MOSSIMO INC, 10-K405, 1997-03-27

MOSSIMO INC
10-K405, 1997-03-27
MEN'S & BOYS' FURNISHGS, WORK CLOTHG, & ALLIED GARMENTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

/ / 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)

<TABLE>
<CAPTION>
Delaware 33-0684524
<S> <C>
- -------------------------------------------- --------------------------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)

15320 Barranca Parkway
Irvine, California 92618
- -------------------------------------------- --------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>

(714) 453-1300
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(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Common stock,
par value $.001 per share

Securities registered pursuant to Section 12(g) of the Act: None

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.

Yes X No
------ ------

The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 14, 1997 was approximately $38,155,000.

The registrant had 15,000,000 shares of common stock, par value $.001 per
share outstanding at March 14, 1997.

Documents Incorporated by Reference (To the Extent Indicated Herein):
Portions of the Definitive Proxy Statement for the 1997 Annual Meeting (in Part
III)

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ITEM 1--BUSINESS

GENERAL

Mossimo, Inc. ("Mossimo" or the "Company") is a Delaware corporation formed
in November 1995 to succeed to the assets and liabilities of Mossimo, Inc., a
California corporation, which was organized in 1988 to continue the business
founded by Mossimo Giannulli in 1987 as a sole proprietorship. The Company
designs, sources and markets a lifestyle collection of designer men's and
women's sportswear and activewear bearing Mossimo-Registered Trademark-
trademarks that project the Company's image of a contemporary and youthful
lifestyle. The Company's apparel offerings include tee-shirts, shorts,
sweatshirts, denim products, knit and woven shirts, and outerwear. The Company
also designs, sources and markets men's and women's eyewear and watches, and
licenses its trademarks for use in collections of women's swimwear and bodywear,
men's neckwear, and men's and women's accessories. Mossimo products are
characterized by quality workmanship and are targeted towards the
culturally-conscious, youthful-minded consumer generally age 35 or under.

The Company's primary growth strategy is to increase sales to existing
accounts by expanding its in-store shop program whereby participating retailers
set aside exclusive floor space, highlighted by signature Mossimo fixtures, to
sell the Company's products. This program, which began in early 1995, is
designed to enable retailers to create an environment consistent with the
Mossimo image and to display, stock and sell greater volumes of the Company's
products. The Company believes that these in-store shops will build retailer
commitment and consumer recognition of the Mossimo brand name. As of December
31, 1996, the Company had 100 in-store shops as compared with 11 at the end of
1995. The Company plans to continue the aggressive expansion of its in-store
shop concept in 1997.

The Company also plans for growth through increased penetration of existing
accounts which will be achieved by broadening its range of product offerings,
both in-house and through licensing arrangements, and increasing the number of
stores in which its products are sold. During 1996, the Company introduced its
women's sportswear collection as well as a collection of men's and women's
designer watches. In addition, the Company signed license agreements for men's
neckwear and for the distribution of a broad array of Mossimo products in
Greece, South Africa and Southeast Asia.

References herein to the "Company" and "Mossimo" refer to Mossimo, Inc. and,
unless the context otherwise indicates, its subsidiaries and predecessor.

PRODUCT DESIGN

The cornerstone of the Company's business is its ability to design products
which embody the Mossimo image of a contemporary 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 youthful-minded consumer. Mossimo
Giannulli, the Company's founder and principal designer, provides leadership and
direction for all aspects of the design process and oversees a design staff of
19 people. The design staff reflects the Company's culturally-conscious,
youthful-minded target consumer as they consistently monitor changes in culture
and society. Mr. Giannulli's active participation in, and oversight of, the
design process for all Mossimo products is intended to ensure consistency of the
quality of such products and their adherence to the Company's distinctive image.

PRODUCTS

The Company's products include men's activewear, such as tee-shirts and
shorts, men's and women's sportswear, including knit and woven tops and denim
and related products, and men's and women's eyewear and watches. The Company
also licenses Mossimo trademarks to third-party licensees who manufacture and
distribute women's swimwear and bodywear, men's neckwear and men's and women's

2
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apparel-related accessories utilizing designs approved by the Company. The
following table sets forth the components of the Company's net sales by product
for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994
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NET SALES % NET SALES % NET SALES %
---------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Men's Apparel:
Activewear.................................... $ 42,335 39.0% $ 43,288 60.2% $ 28,820 65.0%
Sportswear.................................... 41,678 38.4 24,427 33.9 13,139 29.6
Women's Sportswear.............................. 19,874 18.3 731 1.0 329 .7
Eyewear......................................... 2,842 2.6 2,295 3.2 1,520 3.4
Other (1)....................................... 1,945 1.7 1,220 1.7 525 1.3
---------- --------- ----------- --------- ----------- ---------
Total........................................... $ 108,674 100.0% $ 71,961 100.0% $ 44,333 100.0%
---------- --------- ----------- --------- ----------- ---------
---------- --------- ----------- --------- ----------- ---------
</TABLE>

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(1) Other is comprised primarily of sales of the Company's Time collection of
watches, sales of fabric, trim, merchandising supplies and fixtures to
certain of the Company's licensees, and sales made by the Company's two
signature retail stores in Southern California, less unallocated discounts
and allowances.

APPAREL

MEN'S ACTIVEWEAR. Mossimo's activewear products are popular among younger
designer-oriented consumers. The Company offers both screenprinted and
embroidered tee-shirts and sweatshirts, in a variety of styles and colors,
prominently displaying the Company's name. In addition, the Company's volley and
walk shorts are offered in a variety of styles, fabrics and colors and are
designed for athletic use or casual wear. The Company believes that its
activewear products are characterized by the quality of fabrics and construction
and are distinguished from other activewear lines by the Mossimo name. The
Company's activewear products compete with other activewear designers such as
Quiksilver, Billabong, Rusty and Redsand and are generally priced between $18
and $48.

MEN'S SPORTSWEAR. Mossimo's men's sportswear encompasses a variety of
products including: knit and woven tops, including polo shirts and collared,
button shirts; denim and related products, such as jeans, shirts and jackets;
and outerwear, including sweaters and jackets. Mossimo's contemporary designer
men's sportswear products compete with other designer men's sportswear lines
such as Tommy Hilfiger, Calvin Klein, Polo/Ralph Lauren, Nautica, Liz Claiborne,
Perry Ellis and Guess?. The Company's sportswear products generally retail for
between $22 to $175, which is generally lower than such competitors' products.
While the Company's sportswear line includes basic styles of jeans and other
products that recur with only minor variation from season to season and year to
year, most of the Company's sportswear products, while having certain consistent
design elements, offer a variety of silhouettes, fabrics, colors and patterns
and are seasonal in nature. The Company also offers generally higher priced
products such as leather jackets, men's suitings, and certain sweaters and
trousers which are more seasonal and fashion-oriented. Although these products
are an important component of the Mossimo designer label, they historically
constitute less than one percent of net sales. The Company expects that such
products will continue to represent a relatively small percentage of its overall
net sales.

WOMEN'S SPORTSWEAR. The Company formally launched its designer young
women's sportswear line in July 1996. The women's sportswear line is being
distributed primarily to the Company's better department store and specialty
store accounts, including the Company's in-store shops. The line consists of
denim products, including tops, pants and jackets, knit tops, dresses, shorts
and outerwear, such as sweaters and leather jackets, and is characterized by
distinctive fabrics and contemporary styling. The women's sportswear products
generally retail for between $20 and $140 and are targeted toward young women
between the ages of 13 and 25.

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EYEWEAR

The Company's eyewear line features three primary categories of high quality
men's and women's sunglasses manufactured to Mossimo's design specifications.
The eyewear features either glass or polycarbonate lenses and highly stylized
frames which are sold primarily in better department stores and optical
specialty stores. The eyewear collections include:

MOSSIMO OPTICS--Mossimo's original contemporary eyewear featuring glass
lenses and highly stylized Italian frames at retail price points ranging from
$138 to $200.

MOSS--A sunwear collection developed to appeal to younger Mossimo customers
featuring polycarbonate lenses and a combination of nylon, nickel and monel
frames. The Moss collection will be available at retail in March 1997 at
price points ranging from $75 to $100.

