002 thru
March 2002) were as follows:
2002
--------------------
HIGH LOW
---- ---
First Quarter.............................................. $ 8.10 $ 3.46
Second Quarter............................................. $ 13.19 $ 7.70
Third Quarter.............................................. $ 9.49 $ 5.30
Fourth Quarter............................................. $ 7.85 $ 5.50
2003
--------------------
HIGH LOW
---- ---
First Quarter.............................................. $ 6.65 $ 4.41
Second Quarter............................................. $ 4.89 $ 3.50
Third Quarter.............................................. $ 6.70 $ 4.00
Fourth Quarter............................................. $ 6.25 $ 4.16
The high and low trades of our common stock reported by the
Over-the-Counter Bulletin Board reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
As of February 13, 2004, the Company had 197 stockholders of record.
This does not include beneficial owners whose shares may be held of record by
brokerage firms and clearing agencies.
DIVIDENDS
Since its initial public offering, the Company has not paid a dividend
on its common stock. Any future determination as to the payment of dividends
will be at the discretion of the Company's Board of Directors and will depend
upon the Company's results of operations, financial condition, contractual
restrictions, and changes in the tax laws, and other factors deemed relevant by
the Board of Directors.
10
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data
regarding the Company which is qualified by reference to, and should be read in
conjunction with, the financial statements and notes thereto (see "Index to
Financial Statements") and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations." The statement of operations and
balance sheet data presented below has been derived from the Company's financial
statements.
YEARS ENDED DECEMBER 31,
------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales of apparel and related products ............... $ -- $ -- $ -- $ 24,150 $ 47,393
Revenue from license royalties and design service fees .. 19,895 19,881 16,666 3,475 3,686
--------- --------- --------- --------- ---------
Total revenues ...................................... 19,895 19,881 16,666 27,625 51,079
Cost of sales of apparel and related products ........... -- -- -- 20,730 37,069
--------- --------- --------- --------- ---------
19,895 19,881 16,666 6,895 14,010
Operating expenses ...................................... 13,477 12,525 10,455 19,017 26,101
--------- --------- --------- --------- ---------
Operating earnings (loss) ............................... 6,418 7,356 6,211 (12,122) (12,091)
Other (income) expense, net ............................. -- (181) (536) (760) 3
Interest (income) expense, net .......................... (23) 276 864 923 834
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes ..................... 6,441 7,261 5,883 (12,285) (12,928)
Provision (benefit) for income taxes - Note (a) ......... 1,875 (6,404) (3,153) 3 13
--------- --------- --------- --------- ---------
Net earnings (loss) ..................................... $ 4,566 $ 13,665 $ 9,036 $(12,288) $(12,941)
========= ========= ========= ========= =========
Net earnings (loss) per common share:
Basic ............................................... $ 0.29 $ 0.89 $ 0.59 $ (0.81) $ (0.86)
========= ========= ========= ========= =========
Diluted ............................................. $ 0.29 $ 0.87 $ 0.59 $ (0.81) $ (0.86)
Weighted average common shares outstanding:
Basic ............................................... 15,613 15,409 15,254 15,080 15,050
========= ========= ========= ========= =========
Diluted ............................................. 15,658 15,648 15,290 15,080 15,050
========= ========= ========= ========= =========
Note (a): Reflects the reductions of the valuation against certain components
of deferred tax assets in 2002 and 2001.
DECEMBER 31,
------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital .................. $ 12,251 $ 5,971 $ (1,342) $ (5,423) $ (680)
Total assets ..................... $ 26,413 $ 20,536 $ 9,294 $ 1,964 $ 10,736
Long-term debt ................... $ -- $ -- $ -- $ -- $ 3
Other long-term liabilities ...... $ -- $ 191 $ 1,596 $ 5,676 $ --
Stockholders' equity (deficit) ... $ 19,012 $ 13,480 $ (678) $(10,458) $ 2,396
11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto set forth in this Form
10-K commencing on page F-1.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Our financial results are significantly impacted by our staffing levels
and key executive compensation, and by the retail sales of our Mossimo branded
products under the licensing and design services agreement with Target, which is
exclusive to the United States. Under the Target agreement, we earn fees based
on percentage of Target stores net sales of Mossimo branded product. The
percentage varies according to the volume of sales. We earn 4% on the first $100
million of sales, 2-1/4 % on $100 million to $500 million of sales, and 1% on
sales above $500 million each year. As a result, we recognize a higher level of
revenues early in the year when the higher rates apply to the net retail sales
base.
Revenues from Target were 88% and 92% of total revenues in 2003 and
2002, respectively. This change was primarily due to the introduction of our
Mossimo branded products into Canada during March of 2003, under a licensing and
design services agreement with Hudson's Bay Company for distribution thru its
Zellers stores exclusively in Canada. The Canadian business has diversified our
customer base and expanded our territory coverage of the Mossimo brand. Total
revenues were approximately the same in 2003 and 2002 at $19.9 million. However,
in 2002 we recognized $1.5 million in revenues which had been deferred during
the initial Target contract year pending the results of an audit that was
completed in second quarter of 2002. Excluding the $1.5 million of non-recurring
revenue in 2002, total revenue in 2003 increased by $1.5 million, or 8%, and
revenue from Target increased 4% from 2002. The increase in revenue from sources
other than Target were primarily due to the new Canadian business. We expect
increases in future revenues from Canada, as well as modest increases in future
revenues from Target.
The major components of selling, general and administrative (S, G & A)
expenses are payroll and personnel, executive bonuses, commissions payable to a
third party in connection with the Target agreement, and expenses incurred in
connection with design related and business development activities such as
travel, samples and artwork purchases, and free-lance artists, as well as
facilities, legal, accounting, and insurance expenses. Our S, G & A increased
approximately $900,000, or 8% from 2002 to 2003, principally due to increases in
personnel and related payroll expenses of approximately $850,000 and increases
in design related and business development activities expenses of approximately
$650,000, which was partially offset by reductions in executive bonuses of
$450,000 and commissions of $150,000. The increases in personnel and design
related activities were necessary to better serve the Target business in the
United States, and to launch the new Canadian business with Zellers. Executive
bonuses were reduced consistent with the Company's comparative performance.
These bonuses which are determined at the discretion of the Board of Directors,
in accordance with a performance criteria outlined in the respective bonus
plans, and are subject to a maximum annual amount based on a percent of Target
license royalty fees in excess of the minimum annual fee, are estimate and
accrued on a quarterly basis, with a final determination made by the Board of
Directors at the end of each year. Commissions were less this year because of
the non-recurring Target revenue recognized last year. We continue our business
development activities in search of growth opportunities for the Company. We do
not expect that further increases in staff or design related activities will be
necessary in order to service the Target and Zellers business in the future.