MOSSIMO GIANNULLI--A signature collection developed exclusively for high-end
optical retailers and specialty department stores. The signature collection
is manufactured in Japan and will be available at retail in May 1997 at price
points upwards of $300.

WATCHES

The Company introduced its new collection of custom timepieces in the fall
of 1996. The collection is offered in men's and junior sizes and is distributed
through department and specialty stores. The watch collection features four main
styles with a broad selection of bands: STONEHENGE--a basic timepiece; HUBBLE--a
pocket watch worn on the wrist; EDDINGTON--a dress piece; and AQUANAUT--a
diver's watch.

The collection, which was designed and is being sourced in-house, is
constructed with 100% stainless steel parts and quartz movements and retails
between $75 and $170.

Licensed Products

WOMEN'S SWIMWEAR AND BODYWEAR. The Mossimo line of women's swimwear and
bodywear is manufactured and distributed in the United States by a licensee
utilizing designs approved by the Company bearing Mossimo trademarks. The
swimwear products include both one-piece and two-piece swimsuits which are
fashion-oriented and targeted towards young, body conscious women. The Mossimo
swimwear line has been featured in several magazines, including the SPORTS
ILLUSTRATED swimsuit issue. The women's bodywear line is a collection of
fashionable aerobic activewear which prominently bears the Mossimo trademarks
and is designed using materials such as lycra that stretch and compensate for
body movements during strenuous exercise.

ACCESSORIES. Accessories, including hats, bags, belts, jewelry and wallets
bearing the Company's trademarks, are manufactured and distributed in the United
States by a licensee based on designs approved by Mossimo. Such accessories are
consistent with Mossimo's contemporary and youthful image and are intended to
complement the Company's other lines through related styles, colors or fabrics.

NECKWEAR. In 1996, the Company signed a license agreement with Superba to
produce a collection of men's better ties and neckwear under the Mossimo label.
The neckwear collection will be available at retail in June 1997.

SOURCING AND MANUFACTURING

The Company sources each of its product lines separately based on the
individual design, styling and quality specifications of such products through
independently owned contractors with manufacturing facilities primarily in the
United States, China, India, Macao, Peru, Portugal and Italy. The Company
believes that outsourcing the substantial majority of its production allows it
to enhance production flexibility and capacity while substantially reducing
capital expenditures and avoiding the costs of managing a large production work
force. In addition, outsourcing provides the Company with expertise in fabric
selection and manufacturing processes.

4
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Mossimo contracts for the manufacture and sewing of its products with
approximately 35 domestic factories and mills and 138 overseas factories and
mills. During 1996, approximately 60% of the Company's products were
manufactured offshore. The balance of the Company's finished goods were
manufactured by domestic suppliers. The Company anticipates that the importation
of its products will increase primarily due to its increasing sportswear sales.

The Company utilizes international sourcing agents who assist the Company in
selecting and overseeing third party contractors, sourcing fabric and monitoring
quotas and other trade regulations. The Company's production staff and
independent sourcing agents oversee all aspects of apparel manufacturing and
production. The Company and its sourcing agents separately negotiate with
suppliers for the purchase of fabrics which are then purchased either by the
Company or by its contractors.

The Company arranges for the production of its products primarily based on
orders received. The Company has traditionally received a significant portion of
its customer orders prior to placement of its initial manufacturing orders. Many
of these customer orders may change with respect to colors, sizes, allotments or
assortments prior to the delivery date. The Company utilizes such orders and its
historical experience to estimate production requirements in order to secure
necessary fabrics and manufacturing capacity. Because the Company's foreign
manufacturers are located at greater geographic distances from the Company than
its domestic manufacturers, the Company is generally required to allow greater
lead time for foreign manufacturing orders.

The Company does not own or operate any manufacturing facilities and is
therefore dependent on independent contractors for the manufacture of its
products. The Company's products are manufactured to its specifications by both
domestic and international manufacturers. The inability of a manufacturer to
ship the Company's products in a timely manner or to meet the Company's quality
standards could adversely affect the Company's ability to deliver products to
its customers in a timely manner. Delays in delivery could result in missing
certain retailing seasons with respect to some or all of the Company's products
or could otherwise have an adverse effect on the Company's financial condition
and results of operations. There are no formal arrangements between the Company
and any of its contractors or suppliers.

The Company's quality control program is designed to ensure that all goods
bearing Mossimo trademarks meet the Company's standards. With respect to its
products, the Company develops and inspects prototypes of each product prior to
cutting by the contractors, establishes fittings based on the prototype,
inspects samples and, through its employees or sourcing agents, inspects fabric
prior to cutting. The Company or its sourcing agents inspect the final product
prior to shipment to the Company's Irvine, California warehouse. With respect to
licensed products, the Company oversees the quality control programs of its
licensees and regularly inspects samples of their products.

In June 1996, the Company formed a wholly-owned subsidiary, Giannico, Inc.
(Giannico), which is engaged in the screenprinting of tee-shirts for the Company
and others. Giannico commenced operations in a 53,000 square foot facility in
October 1996.

MARKETING AND ADVERTISING

In marketing its men's apparel products in the United States, the Company
utilizes 13 independent sales representatives who are assigned geographic
territories by the Company and compensated on a commission basis. The Company
utilizes four in-house sales representatives who are salaried rather than paid
on commission to market the women's sportswear line. The Company's eyewear
products are marketed through a sales force of 11 independent representatives,
three of whom also carry the Company's men's apparel lines. The Company
maintains showrooms at its headquarters in Irvine, California, New York City,
Dallas and Chicago to display various portions of its product line. The
Company's products are presented at a number of trade shows, including the
semi-annual MAGIC Show where the Company's products appear in the designer
pavilion.

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The Company strives to maintain a consistent image through the coordination
of merchandising, advertising and promotion. The Company advertises extensively
in magazines such as GQ, DETAILS, DETOUR, ELLE and VANITY FAIR. The Company
develops its advertising program in-house which provides the Company with a
greater degree of creative control. The goal of the Company's print campaign is
to present a distinctive image of a contemporary and youthful lifestyle which
consumers will associate with the Company's products. This image is carried
forward in hangtags and in the design of the Company's in-store shops and
displays and its two Southern California signature retail stores. The Company
also uses personal appearances by Mossimo Giannulli to promote its products to
the consumer and to enhance its relationships with its accounts.

DISTRIBUTION

Distribution of all Mossimo non-licensed products is centralized in the
Company's Irvine facility. Upon receipt from the manufacturers, the Company's
products are inspected, sorted, packed and shipped to retail accounts in the
United States. The Company's licensees are responsible for the distribution of
licensed products. The Company maintains an open stock program for certain of
its denim products to facilitate reorders by its customers. The Company expects
to expand this program to other products in 1997.

Mossimo has an electronic data interchange ("EDI") system through which
certain orders are automatically placed by the retailer with the Company. In
addition, the Company's sales representatives can transmit orders directly to
the Company's system from the field, further expediting order processing.

During 1996, the Company's products were sold in over 2,800 department and
specialty retail store locations throughout the United States. The Company's
five largest customers accounted for approximately 37.8% and 40.3% of net sales
in 1996 and 1995, respectively. The Company's largest customer, Dillard's,
accounted for approximately 10.5% of net sales in 1996. A decision by Dillard's,
or the controlling owner of a group of department stores or any other
significant customer, to decrease the amount purchased from the Company or to
cease carrying the Company's products could have a material adverse effect on
the Company's financial condition and results of operations.

The Company seeks to enhance brand image by controlling the distribution
channels for its products based on criteria which include the image of the
store, availability of a desirable location within the store and the store's
ability to effectively display and promote the Company's products.

A significant component of this strategy is the Company's in-store shops
program in department and selected specialty retail stores. This program enables
Mossimo to design a retail space consistent with the Company's image and is
intended to enable the retailers to display, stock and sell a greater volume of
the Company's products. The Company believes that these in-store shops build
longer term retailer commitment to the Company's products and consumer
recognition of the Mossimo brand name. As of December 31, 1996, the Company had
installed 100 in-store shops in department and specialty retail store chains,
including Macy's, Bloomingdales, Bon Marche and Dayton Hudson, and currently
plans to install approximately 125 additional men's and women's in-store shops
in 1997. The costs of the shops to date have generally been shared between the
retailer and the Company.

The apparel industry historically has been subject to substantial cyclical
variations. During recessionary periods, when disposal income is low, purchases
of apparel and related goods tend to decline. Accordingly, a recession in the
general economy or uncertainties regarding future economic prospects that effect
consumer spending habits could have a material adverse effect on the Company's
results of operations. Additionally, the retail industry has experienced
significant changes and difficulties over the past several years, including
consolidation of ownership, increased centralization of buying decisions,
restructuring, bankruptcies and liquidations. While various retailers, including
some of the Company's customers, experienced financial difficulties in the past
few years which increased the risk of extending credit to such retailers, the
Company's bad debt experience has been limited. Financial problems of a retailer
could cause the Company's factor to limit the amount of receivables of such
retailer that the factor would approve, which could cause the Company to curtail
business with such retailer or require the

6
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Company to assume more credit risk relating to such customer's receivables. The
Company cannot predict what effect, if any, continued changes within the retail
industry will have on the Company's business.

RETAIL STORES

The Company operates two signature retail stores which provide a means to
showcase the Company's products. The stores are located in South Coast Plaza,
Orange County, California (established in 1993) and Old Towne, Pasadena,
California (established in 1994). Each store incorporates contemporary
architectural designs which are consistent with the Company's in-store shop
environment and the Company's image.

LICENSING

The Company enters into licensing agreements for certain products and
geographical territories if the Company believes such arrangements will provide
more effective manufacturing, distribution or marketing of such products than
could otherwise be achieved in-house. In addition, the Company believes that
selective licensing of the Mossimo name and trademarks provides an opportunity
to promote the Mossimo brand name while significantly reducing capital outlays
and operating expenses. In evaluating a licensing decision, the Company
considers various factors including potential profit and capital and management
resources available to the Company at such time. The Company maintains
substantial control over the design, manufacturing specifications, advertising
and distribution of its licensed products and maintains a policy of evaluating
its licensing arrangements to ensure consistent presentation of the Mossimo
image.

The Company has licensed the exclusive right to manufacture and distribute
women's swimwear and bodywear bearing its trademarks in the United States
pursuant to a license agreement with The Lunada Bay Corporation that expires in
September 1997, subject to renewal upon negotiation. Mossimo currently licenses
to Aquarius, Ltd. the exclusive right to manufacture and distribute men's and
women's accessories in the United States. This license agreement expires in
December 1999, subject to renewal by the licensee for an additional two-year
term, if minimum sales and royalty requirements are met. In addition, the
Company recently licensed to Superba the exclusive right to manufacture and
distribute finer men's neckwear in the United States. This license currently
expires in March 2000, subject to renewal by the licensee for an additional
three-year term, if minimum sales and royalty requirements are met. Under all
license agreements, Mossimo retains approval rights with respect to the design
of products.

Currently, Mossimo has seven license agreements pursuant to which
third-party licensees have the exclusive right to manufacture and sell certain
products under the Company's trademarks according to designs furnished or
approved by the Company in specified territories including Japan (where the
licensee is Itochu Corporation), Canada, Australia and New Zealand, Greece,
Chile, South Africa and Southeast Asia. The present terms of these agreements
(exclusive of renewal terms) expire at various dates ranging from July 1998
through December 2000.

TRADEMARKS

The Company utilizes a variety of trademarks which it owns, including the
script Mossimo trademark. The Company has 8 registrations and 6 pending
applications for its trademarks in the United States. In addition, the Company
has approximately 106 trademark registrations and applications in over 41 other
countries. The Company regards its trademarks and other proprietary rights as
valuable assets and believes they have significant value in the marketing of its
products. The Company vigorously protects its trademarks against infringement,
including the use of cease-and-desist letters, administrative proceedings and
lawsuits.

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COMPETITION

The men's sportswear and activewear segments of the apparel industry are
highly competitive. The Company encounters substantial competition in the men's
and women's designer sportswear business, including Tommy Hilfiger, Calvin
Klein, Polo/Ralph Lauren, Nautica, Liz Claiborne, Perry Ellis and Guess?, as
well as certain other designer and nondesigner lines. With respect to its men's
activewear products, the Company encounters substantial competition from other
activewear and beachwear lines. Additionally, the Company encounters substantial
competition from department stores, including some of the Company's major retail
customers, which have increased in recent years the amount of sportswear and
activewear manufactured specifically for them and sold under their own labels.
Mossimo's eyewear, watches, licensed accessories and women's swimwear and
bodywear also compete with a substantial number of designer and nondesigner
lines. Many of the Company's competitors are significantly larger and more
diversified than the Company, have substantially greater financial,
distribution, marketing and other resources and have achieved greater
recognition for their brand names than the Company. The Company competes
primarily on the basis of fashion, image, price, quality and service. The
Company believes its competitive position depends upon its ability to anticipate
and respond effectively to changing consumer demands and to offer
fashion-conscious customers a wide variety of high quality apparel at
competitive prices.

BACKLOG

The Company generally receives the bulk of the orders for each of the
Spring, Summer, Fall and Holiday seasons a minimum of three months prior to the
date the products are shipped to stores. Such orders are cancelable by the
retailer up to 30 days prior to the date of shipment of the products. At
December 31, 1996, the Company's Spring backlog of orders for delivery primarily
in the first quarter was approximately $22.7 million, as compared with Spring
backlog of approximately $22.9 million at December 31, 1995. Historically, the
Company has shipped less than all orders in its backlog. The Company's backlog
depends upon a number of factors, including the timing of trade shows during
which a significant percentage of the Company's orders are received, the timing
of shipments, product mix of customer orders and the amount of in-season orders.
Accordingly, a comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of actual shipments.

EMPLOYEES

At December 31, 1996, the Company had approximately 330 full-time employees.
None of the Company's employees are covered by collective bargaining agreements.
The Company considers its relations with its employees to be good.

ITEM 2--PROPERTIES

The Company's current corporate headquarters, distribution facility and
screenprinting operation are located in Irvine, California and consist of eight
leased buildings totaling approximately 165,000 square feet of space. In
addition, the Company leases showrooms in New York City, Dallas and Chicago as
well as two retail stores in Costa Mesa and Pasadena, California.

To accommodate the Company's growth for the foreseeable future and provide a
significant increase in distribution capacity, the Company has entered into an
agreement to lease a new build-to-suit facility in Irvine, California. This
facility is currently under construction and is expected to be ready for
occupancy in June 1997. The new facility will initially include 40,000 square
feet of office space and a 160,000 square foot distribution facility, with
potential distribution facility expansion of an additional 70,000 square feet.

ITEM 3--LEGAL PROCEEDINGS

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certain of its officers and directors with respect to statements made in
connection with its initial public offering, subsequent Securities and Exchange
Commission filings, analyst reports and other public announcements. The suit is
purportedly brought on behalf of all persons who purchased the Company's Common
Stock during the period from February 23, 1996, the date of its initial public
offering, through January 14, 1997 by named plaintiff Chaile Steinberg. Such
suit seeks compensatory damages of unspecified amounts and other relief.
Although the outcome of litigation cannot be predicted with certainty,
management believes that the Company has meritorious defenses to the claims
alleged and intends to vigorously defend against this action.

The Company is involved in certain other legal and administrative
proceedings and threatened legal and administrative proceedings arising in the
normal course of its business. While the outcome of such proceedings and
threatened proceedings cannot be predicted with certainty, in the opinion of
management, the ultimate resolution of these matters individually or in the
aggregate will not have a material adverse effect on the Company.

ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1996.