As further discussed in Item - 3 Legal Proceedings of this report, we
have a dispute over the commissions payable to a third party which relate to our
agreement with Target. In connection with pursuing our claim, we incurred
$600,000 in 2002 and $643,000 in 2003. These costs include interest and legal
fees that would be due to the third party in the event that our appeal to the
Supreme Court of the State of California fails. In addition to these costs,
accrued and unpaid commissions payable to the third party would also be due. We
accrue these costs based on the contractual rate for commissions, based on the
maximum legal rate for interest of 10% applied to the unpaid balance, and based
on estimates of legal fees incurred by the third party when such estimates are
reasonably determinable. Total amount of accrued commissions, interest and legal
fees at December 31, 2003 was approximately $6.4 million, and sufficient cash
had been segregated and was available to pay this amount if necessary. We expect
to incur additional commissions under the underlying agreement, plus interest on
the unpaid amounts, and legal fees for as long as we continue to pursue this
claim.
12
At the end of 2002 we completed our assessment of the benefit to be
derived from our tax net operating loss carry forward and recorded a benefit for
income taxes of $6.4 million, which increased our diluted net earnings per share
by $0.41. We reduced the valuation allowance previously provided against our
deferred tax asset, as a result of the extension of the Target Agreement through
January 31, 2006, and the reevaluation of our 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. In 2003 we recorded a provision for
income taxes of approximately $1.9 million, which decreased diluted net earnings
per share by $0.12, this provision is based on the applicable statutory rates
for federal and California state taxes, at an effective rate of 40%, net of an
additional deferred tax asset of approximately $700,000 recognized in 2003. A
substantial amount of the 2003 provision for income taxes is a deferred expense
and represents a reduction of the corresponding deferred tax asset to reflect
the utilization of our tax net operating loss carry forwards.
Diluted net earnings per share were $0.29 in 2003 and $0.87 in 2002.
However, we believe that it is important to compare pretax diluted earnings per
share of $0.41 in 2003 and $0.46 in 2002, because of the significant impact that
the benefit for income taxes has on the 2002 net earnings.
The recent acquisition of the Modern Amusement assets was completed in
January 2004, and has no material impact on operating results for 2003. We do
not expect that Modern Amusement will have a significant impact in the near term
on the Company's operating results.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues from Target were 92% of total revenues in 2002 and 2001, and
total revenues increased approximately 19% to approximately $19.9 million in
2002, from approximately $16.7 million in 2001. This increase was primarily due
to a 10% increase in normal ongoing revenues from Target, and revenues of $1.5
million recognized in 2002, which had been deferred during the initial Target
contract year pending the results of a royalty audit completed in second quarter
of 2002, which is not expected to recur. The remaining revenues are derived from
license fees from other agreements.
Our S, G & A increased approximately $1.5 million, or 14% in 2002 from
2001, principally due to increases in personnel related payroll of approximately
$1 million, increases in commissions of approximately $400,000, increases in
design related and business development activities expenses of approximately
$600,000, and increases in other S, G & A expenses of approximately $450,000.
The increases were partially offset by reductions in executive bonuses of
approximately $1 million. The bonus plan covering the Company's Chief Executive
Officer was changed in 2002 to a discretionary plan, not to exceed a formula
based amount, from strictly a formula based plan in 2001. During 2002, the
discretionary bonuses, not to exceed the 2002 formula, were determined at the
discretion of the Board of Directors and were lower than those calculated under
the 2001 formula. The Company's total personnel increased from eight employees
at the beginning of 2002 to twenty employees by the end of 2002. The increases
in personnel and design related activities were necessary to better serve the
Target business in the United States, and to implement the new Canadian business
with Zellers, which was expected to fully launch in March 2003. Commissions are
directly related to Target revenue and the increase is consistent with same.
Other S, G & A expenses increased primarily due to expenditures incurred in
connection with initiating the Company's listing on NASDAQ in April 2002.
As further discussed in Item - 3 Legal Proceedings of this report, at
the beginning of 2002, we began to pursue a claim in connection with a dispute
over commissions payable to a third party which relate to our agreement with
Target, and we incurred approximately $600,000 in related costs during 2002.
These costs include incremental interest and legal fees that would be due to the
third party in the event that a final decision is rendered in their favor. In
addition to these costs, accrued and unpaid commissions payable to the third
party would also be due. The total amount of accrued commissions, interest and
legal fees at December 31, 2002 was approximately $2.9 million.
We incurred net interest expense of approximately $276,000 in 2002,
compared to net interest expense of approximately $864,000 in 2001. The decrease
was due primarily to a reduction in the applicable variable interest rate,
reductions of the outstanding balance of the loan payable to a bank, and
additional interest income earned in 2002.
At the end of 2002 we completed our assessment of the benefit to be
derived from our tax net operating loss carry forward and recorded a benefit for
income taxes of $6.4 million, as compared to a benefit for income taxes of $3.2
million recorded in 2001. In 2002, we further reduced the valuation allowance
previously provided against our deferred tax asset, as a result of the extension
of the Target Agreement through January 31, 2006, and the reevaluation of our
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.
Diluted net earnings per share were $0.87 in 2002, and $0.59 in 2001. However,
we believe that it is important to compare pretax earnings per share of $0.46 in
2002, and $0.38 in 2001, because of the significant impact that the benefit for
income taxes has on net earnings.
13
LIQUIDITY AND CAPITAL RESOURCES
We have generated substantial amounts of cash from operations in the
past two years. However, we have not paid $6.4 million of cumulative commissions
and other costs due a third party as further discussed in Item - 3 Legal
Proceedings of this report. Accordingly, we have accumulated a total cash
balance of approximately $14.3 million as of December 31, 2003. We have
segregated $6.4 million of the total cash balance from our normal operating
funds in order to have it available to settle amounts due to the third party
under the legal dispute in the event that a final decision is rendered in their
favor. We deposited $4.6 million of the total $6.4 million with the court having
jurisdiction over this matter and classified this amount as restricted cash in
the accompanying balance sheet as of December 31, 2003. The balance of
approximately $1.8 million has been segregated in a separate Company account and
included with cash and cash equivalents in the accompanying balance sheet as of
December 31, 2003. Aside from the $6.4 million we have approximately $7.9
million of cash available for normal operations. If the payment of the $6.4
million is required as a result of a court order, such a payment is not expected
to have a material impact on our liquidity.
We have been effective at paying off all outstanding indebtedness and
we are well positioned to satisfy our contractual obligations and ongoing
operating requirements. Because of our certainty of contractual guaranteed
minimums under the Target agreement, and our relatively high operating margins,
we are confident in our ability to continue to generate positive cash flow from
operations. Further, the available net operating loss carry forward will
significantly reduce our tax payments at least thru January 2006. During 2003,
we repaid the remaining $1.1 million of bank debt. We have no current plans to
incur new debt obligations or to enter into new long-term contractual
obligations, capital leases, or significant capital projects.
There were no significant changes in our cash flows in 2003 as compared
to 2002. The primary cash sources are from fees collected under our design
services and licensing agreements, primarily Target. Our most significant cash
outflow is our personnel costs, including bonuses.
We have a commission obligation under an agreement with a third party
for 15% of fees received from Target for the duration of the Target agreement
thru January 2006, and for subsequent extensions if they are exercised by
Target. No cash payments were made for commissions in 2003, although all
commissions of approximately $2.6 million due in 2003 under contract were
accrued at December 31, 2003. Future commission amounts will vary depending on
the fees to be received from Target. The underlying agreement is in dispute, as
further discussed in Item - 3 Legal Proceedings of this report, and there is no
assurance that this agreement with the third party could be terminated. We
anticipate having the resources available to meet the obligations under this
agreement as they become due, regardless of the final resolution of the dispute.
In January 2004 we completed the acquisition of the Modern Amusement
assets and we amended our facility lease increasing our space from approximately
6,000 square feet to approximately 9,000 square feet, and extending the lease
term thru July 2009. The expanded facility is intended to also accommodate
Modern Amusement. The future annual obligation under the amended lease varies
each year, starts at approximately $290,000 in 2004, increasing to $334,000 in
2008. The purchase price of the Modern Amusement assets of $250,000 plus the
acquisition costs were funded with existing cash. We are in the process of
finalizing the business plans for Modern Amusement, including the required cash
and liquidity resources which are not expected to have a significant impact on
our liquidity and capital resources in 2004, due to the size of the acquired
business being relatively small. Future cash and liquidity resources required
beyond 2004 will depend on our planned expansion of the Modern Amusement
business.
The Company is approached from time to time by parties seeking to sell
their businesses, brands and related trademarks. Should an established viable
business and 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 as well as different
financing alternatives, including the issuance of debt instruments and / or
equity securities.
14
The following table provides information related to our contractual
cash obligations under various financial and commercial agreements (amounts in
thousands):
Payments Due by Period(s):
Contractual Obligations Less than 1 year 1 - 3 years 4 - 5 years After 5 years Total
- ----------------------- ---------------- ----------- ----------- ------------- -------
Long-Term Debt $ -- $ -- $ -- $ -- $ --
Capital Lease Obligations -- -- -- -- --
Operating Leases (a) 290 621 658 196 1,765
Unconditional Purchase Obligations -- -- -- -- --
Other Long-Term Obligations (b), (c), (d), (e) 1,290 1,475 10 -- 2,775
----------- --------- --------- --------- --------
Total Contractual Cash Obligations $ 1,580 $ 2,096 $ 668 $ 196 $ 4,540
=========== ========= ========= ========= ========
Notes:
(a) These amounts represent future minimum non-cancelable lease payments under
an operating lease agreement through July 2009 for our office and design studio
facilities in Santa Monica, California including the future facilities for
Modern Amusement.
(b) These amounts include $900,000 per year under our employment agreement with
Mossimo Giannulli, our Chairman and Chief Executive Officer through January
2006, that provides for a $900,000 annual salary, plus a bonus which is
determined at the discretion of the Board of Directors, in accordance with a
performance criteria outlined in the bonus plan, and is subject to a maximum
annual amount based on a percent of Target license royalty fees in excess of the
minimum annual fee under the Target Agreement. The future bonus amounts, if any,
have been excluded because they are at the discretion of the Board of Directors
and can not be determined.
(c) We have a bonus agreement with Edwin Lewis, our Vice-Chairman and President
that provides for a bonus which is determined at the discretion of the Board of
Directors, in accordance with a performance criteria outlined in the bonus plan,
and is subject to a maximum annual amount based on a percent of Target license
royalty fees in excess of the minimum annual fee under the Target Agreement. The
future bonus amounts, if any, have been excluded because they are at the
discretion of the Board of Directors and can not be determined.
(d) We have a commission obligation under an agreement with a third party for
15% of fees received from Target for the duration of the Target agreement thru
January 2006, and for subsequent extensions if they are exercised by Target. The
future commission amounts have been excluded because they are based on future
Target fees and can not be determined. (See Item-3 Legal Proceedings)
(e) The amount for less than one year includes a payment of $150,000 made in
January 2004, in connection with the purchase agreement for Modern Amusement. In
addition, we have an employment agreement with Jeff Yokoyama of Modern
Amusement, that provides of an annual salary of $250,000 thru January 2007, plus
bonuses to be determined based on net sales of Modern Amusement. The future
bonus amounts, if any, have been excluded because they are based on future
Modern Amusement net sales and can not be determined.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from license royalties and design service fees are recognized
in accordance with the terms of the underlying agreements, which is generally
15
after the design services are performed, and as the licensee achieves sales of
the Company's products. Revenue from license royalties and design service fees
are generally collected on a quarterly basis, and they range from one percent to
seven percent of sales, as defined in the respective agreements. A substantial
amount of the Company's revenue is generated under the Target Agreement, under a
declining rate as the year progresses and Target achieves certain levels of
retail sales. Accordingly, the Company's revenues from Target decrease as the
year progresses. The declining rate is reset each contract year on February 1.
In 2003, Target reached the minimum rate during the third quarter of the
Company's calendar year. If Target sales of Mossimo branded products increase in
the future, as a result of opening new stores or otherwise, the minimum rate of
fees may apply earlier in the Company's future calendar years, shifting
additional revenue recognition to the first half of the year, and potentially
reducing the revenue recognition in the second half of the year. A decrease of
Target sales of Mossimo branded product in the future could have a material
impact on the Company's total revenues, results of operations, and financial
condition.
DEFERRED TAX ASSET VALUATION
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes primarily result from the
recognition of the income tax benefit to be derived from the Company's net
operating loss carry forward for income taxes purposes. As of December 31, 2003,
the Company has approximately $22 million, and $18 million of federal and state
income tax net operating loss carry-forwards, respectively, available to offset
future taxable income, which expires in various years through 2022. At December
31, 2002, the Company recorded a deferred income tax asset of approximately $10
million, upon reducing the related valuation allowance for its deferred income
tax asset, as a result of the extension of the Target Agreement through January
31, 2006, and the reevaluation of its forecasted operating results and resultant
taxable income during the extended term of the Target Agreement, and the
consequent expected utilization of available net operating losses during the
extended term of the Target Agreement. The Company monitors its profitability
and considers the credit and collections risk of future fees under its
agreements. The Company factors in the term of the related agreements and
extensions that are "more likely than not" to be exercised, particularly in
connection with the Target Agreement, in the analysis of the recoverability of
its deferred tax asset.
CONTINGENCIES AND LITIGATION
Management evaluates contingent liabilities including pending or
threatened litigation in accordance with SFAS No. 5, and records accruals when
the outcome of these matters is deemed probable and the amount of the liability
is subject to reasonable estimate. Management makes these assessments based on
the facts and circumstances available at the time, and in some instances based
in part on the advice of outside counsel.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation experienced in the United States over the last three years have had a
significant effect on its operations. Since the Company's future revenues are
based on a percentage of sales of licensed products by licensees, the Company
does not anticipate that inflation will have a material impact on future
operations.