ITEM 5-- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock, par value $.001 per share (Common Stock), began
trading February 23, 1996 on the New York Stock Exchange upon completion of the
Company's initial public offering (trading symbol "MGX"). As of March 14, 1997,
there were approximately 6,100 shareholders of record. The following table sets
forth the high and low sales prices for the Common Stock for each quarterly
period since such stock began trading, as reported on the New York Stock
Exchange Composite Tape:

<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
First Quarter (from February 23, 1996).................................... $ 34 1/4 $ 23 3/4
Second Quarter............................................................ $ 50 1/8 $ 27 3/4
Third Quarter............................................................. $ 49 3/4 $ 26 1/4
Fourth Quarter............................................................ $ 31 7/8 $ 11 7/8
</TABLE>

The Company intends to use its cash flow from operations to finance the
build-out of its new leased headquarters facility, the construction and
installation of in-store shops in connection with the Company's in-store shop
program and its working capital needs. 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 other factors deemed relevant by the
Board of Directors. Further, the Company's revolving credit facility restricts
its ability to pay dividends.

Since its initial public offering, the Company has not paid a dividend on
its Common Stock. For certain information regarding distributions made by the
Company in 1995 and 1996 (prior to its initial public offering in February
1996), see "Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

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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 consolidated financial statements and notes thereto (see "Index to
Consolidated Financial Statements") and "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations." The income statement
and balance sheet data presented below have been derived from the Company's
consolidated financial statements. The selected pro forma income statement data
set forth below is for informational purposes only and may not necessarily be
indicative of the Company's results of operations in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $108,674 $71,961 $44,333 $22,134 $16,467
Cost of sales........................... 69,364 41,210 26,027 14,516 11,573
-------- ------- ------- ------- -------
Gross profit............................ 39,310 30,751 18,306 7,618 4,894
Royalty income.......................... 3,919 3,413 2,375 1,051 529
Operating expenses...................... 25,283 14,586 9,380 5,954 4,679
-------- ------- ------- ------- -------
Operating income........................ 17,946 19,578 11,301 2,715 744
Interest income (expense), net.......... 191 (233) (148) (216) (183)
Other income (expense).................. 19 114 87 (4) (16)
-------- ------- ------- ------- -------
Income before income taxes.............. 18,156 19,459 11,240 2,495 545
Provision for income taxes (1).......... 5,526 297 176 70 14
-------- ------- ------- ------- -------
Net income.............................. $ 12,630 $19,162 $11,064 $ 2,425 $ 531
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
PRO FORMA DATA (2):
Historical income before income taxes... $ 18,156 $19,459 $11,240 $ 2,495 $ 545
Pro forma provision for income taxes.... 7,374 7,946 4,663 1,026 231
-------- ------- ------- ------- -------
Pro forma net income.................... $ 10,782 $11,513 $ 6,577 $ 1,469 $ 314
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Pro forma net income per share (3)...... $ .72
--------
--------
Pro forma weighted average common shares
outstanding (3)........................ 14,877
--------
--------

DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 36,152 $12,621 $ 9,880 $ 1,932 $ 1,055
Total assets............................ 50,754 17,162 14,635 5,326 3,617
Long-term debt.......................... 85 30 64 72 118
Stockholders' equity.................... 41,131 14,035 10,987 2,459 1,033
</TABLE>

- ------------------------

(1) Represents California state franchise taxes for periods prior to the
Company's conversion to C corporation status.

(2) Amounts reflect adjustment for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than an S corporation.

(3) Amounts reflect the assumed issuance of 23,722 shares of Common Stock at the
initial public offering price per share to generate sufficient cash to pay
the balance of the S distribution notes at December 31, 1996. The notes
represent amounts payable to the shareholder for previously earned and
undistributed taxable S corporation earnings prior to the Company's
conversion to C corporation status.

10
<PAGE>
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 consolidated financial statements and the notes thereto.

Results of Operations

The following table sets forth pro forma operating results (as a percentage
of net sales) for the periods indicated. Pro forma operations reflect
adjustments to historical operating results for Federal and state income taxes
as if the Company had been taxed as a C corporation rather than an S
corporation.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of sales..................................................... 63.8 57.3 58.7
--------- --------- ---------
Gross profit...................................................... 36.2 42.7 41.3
Royalty income.................................................... 3.6 4.7 5.4
Operating expenses:
General and administrative...................................... 8.6 7.9 8.8
Selling......................................................... 8.6 8.0 7.7
Marketing....................................................... 3.9 2.9 3.0
Design.......................................................... 2.2 1.4 1.7
--------- --------- ---------
Total operating expenses...................................... 23.3 20.2 21.2
--------- --------- ---------
Operating income.................................................. 16.5 27.2 25.5
Interest income (expense)......................................... .2 (.3) (.3)
Other income (expense)............................................ .1 .2
--------- --------- ---------
Income before income taxes........................................ 16.7 27.0 25.4
Provision for income taxes........................................ 6.8 11.0 10.6
--------- --------- ---------
Net income........................................................ 9.9% 16.0% 14.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net sales increased 51.0% to $108.7 million in 1996 from $72.0 million in
1995, an increase of $36.7 million. The Company's increase in net sales was
principally driven by the successful launch of the women's sportswear line in
department and specialty stores and increased sales of men's sportswear to new
and existing wholesale customers as they expanded their purchases to include a
more complete line of Mossimo products. Net sales of the women's sportswear
line, which represented approximately 18.3% of the Company's net sales in 1996,
increased to $19.9 million in 1996 from $731,000 in 1995. Men's activewear
represented approximately 39% of the Company's net sales in 1996. Net sales of
men's activewear in 1996 decreased approximately 2.2% from men's activewear net
sales in 1995, primarily as a result of decreased sales of screenprinted
tee-shirts. Men's sportswear represented approximately 38.4% of the Company's
net sales in 1996. Net sales of men's sportswear in 1996 increased approximately
70.6% over such sales in 1995, primarily as a result of increased sales of knit
shirts, woven shirts and denim. Net sales of the Company's eyewear increased
approximately 23.8% to $2.8 million in 1996 from $2.3 million in the comparable
period in 1995.

11
<PAGE>
Gross profit increased to $39.3 million in 1996 from $30.8 million in 1995.
Gross profit as a percentage of net sales decreased to 36.2% in 1996, from 42.7%
in 1995. The decrease resulted primarily from higher than planned production
development costs of approximately $2.6 million and late product deliveries
which necessitated approximately $1.2 million in year-end allowances to the
Company's retail customers. The higher development costs are the result of
increased product sampling costs related to an expanded number of men's
sportswear offerings and the launch of the women's sportswear line, compounded
by certain inefficiencies in sourcing such product samples through new agents
and factories. To a lesser extent, gross margins for the year ended December 31,
1996 were impacted by a physical inventory shortage, off-price sales of certain
out-of-season merchandise and change in sales mix, with men's and women's
sportswear representing a substantially higher portion of sales (56.7% in 1996
compared to 35.0% in 1995).

Royalty income increased 14.8% to $3.9 million in 1996 from $3.4 million in
1995, primarily due to increased sales by the Company's women's swimwear and
bodywear licensee and increased sales by certain of the Company's international
licensees.

Operating expenses increased in all categories to $25.3 million in 1996 from
$14.6 million in 1995. General and administrative expense increased to $9.4
million in 1996 compared to $5.7 million in 1995, primarily as a result of
increases in staffing levels necessary to manage higher levels of net sales,
increased costs of protecting the Company's trademarks globally, and certain
increased costs customary to the Company's change in status from a privately
held to a publicly traded company. Selling expense increased to $9.3 million in
1996 from $5.8 million in 1995, primarily as a result of commissions on higher
levels of sales and increases in staffing levels, including the addition of
women's sales representatives who are salaried rather than commissioned.
Marketing expense increased to $4.2 million in 1996 from $2.1 million in 1995,
primarily due to increased advertising expenses, including the cost of photo
shoots related to the Company's advertising campaign. Design expense increased
to $2.4 million in 1996 compared to $1.0 million in 1995, primarily as a result
of increases in staffing levels necessary to support the expansion of the
Company's product offerings, including men's and women's sportswear. Operating
expenses as a percentage of net sales increased to 23.3% in 1996 from 20.2% in
1995.

The Company had interest income of $191,000 in 1996 compared to interest
expense of $233,000 in 1995, which was attributable to interest earned on the
investment of net cash proceeds from the Company's initial public offering.