EXCHANGE RATES
The Company receives United States dollars for all its revenue from
license royalties and design service fees, other than from its business in
Canada, which began in 2003 and does not represent a substantial amount of
revenue at this time. During the last three fiscal years, exchange rate
fluctuations have not had a material impact on the Company's operating results.
The Company does not engage in hedging activities with respect to exchange rate
risk.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity." SFAS
No. 150 changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
16
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003. The
implementation of SFAS No. 150 did not have an impact on the Company's financial
position or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities". This interpretation 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. The provisions of FIN 46 for certain variable interest
entities were delayed until the fourth quarter of 2003. 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 Company licenses its
trademarks, provides design services and has approval rights for product design,
marketing and advertising materials under licensing and design service
agreements which include certain provisions for indemnifying the licensee. As an
element of its standard commercial terms, the Company includes an
indemnification clause in its licensing and design services agreements that
indemnifies the licensee against liability and damages arising from any claims,
suits, damages, or costs relating to the breach of any warranty, representation,
term or condition made or agreed to by its licensees involving the manufacture,
packaging, distribution, promotion, sale, marketing, advertising or other use of
the trademarks under license. We believe that our policies and practices limit
our exposure related to the indemnification provisions of the license and design
services agreements. For several reasons, including the lack of prior
indemnification claims and the lack of monetary liability limit for certain
infringement cases under the license and design services agreements, we cannot
determine the maximum amount of potential future payments, if any, related to
such indemnification provisions.
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; the adoption of this issue did not have a
material impact on the Company's financial position or results of operations.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on the Company's results of operations,
financial position or cash flows.
17
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company makes temporary investments of cash in liquid interest
bearing accounts and marketable securities. 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 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed hereunder are set forth
on pages F-1 through F-14 of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A - CONTROLS AND PROCEDURES
Based on their evaluation as of December 31, 2003, our Chief Executive
Officer and Chief Financial Officer have concluded that our internal controls
and disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Act of 1934, as amended) were sufficiently
effective to ensure that the information required to be disclosed by us in this
annual report on Form 10-K was recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and instructions for Form
10-K.
There are no changes in our internal controls over financial reporting
during the quarter ended December 31, 2003 that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our internal controls and disclosure
controls and procedures will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
18
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the
Company's Proxy Statement for its 2004 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2003 and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be contained in the
Company's Proxy Statement for its 2004 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2003 and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be contained in the
Company's Proxy Statement for its 2004 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2003 and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the
Company's Proxy Statement for its 2004 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2003 and is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be contained in the
Company's Proxy Statement for its 2004 Annual Stockholders Meeting to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2003 and is incorporated herein by reference.
19
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1) List of Financial Statements - see Index to Financial
Statements on page 31.
(2) List of Financial Statement Schedules - None
(b) The Registrant filed the following reports on Form 8-K during the
last quarter of its fiscal year ended December 31, 2003:
On March 11, 2004, the registrant filed a report on Form 8-K
under Item - 12 announcing its financial results for the quarter
and the year ended December 31, 2003.
(c) List of Exhibits
The exhibits listed in the accompanying Index of Exhibits are
filed as part of this Form 10-K.
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------
3.1 Certificate of Incorporation of Registrant (1)
3.2 Bylaws of the Registrant (1)
4.1 Specimen certificate of shares of Common Stock of the Registrant
(1)
10.1* Registrant's 1995 Stock Plan (1)
10.2* Registrant's 1995 Directors Stock Option Plan (1)
10.3* Form of Indemnification Agreement between the Registrant and its
directors and officers (1)
10.5 Mossimo License Agreement, dated as of March 28, 2000, between
Mossimo, Inc. and Target Stores, a division of Target Corporation
(2)
10.5.1 Amendment to License and Design Services Agreement, dated February
1, 2002 (7)
10.5.2 Consent of Assignment and Amendment to License and Design Services
Agreement dated February 2, 2003 (8)
10.5.3 Amendment to License and Design Services Agreement dated June 20,
2003 (9)
10.6 Cherokee-Mossimo Finders Agreement dated March 27, 2000 between
Mossimo, Inc. and Cherokee Inc. (2)
10.7 Lease, dated June 29, 2000, between the Registrant and
Lexington-Broadway Place, LLC (3)
10.7.1 First Amendment to Office Lease dated June 26, 2002 (9)
10.7.2 Second Amendment to Office Lease dated January 1, 2004
10.8 Sunglasses Agreement, dated as of December 1, 2000, between
Mossimo, Inc., Marcolin S.P.A. and Target Stores (4)
10.9* Amended and Restated Employment Agreement between the Registrant
and Mossimo Giannulli dated February 1, 2002 (7)
10.9.1* Amendment Number One to the Mossimo Giannulli Employment
Agreement, dated September 23, 2002 (6)
10.9.2* Amendment Number Two to the Mossimo Giannulli Employment
Agreement, dated March 18, 2002 (8)
10.10* The Mossimo Giannulli Bonus Plan, dated February 1, 2002, between
the Registrant and Mossimo Giannulli (7)
10.10.1* Amendment Number One to the Mossimo Giannulli Bonus Plan, dated
July 1, 2002 (5)
10.11* The Edwin Lewis Bonus Plan, dated April 17, 2002, between the
Registrant and Edwin Lewis (5)
10.11.1* Amendment Number One to the Edwin Lewis Bonus Plan, dated July 1,
2002 (5)
10.11.2* Amendment Number Two to the Edwin Lewis Bonus Plan, dated
September 23, 2002 (6)
21 Subsidiaries of Registrant
23 Consent of Independent Auditors - KPMG LLP
31.1 Certification of Principal Executive Officer as required by Rule
13a - 14(a) of the Securities Act of
31.2 1934
32.1 Certification of Principal Financial Officer as required by Rule
13a - 14(a) of the Securities Act of
32.2 1934 Certification of Principal Executive Officer as required by
Rule 13a - 14(b) of the Securities Act of 1934 Certification of
Principal Financial Officer as required by Rule 13a - 14(b) of the
Securities Act of 1934
20
NOTES:
------
(1) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (No. 33-80597), as amended, which became
effective February 22, 1996.
(2) Incorporated by reference from the Registrant's Current Report
on Form 8-K, dated March 28, 2000.
(3) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000.
(4) Incorporated by reference from the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2000.
(5) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 2002.
(6) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2002.
(7) Incorporated by reference from the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2002.
(8) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 2003.
(9) Incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 2003.
* Indicates a management contract or compensatory plan or arrangement
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 12th day of
March 2004.
MOSSIMO, INC.
By: /s/ MOSSIMO GIANNULLI
--------------------------
Mossimo Giannulli
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 12th day of March 2004.