Due to the Company's conversion to a C corporation in 1996, the provision
for income taxes increased from $297,000 in the 1995 period to $7.4 million (on
a pro forma basis) in the 1996 period.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net sales increased 62.3% to $72.0 million in 1995 from $44.3 million in
1994, an increase of $27.7 million. The Company's increase in net sales was
principally driven by increased sales to existing wholesale customers as they
expanded their purchases to include a more complete line of Mossimo products and
as the number of their stores in which such products were sold increased. Men's
activewear represented approximately 60.2% of the Company's net sales in 1995.
Net sales of men's activewear in 1995 increased approximately 50.2% over such
net sales in 1994, led by increased sales of tee-shirts. Men's sportswear
represented approximately 33.9% of the Company's net sales in 1995. Net sales of
men's sportswear increased approximately 85.9% over such sales in 1994,
primarily as a result of increased sales of denim and related products and knit
and woven shirts. Net sales of the Company's eyewear to wholesale customers
increased approximately 51.0% to $2.3 million in 1995 from $1.5 million in the
comparable period in 1994.

Gross profit increased to $30.8 million in 1995 from $18.3 million in 1994.
Gross profit as a percentage of net sales increased to 42.7% in 1995, from 41.3%
in 1994. The increase resulted primarily from higher sales over which to spread
overhead and an increase in tee-shirt prices.

Royalty income increased 43.7% to $3.4 million in 1995 from $2.4 million in
1994, primarily due to increased sales by the Company's accessories licensee
and, to a lesser extent, increased sales by the Company's women's swimwear and
bodywear licensee and the Canadian licensee.

12
<PAGE>
Operating expenses increased in all categories to $14.6 million in 1995 from
$9.4 million in 1994. Selling expense increased to $5.8 million in 1995 from
$3.4 million in 1994 primarily as a result of commissions on higher levels of
sales. Increases in general and administrative ($5.7 million in 1995 compared to
$3.9 million in 1994), marketing ($2.1 million in 1995 compared to $1.3 million
in 1994) and design ($1.0 million in 1995 compared to $747,000 in 1994) expense
reflected, in part, increases in staffing levels necessary to manage higher
levels of net sales and the expansion of the Company's product offerings,
including men's sportswear and the anticipated line of women's sportswear.
Marketing expense also reflected increased levels of advertising in 1995 over
1994. Operating expenses as a percentage of net sales decreased to 20.3% in 1995
from 21.2% in 1994. This decrease resulted primarily from spreading fixed
expenses over significantly higher sales levels.

Interest expense increased 57.4% to $233,000 in 1995 from $148,000 in 1994,
attributable to higher cash advances from the Company's factor.

Other income increased to $114,000 in 1995 from $87,000 in 1994, primarily
attributable to the settlement of a trademark dispute.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash requirements are to fund the Company's working
capital needs, primarily inventories and accounts receivable, and to purchase
property and equipment. During 1996, the Company experienced significant growth
in sales and, accordingly, utilized cash provided by operations to fund
increases in accounts receivable and inventories. Net cash used in operating
activities totaled $383,000 during 1996. At December 31, 1996, working capital
was approximately $36.2 million as compared to $12.6 million at December 31,
1995. Working capital may vary from time to time as a result of seasonality, new
product introductions, capital expenditures, including purchases of equipment
and construction of in-store shops, and changes in inventory levels. To
supplement cash flow from operations, if necessary, the Company maintains a
$10.0 million revolving credit facility to be used for general working capital
purposes. The credit agreement contains normal restrictive covenants with
respect to the conduct of the Company's business and requires the maintenance of
various financial levels and ratios. At December 31, 1996, there were no
borrowings outstanding on the line of credit. In addition, the Company has
historically sold a substantial portion of its trade accounts receivable to a
factor which assumes the credit risk with respect to collection of such
accounts. The factor pays the Company the receivable amount after the factor
receives payment from the Company's customer or, if earlier, shortly following
the bankruptcy or insolvency of the customer or when the receivable becomes 90
days past due. The Company may request advances against a percentage, determined
by the factor, of the qualifying accounts receivable factored at any time before
their maturity date. The factor charges a commission on the net sales factored
and interest at a negotiated rate over prime on advances. Advances on accounts
sold to the factor are payable on demand. All obligations under the factoring
agreement, which also includes a letter of credit facility, are collateralized
by the Company's inventories.

The Company believes that available cash, cash flow from operations and
available borrowings, either through its factoring arrangement or credit
facility, will be sufficient to meet operating needs and capital expenditure
requirements, including the cost of tenant improvements and equipment for the
Company's new leased headquarters/distribution facility for the foreseeable
future.

Cash flows used in investing activities totaled $4.0 million for 1996 and
was comprised of capital expenditures related primarily to the construction of
in-store shops and equipment for the Company's new screenprinting subsidiary. In
May 1996, the Company entered into a 10-year lease for its new headquarters and
distribution facility in Irvine, California, which it expects to occupy in June
1997. The Company currently estimates that its share of cost to construct tenant
improvements and equip such facility will be approximately $4.0 million, of
which $400,000 was spent in 1996.

The Company is currently evaluating its management information systems as
part of the development of an information technology strategy. The likely result
of this evaluation will be a systems conversion for the Company's core business
processes. Although the ultimate cost of a systems conversion has not yet

13
<PAGE>
been determined, the Company believes that it will incur between $500,000 and
$1.0 million related to this project in 1997.

The Company completed its initial public offering of 2,000,000 shares of
common stock in February 1996. Net proceeds to the Company from the sale of its
common stock were $32.1 million, after deducting underwriting discounts and
commissions and offering expenses. Proceeds from the offering were used to repay
factor advances totaling $3.9 million and pay a portion of the final S
corporation distribution totaling $17.2 million; the remaining proceeds were
used for general corporate purposes.

In June 1996, the Company formed a wholly-owned subsidiary, Giannico, which
is engaged in the screenprinting of tee-shirts. In June 1996, Giannico entered
into a lease, guaranteed by the Company, for a screenprinting and warehousing
facility and commenced operations in November 1996.

The Company expects to significantly increase its investments in selling and
marketing programs in 1997. Mossimo's ongoing sales strategy includes a dramatic
increase in certain promotional programs with its department store customers
which it believes will allow for the placement and merchandising of its products
in sections of the department stores consistent with its image as a resource for
finer men's and women's sportswear. Marketing efforts will focus on two key
areas--in-store shops and advertising. The Company expects to increase its
number of in-store shops to over 200 by the end of 1997 by adding approximately
125 new in-store shops in 1997. Additionally, the Company will initiate a new
advertising campaign featuring its lifestyle collection of men's and women's
sportswear aimed at reinforcing its product message with the consumer.

By reason of the Company's treatment as an S corporation for Federal and
state income tax purposes, the Company, since inception through its initial
public offering, provided to its sole stockholder funds for the payment of
income taxes on the earnings of the Company through the termination of S
corporation status. In addition, the Company historically paid dividends to its
sole stockholder to provide a return on investment. In connection with its
initial public offering, the Company's S corporation status was terminated, and
the Company declared the final S corporation distribution of its previously
undistributed earnings. For the year ended December 31, 1996, the Company paid
dividends, including amounts attributable to the payment of taxes and a portion
of the final S corporation distribution, of $17.2 million. For the foreseeable
future, earnings will be retained in the operation of the business.

SEASONALITY

The Company's business is impacted by general seasonal trends that are
characteristic of the many companies in the apparel industry. However, due
primarily to the significant growth that the Company has experienced, quarterly
sales and profit trends have not reflected the normal apparel industry
seasonality. In 1997 and future years, the Company expects that its sales may
reflect greater seasonal trends as its growth rate moderates and as men's and
women's sportswear become a larger percentage of apparel sales.

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 net sales or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net sales or profitability. In the past,
the Company has been able to offset its foreign product cost increases by
increasing prices or changing suppliers, although no assurance can be given that
the Company will be able to continue to make such increases or changes in the
future.