/s/ MOSSIMO GIANNULLI Chairman of the Board and Chief Executive Officer
- -----------------------------
Mossimo Giannulli
/s/ EDWIN LEWIS Vice Chairman and President
- -----------------------------
Edwin Lewis
/s/ MALI SHRINIVAS Chief Financial Officer
- -----------------------------
Mali Shrinivas
/s/ ROBERT MARTINI Director
- -----------------------------
Robert Martini
/s/ WILLIAM HALFORD Director
- -----------------------------
William Halford
/s/ BRETT WHITE Director
- -----------------------------
Brett White
22
MOSSIMO, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORTS F-1
FINANCIAL STATEMENTS:
Balance sheets as of December 31, 2003 and 2002............................................ F-3
Statements of operations for the years ended December 31, 2003, 2002 and 2001.............. F-4
Statements of stockholders' equity for the years ended December 31, 2003, 2002 and 2001.... F-5
Statements of cash flows for the years ended December 31, 2003, 2002 and 2001.............. F-6
Notes to financial statements.............................................................. F-7
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Mossimo, Inc.:
We have audited the accompanying balance sheets of Mossimo, Inc. (a Delaware
corporation) as of December 31, 2003 and 2002, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The statements of operations and cash
flows of Mossimo, Inc. for the year ended December 31, 2001 were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated February
27, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mossimo, Inc. as of December
31, 2003 and 2002, and the results of it's operations and it's cash flows for
the years ended December 31, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States.
KPMG LLP
Los Angeles, California
February 19, 2004
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders of Mossimo, Inc.:
We have audited the accompanying consolidated balance sheets of Mossimo, Inc. (a
Delaware corporation) and subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mossimo, Inc. and subsidiary as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
February 27, 2002
Notes:
(1) This report is a copy of the previously issued report.
(2) The predecessor auditor has not reissued this report.
F-2
MOSSIMO, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS:
Cash, and cash equivalents ........................................... $ 9,707 $ 7,786
Restricted cash (Note 7) ............................................. 4,585 --
Accounts receivable (Note 2) ......................................... 2,007 1,926
Deferred income taxes (Note 4) ....................................... 3,071 3,000
Prepaid expenses and other current assets ............................ 282 124
--------- ---------
Total current assets .............................................. 19,652 12,836
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation and amortization (Note 5) ............................... 480 608
DEFERRED INCOME TAXES (Note 4) ......................................... 6,037 7,000
OTHER ASSETS ........................................................... 244 92
--------- ---------
$ 26,413 $ 20,536
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable ......................................................... $ -- $ 1,066
Accounts payable ..................................................... 525 741
Accrued liabilities (Note 7) ......................................... 1,513 1,332
Accrued commissions (Note 7) ......................................... 5,251 2,661
Accrued bonuses ...................................................... 112 1,065
--------- ---------
Total current liabilities .......................................... 7,401 6,865
--------- ---------
LONG-TERM ACCOUNTS PAYABLE, net of current portion ..................... -- 191
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 8):
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 15,738,442 in 2003 and 15,488,042 in 2002 ... 15 15
Additional paid-in capital ........................................... 39,763 38,797
Accumulated deficit .................................................. (20,766) (25,332)
--------- ---------
Net stockholders' equity ........................................... 19,012 13,480
--------- ---------
$ 26,413 $ 20,536
========= =========
See accompanying notes to financial statements
F-3
MOSSIMO, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Revenue from license royalties and design service fees (Note 2) ... $ 19,895 $ 19,881 $ 16,666
Operating expenses:
Selling, general and administrative ........................... 12,834 11,925 10,455
Settlement costs of disputed commissions (Note 7) ............. 643 600 --
--------- --------- ---------
Total operating expenses .............................. 13,477 12,525 10,455
--------- --------- ---------
Operating earnings ................................................ 6,418 7,356 6,211
--------- --------- ---------
Other (income) expense:
Other, net .................................................... -- (181) (536)
Interest, net ................................................. (23) 276 864
--------- --------- ---------
Other expense, net ........................................ (23) 95 328
--------- --------- ---------
Earnings before income taxes ...................................... 6,441 7,261 5,883
Provision (benefit) for income taxes (Note 4) ..................... 1,875 (6,404) (3,153)
--------- --------- ---------
Net earnings ...................................................... $ 4,566 $ 13,665 $ 9,036
========= ========= =========
Net earnings per common share:
Basic ......................................................... $ 0.29 $ 0.89 $ 0.59
========= ========= =========
Diluted ....................................................... $ 0.29 $ 0.87 $ 0.59
========= ========= =========
Weighted average common shares outstanding:
Basic ......................................................... 15,613 15,409 15,254
========= ========= =========
Diluted ....................................................... 15,658 15,648 15,290
========= ========= =========
See accompanying notes to financial statements
F-4
MOSSIMO, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- --------- --------- ---------
BALANCE, December 31, 2000 .... 15,080 $ 15 $ 37,560 $(48,033) $(10,458)
Issuance of common stock ... 250 -- 744 -- 744
Net earnings ............... -- -- -- 9,036 9,036
--------- --------- --------- --------- ---------
BALANCE, December 31, 2001 .... 15,330 15 38,304 (38,997) (678)
Issuance of common stock ... 158 -- 493 -- 493
Net earnings ............... -- -- -- 13,665 13,665
--------- --------- --------- --------- ---------
BALANCE, December 31, 2002 .... 15,488 15 38,797 (25,332) 13,480
Issuance of common stock ... 250 -- 749 -- 749
Income tax benefit from
exercise of stock
options (Note 8) ......... -- -- 217 -- 217
Net earnings ............... -- -- -- 4,566 4,566
--------- --------- --------- --------- ---------
BALANCE, December 31, 2003 ..... 15,738 $ 15 $ 39,763 $(20,766) $ 19,012
========= ========= ========= ========= =========
See accompanying notes to financial statements
F-5
MOSSIMO, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................ $ 4,566 $ 13,665 $ 9,036
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ........................... 257 227 295
Deferred royalty income ................................. -- (1,483) --
Deferred income taxes ................................... 1,109 (6,404) (3,597)
Changes in:
Restricted cash .................................... (4,585) -- --
Accounts receivable ................................ (81) 32 (749)
Prepaid expenses and other current assets .......... (158) (6) (54)
Other assets ....................................... (152) -- 11
Accounts payable and long-term accounts payable .... (407) (1,119) (421)
Accrued liabilities ................................ 181 570 230
Accrued commissions ................................ 2,590 2,415 121
Accrued bonuses .................................... (953) 452 613
Deferred compensation .............................. -- -- (564)
S corporation distribution note .................... -- -- (255)
--------- --------- ---------
Net cash provided by operating activities ...... 2,367 8,349 4,666
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of property and equipment ...... (129) (487) (104)
--------- --------- ---------
Net cash used in investing activities .......... (129) (487) (104)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................. 749 493 744
Payments of loan payable ................................ (1,066) (3,751) (2,174)
--------- --------- ---------
Net cash used in financing activities .......... (317) (3,258) (1,430)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 1,921 4,604 3,132
CASH AND CASH EQUIVALENTS, beginning of year ............ 7,786 3,182 50
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year .................. $ 9,707 $ 7,786 $ 3,182
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ............. $ 10 $ 249 $ 743
========= ========= =========
Cash paid during the year for state income taxes ... $ 640 $ -- $ 203
========= ========= =========
See accompanying notes to financial statements
F-6
MOSSIMO, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Mossimo, Inc. (the Company) is a Delaware corporation formed in
November 1995, and presently operates as a designer and licensor of apparel and
related products. A substantial amount of the Company's revenue is derived under
an agreement with Target Corporation as further described below.