EXCHANGE RATES

The Company receives United States dollars for substantially all of its
product sales and its licensing revenues. Inventory purchases from offshore
contract manufacturers are primarily denominated in United States dollars;
however, purchase prices for the Company's products may be impacted by
fluctuations in the exchange rate between the United States dollar and the local
currencies of the contract manufacturers,

14
<PAGE>
which may have the effect of increasing the Company's cost of goods in the
future. During the last two fiscal years, exchange rate fluctuations have not
had a material impact on the Company's inventory costs. The Company does not
engage in hedging activities with respect to such exchange rate risk.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which requires adoption of the disclosure provisions no later than
fiscal years beginning after December 15, 1995 and adoption of the recognition
and measurement provisions for nonemployee transactions no later than December
15, 1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.

Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but would be required to disclose in a
note to the financial statements pro forma net income and, if presented,
earnings per share as if the company had applied the new method of accounting.

The Company has determined that it will not change to the fair value method
and will continue to use APB Opinion No. 25 for measurement and recognition of
employee stock-based transactions.

FORWARD LOOKING INFORMATION

The matters discussed in this report with respect to the effects of the
expected capital expenditures in connection with the timing of new product
introductions by the Company, the Company's new headquarters and distribution
facility and management information systems, the impact of the Company's
expected increase in its investments in selling and marketing programs in 1997
on its operating expenses, the retention of earnings in the operation of the
business, the sufficiency of the Company's current sources of liquidity to meet
operating needs and capital expenditures for the next 12 months and the expected
greater seasonal trends in the Company's sales in future periods are forward
looking statements and are subject to uncertainties associated with such
statements. Such uncertainties include construction delays and other events that
could increase the costs incurred by the Company in connection with its new
headquarters and distribution facility, changes in consumer demands and
preferences which could adversely impact the Company's sales in general and its
in-store program in particular, and the ability of the Company to place its
products in desirable sections of its department store customers. The Company's
financial results are subject to other risks and uncertainties, including
competition from other lines and uncertainties generally associated with new
product introductions and apparel retailing. Such uncertainties are discussed in
greater detail in the Company's prospectus dated February 22, 1996 filed with
the SEC.

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Index to Consolidated Financial Statements" at Item 14(a) for a listing
of the consolidated financial statements and supplementary data submitted as
part of this report.

ITEM 9-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

15
<PAGE>
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 Annual Shareholders Meeting to be held May 28, 1997 to
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996 and is incorporated herein by reference.

ITEM 11--EXECUTIVE COMPENSATION

ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

(1) Financial Statements:

Report of Independent Auditors

Consolidated Balance Sheets at December 31, 1996 and 1995

Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994

Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994

Notes to Consolidated Financial Statements

(2) Financial Statement Schedule:

The following financial statement schedule of Mossimo, Inc. and
Subsidiary for the years ended December 31, 1996, 1995 and 1994 is filed
as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Mossimo, Inc. and Subsidiary.

Schedule Page

II Valuation and Qualifying Accounts 34

16
<PAGE>
(3) Exhibits:
The Exhibits listed on the accompanying Index to Exhibits immediately
following the financial statement schedules are filed as part of, or
incorporated by reference into, this Report.

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------
<C> <S>
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 Option Plan (1)

10.2 Registrant's 1995 Directors Stock Option Plan (1)

10.3 Employment Agreement, dated January 1, 1996, by and between the Registrant and Mossimo Giannulli
(1)

10.4 Factoring Agreement, dated January 2, 1990, by and between the Registrant and The CIT Group, as
amended to date (1)

10.4.1 Letter Amendment to Factoring Agreement dated June 16, 1995 (1)

10.4.2 Letter Amendment to Factoring Agreement dated February 1, 1996 (1)

10.4.3 Letter Amendment to Factoring Agreement dated November 1, 1996

10.5 Lease, dated June 24, 1991, by and between The Irvine Company and the Registrant (1)

10.6 Form of Indemnification Agreement between the Registrant and its directors and officers (1)

10.7 Employment Agreement, dated November 8, 1994, by and between the Registrant and Donald A. Kerkes,
as amended to date (1)

10.8 Credit Agreement, dated February 27, 1996, between the Registrant and Wells Fargo Bank, National
Association (2)

10.9 Lease, dated May 3, 1996, between the Registrant and The Irvine Company (3)

10.10 Employment Agreement, dated August 22, 1996, between the Registrant and Tony Cherbak (4)

11.1 Computation of net income per share

21.1 Subsidiaries

23.1 Independent Auditors' Consent

27.1 Financial Data Schedule
</TABLE>

- ------------------------

(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 33-80597), as amended, which became effective February 22,
1996.

(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.

(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.

(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed by the Company during the fiscal quarter
ended December 31, 1996.

17
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT.............................................. 19

FINANCIAL STATEMENTS:

Consolidated balance sheets at December 31, 1996 and 1995................. 20

Consolidated statements of income for the years ended December 31, 1996,
1995 and 1994........................................................... 21

Consolidated statements of stockholders' equity for the years ended
December 31, 1996, 1995 and 1994........................................ 22

Consolidated statements of cash flows for the years ended December 31,
1996, 1995 and 1994..................................................... 23

Notes to consolidated financial statements................................ 24
</TABLE>

18
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Mossimo, Inc.:

We have audited the accompanying consolidated balance sheets of Mossimo,
Inc. and subsidiary (the Company) as of December 31, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the consolidated financial statement schedule listed in the Index
at Item 14(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 and 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mossimo,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

Deloitte & Touche LLP
Costa Mesa, California

February 21, 1997

19
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................... $ 7,007 $ 481
Accounts receivable, net of allowance for doubtful accounts of $300 (1996) and $205
(1995)..................................................................................... 2,831 1,527
Due from factor (Note 2).................................................................... 13,561 3,255
Refundable taxes............................................................................ 1,346 --
Inventories (Note 3)........................................................................ 17,415 9,773
Deferred taxes (Note 4)..................................................................... 1,455 --
Prepaid expenses and other current assets................................................... 869 588
--------- ---------
Total current assets...................................................................... 44,484 15,624
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation and amortization (Notes 5
and 6)..................................................................................... 4,859 1,420
OTHER ASSETS................................................................................ 1,411 118
--------- ---------
$ 50,754 $ 17,162
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................................ $ 6,701 $ 2,032
Accrued liabilities......................................................................... 1,118 915
Income taxes payable (Note 4)............................................................... -- 6
Current portion of long-term debt (Note 6).................................................. 86 50
S distribution note......................................................................... 427 --
--------- ---------
Total current liabilities................................................................. 8,332 3,003
DEFERRED ROYALTY INCOME..................................................................... 1,100 --
DEFERRED RENT............................................................................... 106 94
LONG-TERM DEBT, net of current portion (Note 6)............................................. 85 30

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Note 12):
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
15,000,000 (1996) and 13,000,000 (1995).................................................... 15 13
Additional paid-in capital.................................................................. 31,386 1,187
Retained earnings........................................................................... 9,730 12,835
--------- ---------
41,131 14,035
--------- ---------
$ 50,754 $ 17,162
--------- ---------
--------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

20
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
NET SALES....................................................................... $ 108,674 $ 71,961 $ 44,333
COST OF SALES................................................................... 69,364 41,210 26,027
---------- --------- ---------
GROSS PROFIT.................................................................... 39,310 30,751 18,306
ROYALTY INCOME (Note 10)........................................................ 3,919 3,413 2,375
---------- --------- ---------
43,229 34,164 20,681
OPERATING EXPENSES:
General and administrative (Note 7)............................................. 9,363 5,721 3,891
Selling......................................................................... 9,329 5,773 3,429
Marketing....................................................................... 4,223 2,055 1,313
Design.......................................................................... 2,368 1,037 747
---------- --------- ---------
Total operating expenses...................................................... 25,283 14,586 9,380
---------- --------- ---------
Operating income................................................................ 17,946 19,578 11,301
OTHER INCOME (EXPENSE):
Other........................................................................... 19 114 87
Interest income (expense), net.................................................. 191 (233) (148)
---------- --------- ---------
Net other income (expense).................................................... 210 (119) (61)
---------- --------- ---------
INCOME BEFORE INCOME TAXES...................................................... 18,156 19,459 11,240
PROVISION FOR INCOME TAXES (Note 4)............................................. 5,526 297 176
---------- --------- ---------
NET INCOME...................................................................... $ 12,630 $ 19,162 $ 11,064
---------- --------- ---------
---------- --------- ---------
PRO FORMA DATA (Note 1):
Historical income before income taxes........................................... $ 18,156 $ 19,459 $ 11,240
Pro forma provision for income taxes............................................ 7,374 7,946 4,663
---------- --------- ---------
PRO FORMA NET INCOME............................................................ $ 10,782 $ 11,513 $ 6,577
---------- --------- ---------
---------- --------- ---------
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE..................... $ .72
----------
----------
PRO FORMA WEIGHTED AVERAGE COMMON SHARES........................................ 14,877
----------
----------
</TABLE>

See accompanying notes to consolidated financial statements.

21
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994.................................. 13,000 $ 13 $ 137 $ 2,309 $ 2,459
Net income................................................ -- -- -- 11,064 11,064
Dividends................................................. -- -- -- (2,536) (2,536)
--------- ----- ----------- ---------- ----------
BALANCE, December 31, 1994................................ 13,000 13 137 10,837 10,987
Capital contribution...................................... -- -- 1,050 -- 1,050
Net income................................................ -- -- -- 19,162 19,162
Dividends................................................. -- -- -- (17,164) (17,164)
--------- ----- ----------- ---------- ----------
BALANCE, December 31, 1995................................ 13,000 13 1,187 12,835 14,035
Issuance of common stock.................................. 2,000 2 32,100 -- 32,102
Reclassification of undistributed S corporation
earnings................................................ -- -- (1,901) 1,901 --
Net income................................................ -- -- -- 12,630 12,630
Dividends................................................. -- -- -- (17,636) (17,636)
--------- ----- ----------- ---------- ----------
BALANCE, December 31, 1996................................ 15,000 $ 15 $ 31,386 $ 9,730 $ 41,131
--------- ----- ----------- ---------- ----------
--------- ----- ----------- ---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

22
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 12,630 $ 19,162 $ 11,064
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................... 686 366 226
Loss on disposition of property and equipment................................... 19 31 6
Deferred rent................................................................... 12 14 (52)
Provision for doubtful receivables.............................................. 535 388 190
Deferred income taxes........................................................... (1,455) -- --
Changes in:
Accounts receivable........................................................... (1,839) (847) (386)
Due from factor............................................................... (6,375) (908) (4,745)
Inventories................................................................... (7,642) (4,108) (2,017)
Prepaid expenses.............................................................. (281) (588) --
Other assets.................................................................. (193) (64) (17)
Accounts payable.............................................................. 4,669 (564) 404
Accrued liabilities........................................................... 203 308 345
Refundable income taxes....................................................... (1,352) (27) (18)
--------- --------- ---------
Net cash (used in) provided by operating activities......................... (383) 13,163 5,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of property and equipment................................ (3,954) (763) (565)
Proceeds from disposition of property and equipment............................... -- 131 --
Proceeds from new licensing agreement............................................. 1,100 -- --
Payment for extinguishment of old licensing agreement............................. (1,100) -- --
--------- --------- ---------
Net cash used in investing activities....................................... (3,954) (632) (565)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt....................................................... (99) (49) (36)
Net proceeds from issuance of common stock........................................ 32,102 -- --
Net change in factor advances..................................................... (3,931) 3,931 (1,719)
Dividends paid.................................................................... (17,209) (17,164) (2,536)
Capital contribution.............................................................. -- 1,050 --
Repayment of subordinated note payable to stockholder............................. -- -- (123)
Proceeds from note payable to stockholder......................................... -- -- 225
Repayment of note payable to stockholder.......................................... -- (225) --
--------- --------- ---------
Net cash provided by (used in) financing activities......................... 10,863 (12,457) (4,189)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 6,526 74 246
CASH AND CASH EQUIVALENTS, beginning of year...................................... 481 407 161
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year............................................ $ 7,007 $ 481 $ 407
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid during the year for:
Interest...................................................................... $ 169 $ 233 $ 147
--------- --------- ---------
--------- --------- ---------
Income taxes.................................................................. $ 8,327 $ 324 $ 194
--------- --------- ---------
--------- --------- ---------
SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS:
Contractual obligations incurred for acquisition of equipment..................... $ 190 $ 22 $ 38
--------- --------- ---------
--------- --------- ---------
S distribution note payable to stockholder........................................ $ 427 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

23
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

The Company designs, sources and markets a lifestyle collection of
contemporary men's activewear and men's and women's sportswear bearing
Mossimo-Registered Trademark- trademarks. The Company also designs, sources and
markets men's and women's eyewear and watches, and licenses its trademarks for
use in collections of women's swimwear and bodywear, men's neckwear, and men's
and women's accessories. The Company distributes its products to a diversified
account base, including department stores, specialty retailers, and sports and
activewear stores located throughout the United States, as well as two signature
retail stores in Southern California.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Mossimo, Inc.,
a Delaware corporation formed to succeed to the assets and liabilities of
Mossimo, Inc., a California corporation, and its wholly-owned subsidiary,
Giannico, Inc. (collectively, the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.

CONCENTRATION OF CREDIT RISK

The Company assigns a substantial portion of its receivables to a factor who
assumes the credit risk with respect to collection of non-recourse receivables.
Ongoing customer credit evaluations are performed with respect to the Company's
trade receivables, and collateral is generally not required.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and investments purchased
with original maturities of three months or less.

INVENTORIES

Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over a
five-year period for automobiles, machinery and equipment. Leasehold
improvements are amortized over the term of the related lease if less than the
estimated service life. The Company's share of the cost of constructing in-store
shop displays is capitalized and amortized using the straight-line method over a
three-year period. These costs are included in furniture and fixtures.

REVENUE RECOGNITION

Revenue is recognized when merchandise is shipped to a customer.

INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES.
Deferred taxes on income result from temporary differences between the reporting
of income for financial statements and tax reporting

24
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purposes. Prior to February 23, 1996, Mossimo, Inc. elected to be treated as an
S corporation under the provisions of the Internal Revenue Code. Accordingly,
the provision for income taxes for periods through February 22, 1996 is computed
by applying the California franchise tax rate for S corporations of 1.5% to
Mossimo, Inc.'s pretax earnings. Effective February 23, 1996, the Company
converted to a C corporation and became subject to regular Federal and state
income taxes on an ongoing basis. As a result, the Company recorded a tax
benefit of $700,000 upon the establishment of deferred income tax assets on
February 23, 1996.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
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.

STOCK SPLIT

On February 15, 1996, the Company effected a 13,000-for-one stock split of
its common stock. All share and per share amounts included in the accompanying
consolidated financial statements and notes have been restated to reflect the
stock split.

PRO FORMA NET INCOME

Pro forma net income represents the results of operations adjusted to
reflect a provision for income taxes on historical income, which gives effect to
the change in the Company's income tax status to a C corporation subsequent to
the public sale of its common stock. The principal difference between the pro
forma income tax rate and Federal statutory rate of 35% relates to state income
taxes.

PRO FORMA NET INCOME PER COMMON SHARE

Historical net income per common share is not presented because it is not
indicative of the ongoing entity.

Pro forma net income per common share has been computed by dividing pro
forma net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the year.

In accordance with a regulation of the Securities and Exchange Commission,
pro forma earnings per share data have been presented to reflect the effect of
the assumed issuance of 23,722 shares of common stock, at the initial public
offering price, that would generate sufficient cash to pay the S corporation
notes outstanding at December 31, 1996.

NEW ACCOUNTING PRONOUNCEMENT

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. The Company has determined that it will not change to the fair
value method and will continue to use Accounting Principles Board Opinion No. 25
for measurement and recognition of employee stock-based transactions.

25
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE RISK

The Company's success is largely dependent upon its ability to gauge the
fashion tastes of its targeted consumers and provide merchandise that satisfies
consumer demand. Any inability to provide appropriate merchandise in sufficient
quantities in a timely manner could have a material adverse effect on the
Company's business, operating results and financial condition.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the 1996
financial statement presentation.