LICENSING AGREEMENTS
The Company entered into a multi-year licensing and design services
agreement with Target Corporation ("Target") in March 2000, subsequently amended
in February 2002, and in February and June 2003, hereinafter 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.
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 annually. 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. The next renewal option could be
exercised by Target on or before January 2005, this renewal option could extend
the Target Agreement thru January 2008, if it is exercised by Target.
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 exclusive agreement with
Hudson's Bay Company. Under the agreement the Company provides product design
services, and licenses the Mossimo trademark to Hudson's Bay Company for
exclusive use in Canada. The Company receives 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 branded product in mid-March 2003 for distribution through its Zellers
stores in Canada.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include temporary investment of cash in
liquid interest bearing accounts and marketable securities.
F-7
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful life of the asset, which is
generally three to ten years for furniture, fixtures, and equipment.
Amortization of leasehold improvements is calculated using the straight line
method over the remaining term of the lease. The Company evaluates the
impairment of long-lived assets when certain triggering events occur. If such
assets are determined to be impaired, a write-down of their fair market value is
recorded.
SEGMENTS
The Company operates in one principal business segment across domestic
and international markets. International sales are primarily made through the
Company's licensees in their respective territories.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes result from the recognition of the
income tax benefit to be derived from the Company's net operating loss
carry-forward for income taxes purposes (see Note 4 for further disclosure of
valuation allowance).
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. The Company follows the pro forma
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation", which require presentation of the pro forma effect of the fair
value based method on net earnings and net earnings per share in the financial
statement footnotes.
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 years ended December 31, 2003, 2002 and
2001:
2003 2002 2001
---------- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
---------- ----------- ----------
Actual net earnings ......................... $ 4,566 $ 13,665 $ 9,036
Less: Total compensation as if the fair value
method was used, net of tax effect ..... (298) (1,788) (1,199)
---------- ----------- ----------
Pro forma net earnings ...................... $ 4,268 $ 11,877 $ 7,837
========== =========== ==========
Net earnings per share:
Basic - as reported .................... $ 0.29 $ 0.89 $ 0.59
Basic - pro forma ...................... $ 0.27 $ 0.77 $ 0.51
Diluted - as reported .................. $ 0.29 $ 0.87 $ 0.59
Diluted - pro forma .................... $ 0.27 $ 0.76 $ 0.51
The fair value of each option grant was estimated as of the grant date
using the Black-Scholes option-pricing model for the years ended December 31,
2003, 2002 and 2001, assuming risk-free interest rates of approximately 1.9
percent, 3.9 percent, and 4.9 percent, respectively; volatility of approximately
50 percent, 80 percent, and 125 percent, respectively; zero dividend yield; and
expected lives of five years for all periods.
F-8
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. There are no items required to be reported by the Company
under this standard.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's balance sheets include the following financial
instruments: cash and cash equivalents, restricted cash, accounts receivable,
and accounts payable. The Company considers the carrying value of these
instruments to approximate fair value for these instruments because of the
relatively short period of time between origination and their expected
realization or settlement, and applicable interest rates reflect comparable
rates currently available to the Company on obligations under similar terms.
EARNINGS PER SHARE
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 include the effect of potential shares outstanding, including dilutive
stock options, using the treasury stock method.
Outstanding stock options under both Company plans are common stock
equivalents for the calculation of earnings per share. The reconciliation
between net earnings and weighted average shares outstanding for basic and
diluted earnings per share is as follows (all amounts in thousands, except per
share data):
2003 2002 2001
-------- -------- --------
Net earnings .................................... $ 4,566 $13,665 $ 9,036
Weighted average shares outstanding - Basic ..... 15,613 15,409 15,254
Basic earnings per share ........................ $ 0.29 $ 0.89 $ 0.59
Add: Dilutive effect of stock options ........... 45 239 36
Weighted average shares outstanding - Diluted ... 15,658 15,648 15,290
Diluted earnings per share ...................... $ 0.29 $ 0.87 $ 0.59
Stock options excluded from diluted weighted average shares outstanding
for the years ended December 31, 2003, 2002 and 2001 were approximately 554,000,
531,000, and 557,000, respectively, as they were antidilutive.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity." SFAS
No. 150 changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003. The
implementation of SFAS No. 150 did not have an impact on the Company's financial
position or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities". This interpretation 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.
The provisions of FIN 46 for certain variable interest entities were delayed
until the fourth quarter of 2003. 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.
F-9
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 Company licenses its trademarks,
provides design services and has approval rights for product design, marketing
and advertising materials under licensing and design service agreements which
include certain provisions for indemnifying the licensee. As an element of its
standard commercial terms, the Company includes an indemnification clause in its
licensing and design services agreements that indemnifies the licensee against
liability and damages arising from any claims, suits, damages, or costs relating
to the breach of any warranty, representation, term or condition made or agreed
to by its licensees involving the manufacture, packaging, distribution,
promotion, sale, marketing, advertising or other use of the trademarks under
license. We believe that our policies and practices limit our exposure related
to the indemnification provisions of the license and design services agreements.
For several reasons, including the lack of prior indemnification claims and the
lack of monetary liability limit for certain infringement cases under the
license and design services agreements, we cannot determine the maximum amount
of potential future payments, if any, related to such indemnification
provisions.
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; the adoption of this issue did not have a
material impact on the Company's financial position or results of operations.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition (SAB No. 104), which codifies, revises and rescinds
certain sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on the Company's results of operations,
financial position or cash flows.
2. MAJOR CUSTOMER
A substantial amount of the Company's revenue and accounts receivable
are derived under the Target Agreement. The accounts receivable are held without
collateral, and are subject to normal credit risk assumed by the Company.
Revenue from license royalties and design service fees from Target were
approximately 88 percent in 2003, and 92 percent in 2002 and 2001, of total
revenue.
3. LOAN PAYABLE
The Company had a loan payable to a bank that was fully paid in June
2003, and all security interests and guarantees in connection therewith were
released. The Company has no outstanding credit arrangements as of December 31,
2003.
4. INCOME TAXES
The provision (benefit) for income taxes consists of the following for
the years ended December 31:
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Current:
Federal ......................................... $ 162 $ -- $ 391
State ........................................... 604 -- 53
-------- -------- --------
766 -- 444
-------- -------- --------
Deferred:
Federal ......................................... 1,032 (5,444) (3,058)
State ........................................... 77 (960) (539)
-------- -------- --------
1,109 (6,404) (3,597)
-------- -------- --------
Total provision (benefit) for income taxes ... $ 1,875 $(6,404) $(3,153)
======== ======== ========
F-10
The provision (benefit) for income taxes may differ from the amount of
tax determined by applying the federal statutory rate to pretax earnings. The
components of this difference consist of the following for the years ended
December 31:
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Provision on earnings at federal statutory tax rate ... $ 2,198 $ 2,460 $ 2,000
State tax provision, net of federal tax effect ........ 375 430 343
Decrease in valuation allowance ....................... -- (6,404) (8,065)
Alternative minimum tax ............................... (494) -- 441
Timing differences on deductible expenses ............. -- (2,890) 1,299
Other ................................................. (204) -- 829
-------- -------- --------
Total provision (benefit) for income taxes .... $ 1,875 $(6,404) $(3,153)
======== ======== ========
Deferred taxes result from the recognition of the income tax benefit to
be derived from the Company's net operating loss carry-forward for income tax
purposes. Significant components of the Company's deferred income taxes are as
follows as of December 31:
2003 2002
-------- --------
(IN THOUSANDS)
Deferred income tax assets:
Net deferred tax assets from net operating loss carry-forward ... $ 8,456 $11,107
Net deferred tax assets from alternative minimum taxes and
other ......................................................... 1,759 --
Less: Valuation allowance ....................................... 1,107 1,107
-------- --------
Total net deferred tax asset .................................... 9,108 10,000
Less: Current portion ........................................... 3,071 3,000
-------- --------
Long-term portion ............................................... $ 6,037 $ 7,000
======== ========
The Company recorded a benefit for income taxes at December 31, 2002 of
approximately $6.4 million, further reducing the related valuation allowance for
its deferred tax asset, as a result of the extension of the Target Agreement
through January 31, 2006, and the reevaluation of its forecasted operating
results and resultant taxable income during the extended term of the Target
Agreement, and the consequent expected utilization of available net operating
losses during the extended term of the Target Agreement. Based upon management's
discussion with Target prior to December 31, 2002, management considered it more
likely than not that Target would extend the agreement; as a result, the Company
has considered the projected taxable income from the Target Agreement and other
agreements in its estimate of deferred tax asset recoverability.
At December 31, 2003 management concluded that future tax benefits
beyond the extended term of the Target Agreement, through January 2008
representing a second two year extension of the Target Agreement, are considered
to be "more likely than not" and have therefore recognized an additional
deferred tax asset of approximately $1.1 million. Additional deferred tax assets
of approximately $1.1 million have been reserved for in the Company's valuation
allowance as of December 31, 2003.
As of December 31, 2003, the Company has approximately $22 million, and
$18 million of federal and state income tax net operating loss carry forwards,
respectively, available to offset future taxable income, which expire in various
years through 2022.
In accordance with the Tax Reform Act of 1986, the benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50 percent over a three-year
period. The impact of limitations, if any that may be imposed upon future
issuances of equity securities can not be determined at this time.
In addition to the Company's taxable income being subject to federal,
state and local income taxes, the Company may be classified as a "personal
holding company" from time to time. Personal holding company status results from
more than 50 percent of the value of outstanding stock being owned directly or
indirectly by five or fewer individuals, and more than 60 percent of the
Company's income, as defined, being derived from royalties. Personal holding
companies are subject to an additional federal tax at a 15 percent tax rate on
undistributed after tax earnings.
F-11
Over 50 percent of the value of the Company's outstanding stock is
owned by one stockholder, and in 2002 and 2001, more than 60 percent of the
Company's income, as defined, was derived from license royalties. Accordingly,
the Company was classified as a personal holding company in 2002 and 2001.
However, no personal holding company tax was due in 2002 because the Company
recognized certain expenses for tax purposes in 2002 that had been recognized in
previous years for financial reporting purposes, and which offset the taxable
income subject to personal holding company tax in 2002. In addition, no personal
holding company taxes were due in 2001 because the Company was able to use its
tax operating loss carry forward to offset the taxable income subject to
personal holding company tax in 2001. In 2003 less than 60 percent of the
Company's income as defined was derived from license royalties, accordingly it
was not classified as a personal holding company and was not subject to the
personal holding company tax. The Company intends to continue to take
appropriate measures to avoid being classified as a personal holding company in
future years. However, there can be no assurance that the Company will be
successful in its efforts to avoid classification as a personal holding company
in the future.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2003 2002
------- -------
(IN THOUSANDS)
Furniture and fixtures ............................ $ 307 $ 294
Leasehold improvements ............................ 604 575
Equipment ......................................... 247 160
------- -------
1,158 1,029
Less: Accumulated depreciation and amortization ... 678 421
------- -------
$ 480 $ 608
======= =======
6. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all full-time employees, and providing for
matching contributions by the Company, as defined in the plan. Contributions
made to the plan for the years ended December 31, 2003, 2002 and 2001 were
approximately $14,000, $3,100, and $2,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its office and design studio under an operating
lease agreement effective through July 2009, providing for annual lease payments
of approximately $290,000 in 2004, $306,000 in 2005, $315,000 in 2006, $324,000
in 2007, $334,000 in 2008, and $196,000 in 2009. Rent expense for the years
ended December 31, 2003, 2002 and 2001 was approximately $260,000, $155,000, and
$105,000, respectively.
The Company has a bonus program with its two top executives. Under this
program bonuses payable to the Chief Executive Officer and the President are
determined at the discretion of the Compensation Committee of the Board of
Directors, are subject to approval by the Board of Directors, and can not exceed
a formula based on a percentage of fees paid by Target to the Company, as
defined in the respective bonus plans of these two officers. Bonus expense in
connection with the bonus plans of these two officers for the years ended
December 31, 2003, 2002, and 2001 was approximately $1,854,000, $2,300,000 and
$3,300,000, respectively.
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 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. In January 2003 the third
party filed a petition to confirm the award, including commissions, the third
party's legal fees, and interest. In June 2003, the award was confirmed and a
judgment entered in favor of the third party, and the third party was awarded
additional interest. In June 2003 the Company filed an appeal to the judgment
and in connection therewith deposited with the court approximately $4,585,000.
The deposit secures 150 percent of the judgment amount. In January 2004 the
appeal decision was rendered in favor of the third party, and the Company is
proceeding with an appeal to the Supreme Court of the State of California. The
Company could be liable for additional legal fees and interest payable to the
third party if the appeal to the Supreme Court of the State of California is not
successful. There can be no assurance that the appeal will be successful.
F-12
The Company continues to accrue and withhold payment of estimated
commissions, legal fees, and interest that may be payable to the third party
until this matter comes to a final resolution. At December 31, 2003, the Company
had accrued approximately $6.4 million of unpaid commissions, legal fees, and
interest potentially payable to the third party in connection with this matter.
The $4,585,000 deposited with the courts was classified as restricted cash on
the Company's balance sheet as of December 31, 2003, additional cash and cash
equivalents are available to pay the balance of the amounts potentially due,
have also been segregated from normal operating funds, and are liquid and
available for payment to the third party if and when those amounts become
payable by court order. The aggregate accruals of approximately $6.4 million
were classified as accrued commissions and accrued liabilities on the Company's
balance sheet as of December 31, 2003. All expenses recognized to date have been
classified with operating expenses on the Company's statements of earnings.
In accordance with the terms of the finder's agreement, the Company
recognized commission expense in the years ended December 31, 2003, 2002, and
2001 of approximately $2.6 million, $2.7 million, and $2.3 million,
respectively. In the fourth quarter of 2002, the Company recognized additional
expenses in connection with the cost of arbitration of approximately $600,000,
which include the accrued interest and legal fees potentially payable to the
third party. During 2003 the Company recognized additional interest expense and
legal fees in connection with the appeals of this case of approximately
$643,000, of which $413,000, were recognized in the fourth quarter of 2003 upon
the Company receiving the court of appeals decision in favor of the third party
and at which time the amounts became subject to estimate. No amounts have been
paid to the third party as of December 31, 2003.
8. STOCKHOLDERS' EQUITY
The Company adopted the Mossimo, Inc. 1995 Stock Option Plan (the "1995
Plan"), which provides for the grant of stock options, stock appreciation rights
and other stock awards to certain officers and key employees of the Company and
to certain advisors or consultants to the Company. A total of 1,500,000 shares
have been reserved for issuance under the 1995 Plan. The exercise price of
options granted under this plan are based on the fair market value of the common
stock on the date of grant. Options granted under this plan vest and terminate
over various periods as defined by each option grant, and in accordance with the
plan, as amended. During 2003 the Company granted options for 540,000 shares,
with a weighted average fair value of $4.14 per share. During the years ended
December 31, 2003, 2002, and 2001 options for 250,000, 125,000, and 250,000
shares were exercised, respectively, at a weighted average price of $3.00,
$3.74, and $2.98 per share, respectively, with net proceeds to the Company of
$749,000, $467,000, and $744,000, respectively. As of December 31, 2003 there
were options granted and outstanding for 471,000 shares, with an exercise price
in the range of $2.50 to $18.00 per share, of which options for 151,000 shares
were fully vested and exercisable through 2013; and 403,000 shares were
available for future grants under the plan.
The Company's Non-Employee Directors Stock Option Plan (the "Directors
Plan") provides for the automatic grant to each of the Company's non-employee
directors of (i) an option to purchase 30,000 shares of common stock on the date
of such director's initial election or appointment to the Board of Directors and
(ii) an option to purchase 3,000 shares of common stock on each anniversary
thereof on which the director remains on the Board of Directors. A total of
250,000 shares have been reserved under the Directors Plan. The exercise price
of options granted under this plan, are based on the fair market value of the
common stock on the date of grant. During 2003, the Company granted options for
9,000 shares, with a weighted average fair value of $3.50 per share. During the
year ended December 31, 2002, options for 33,000 shares were exercised at a
weighted average price of $0.79 for net proceeds to the Company of $26,000. As
of December 31, 2003 there were options granted and outstanding for 154,000
shares, with an exercise price in the range of $0.88 to $25.38 per share, of
which options for 130,000 were fully vested and exercisable through 2013; and
60,000 shares were available for future grants under the plan.
In 2003, the Company recorded an income tax benefit from the exercise
of stock options to recognize the deduction, for tax purposes only, of the gain
recognized by the employees that exercised the stock options. Accordingly, a
credit of $217,000 was recorded as part of additional paid-in-capital in the
accompanying balance sheets.
F-13
9. VALUATION AND QUALIFYING ACCOUNTS
Changes in the allowances for doubtful accounts, and for sales returns
and markdowns were as follows:
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- -------- ----------- -----------
Year ended December 31, 2002 - Note (a):
Allowance for doubtful accounts ............. $ 207 $ -- $ (207) $ --
Allowance for sales returns and markdowns ... 6,229 -- (6,229) --
Year ended December 31, 2001:
Allowance for doubtful accounts ............. $ 207 $ -- $ -- $ 207
Allowance for sales returns and markdowns ... 7,383 -- (1,154) 6,229
Note (a): Deductions reflect the write-off of accounts previously reserved.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The following tables set forth certain selected interim financial data
for the Company by quarter for the years ended December 31, 2003 and 2002.
YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues ........................ $ 5,868 $ 6,858 $ 4,176 $ 2,993 $ 19,895
Earnings (loss) before income taxes ... 2,328 3,075 1,050 (12) 6,441
Provision (benefit) for income taxes .. 930 1,230 420 (705) 1,875
Net earnings (loss) ................... 1,398 1,845 630 693 4,566
Net earnings (loss) per share:
Basic ............................ $ 0.09 $ 0.12 $ 0.04 $ 0.04 $ 0.29
Diluted .......................... 0.09 0.12 0.04 0.04 0.29
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues ........................ $ 5,590 $ 7,404 $ 4,287 $ 2,600 $ 19,881
Earnings (loss) before income taxes ... 3,042 3,654 1,615 (1,050) 7,261
Benefit for income taxes .............. -- -- -- (6,404) (6,404)
Net earnings .......................... 3,042 3,654 1,615 5,354 13,665
Net earnings per share:
Basic ............................ $ 0.20 $ 0.24 $ 0.10 $ 0.35 $ 0.89
Diluted .......................... $ 0.20 $ 0.23 $ 0.10 $ 0.34 $ 0.87
F-14
MOSSIMO, INC.
INDEX TO EXHIBITS
Exhibit - 10.7.2 Second Amendment to Office Lease dated January 1, 2004
Exhibit - 21 Subsidiaries of the Registrant
Exhibit - 23 Independent Auditors' Consent
Exhibit - 31.1 Certification of Principal Executive Officer as required by
Rule 13a - 14(a) of the Securities Exchange Act of 1934
Exhibit - 31.2 Certification of Principal Financial Officer as required by
Rule 13a - 14(a) of the Securities Exchange Act of 1934
Exhibit - 32.1 Certification of Principal Executive Officer as required by
Rule 13a - 14(b) of the Securities Exchange Act of 1934
Exhibit - 32.2 Certification of Principal Financial Officer as required by
Rule 13a - 14(b) of the Securities Exchange Act of 1934