2. DUE FROM FACTOR

Pursuant to the provisions of a factoring agreement, the Company assigns a
substantial portion of its trade accounts receivable to a factor who assumes the
credit risk with respect to collection of the nonrecourse accounts receivable.
The Company may request advances against a percentage, determined by the factor,
of the qualifying accounts receivable factored at any time before their maturity
date. The factoring charge ranges from .5% to .6% of the receivables assigned.
Interest at the prime rate plus .5% per annum is charged on advances.
Outstanding advances are collateralized by the Company's inventories and are
payable on demand.

The factoring agreement continues in force from year to year and may be
terminated by the Company on June 1, 1998 with 60 days prior written notice or
by the factor at any time with 180 days prior written notice.

Due from factor consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Unmatured accounts receivable:
Nonrecourse...................................................................... $ 12,866 $ 7,058
With recourse.................................................................... 1,460 528
Matured accounts receivable (advances)............................................. 800 (3,931)
Allowance for sales returns and doubtful accounts.................................. (1,565) (400)
--------- ---------
$ 13,561 $ 3,255
--------- ---------
--------- ---------
</TABLE>

Matured accounts receivable represent amounts due from the factor for cash
collected from customers in excess of advances made. The Company receives
interest at the prime rate minus 2% per annum on matured accounts receivable. At
December 31, 1996, the prime rate was 8.25%.

26
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

3. INVENTORIES

Inventories consist of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Finished goods..................................................................... $ 8,042 $ 4,715
Work-in-process.................................................................... 1,928 1,191
Raw materials...................................................................... 7,445 3,867
--------- ---------
$ 17,415 $ 9,773
--------- ---------
--------- ---------
</TABLE>

The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements impose quotas on the amount and type of goods which
can be imported into the United States from these countries and can limit or
prohibit importation of products on very short notice. The Company's imported
products are also subject to United States customs duties which are a material
portion of the Company's cost of imported goods. A substantial increase in
customs duties or a substantial reduction in quota limits applicable to the
Company's imports could have a material adverse effect on the Company's
financial condition and results of operations.

A significant portion of the Company's products purchased overseas are
manufactured by independent contractors headquartered in Hong Kong and Macao
with manufacturing facilities in China and Macao. In July 1997 and December
1999, China will resume sovereignty over Hong Kong and Macao, respectively. The
Company cannot predict the effect, if any, this event will have on its
contractors in Hong Kong and Macao, and there can be no assurance that Hong Kong
and Macao will not experience political, economic or social disruption as a
result of the resumption of Chinese sovereignty. In addition, there have been a
number of recent trade disputes between China and the United States during which
the United States has threatened to impose tariffs and duties on some products
imported from China and to withdraw China's "most favored nation" trade status.
The loss of most favored nation trade status for China, changes in current
tariff structures or the adoption by the United States of trade policies or
sanctions adverse to China could have a material adverse effect on the Company's
financial condition and results of operations.

4. INCOME TAXES

The provision for income taxes consists of the following for the years ended
December 31:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal..................................................................... $ 5,478 $ -- $ --
State....................................................................... 1,503 297 176
--------- --------- ---------
Total current provision................................................... 6,981 297 176
Deferred:
Federal..................................................................... (1,205) -- --
State....................................................................... (250) -- --
--------- --------- ---------
Total deferred (benefit) provision........................................ (1,455) -- --
--------- --------- ---------
Total provision for income taxes.............................................. $ 5,526 $ 297 $ 176
--------- --------- ---------
--------- --------- ---------
</TABLE>

27
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

4. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of tax determined by
applying the Federal statutory rate to pretax income. The components of this
difference for the year ended December 31, 1996 are summarized as follows:

<TABLE>
<S> <C>
Taxes on income at Federal statutory tax rate.............................. $ 6,355
State income taxes, net of Federal tax benefit............................. 1,449
Recording of deferred income tax assets in connection with conversion to
C corporation............................................................ (700)
S corporation earnings not subject to Federal tax.......................... (1,105)
Other, net................................................................. (473)
---------
Total provision for income taxes....................................... $ 5,526
---------
---------
</TABLE>

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets as of December 31, 1996 are as follows:

<TABLE>
<S> <C>
Deferred income tax assets:
Reserves not currently deductible......................................... $ 876
State income taxes........................................................ 438
Other..................................................................... 141
---------
Total deferred taxes.................................................... $ 1,455
---------
---------
</TABLE>

Prior to February 23, 1996, Mossimo, Inc. elected to be treated as an S
corporation under the provisions of the Internal Revenue Code. Accordingly, the
provisions for income taxes for the period ended February 23, 1996 and the years
ended December 31, 1995 and 1994 are computed by applying the California
franchise tax rate for S corporations of 1.5%. Effective February 23, 1996, the
Company converted to a C corporation and became subject to regular Federal and
state income taxes on an ongoing basis. As a result, the Company recorded
$700,000 of deferred income tax assets at February 23, 1996.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1996 and
1995:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Furniture and fixtures.................................................... $ 3,164 $ 1,386
Machinery and equipment................................................... 2,025 543
Automobiles............................................................... 173 189
Construction in progress.................................................. 769 --
--------- ---------
6,131 2,118
Accumulated depreciation and amortization................................. (1,272) (698)
--------- ---------
$ 4,859 $ 1,420
--------- ---------
--------- ---------
</TABLE>

28
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

6. LINE OF CREDIT AND LONG-TERM DEBT

The Company has a $10,000,000 unsecured line of credit with a bank, bearing
interest at either the prime rate (8.25% at December 31, 1996) or LIBOR (5.78%
at December 31, 1996) plus 2.25%, which matures in April 1997. At December 31,
1996, there were no borrowings outstanding under the line of credit. The credit
facility has various restrictive covenants which include the maintenance of
minimum tangible net worth (approximately $28,000,000 at December 31, 1996),
annual net income not less than $4,000,000, and certain other financial ratios.
At December 31, 1996, the Company was in compliance with the restrictive
covenants.

Notes payable are due in aggregate monthly installments of $7,500, including
interest from 7.5% to 14.6% per annum, which mature from April 1997 through June
2001. The notes are collateralized by automobiles and equipment.

The following are annual maturities of long-term debt (in thousands):

<TABLE>
<S> <C>
Year ending December 31:
1997............................................................... $ 86
1998............................................................... 54
1999............................................................... 21
2000............................................................... 8
2001............................................................... 2
---------
Total scheduled maturities........................................... $ 171
---------
---------
</TABLE>

7. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all full-time employees after nine months of
employment. The plan provides for annual matching contributions by the Company
as a percentage of employee contributions and annual wages. Contributions made
to the plan for the years ended December 31, 1996, 1995 and 1994 were $35,000,
$16,000 and $5,000, respectively.

8. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company is committed under noncancelable operating leases expiring at
various dates through April 2001. Rent expense for the years ended December 31,
1996, 1995 and 1994 was $1,039,000, $847,000 and $420,000, respectively.

29
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum annual rental payments required under noncancelable operating
leases in excess of one year are as follows (in thousands):

<TABLE>
<S> <C>
Year ending December 31:
1997............................................................. $ 2,121
1998............................................................. 2,486
1999............................................................. 2,490
2000............................................................. 2,081
2001............................................................. 1,522
Thereafter....................................................... 7,148
---------
Total.............................................................. $ 17,848
---------
---------
</TABLE>

LETTERS OF CREDIT

The Company has an agreement with its factor to facilitate the purchase of
goods by issuing letters of credit to various companies overseas. The letters of
credit are collateralized by inventories. At December 31, 1996, the Company had
outstanding letters of credit totaling $6,540,000.

PURCHASE COMMITMENTS

At December 31, 1996, the Company had purchase commitments for approximately
$3,600,000 related to tenant improvements and equipment for its new leased
headquarters and distribution facility.

LITIGATION

On January 24, 1997, a shareholder class action complaint was filed in the
Superior Court for Orange County, California alleging violations of the
California Corporations Code and other California state law claims, including
for unlawful business practices and misleading advertising, against the Company
and certain of its officers and directors with respect to statements made in
connection with its initial public offering, subsequent Securities and Exchange
Commission filings, analyst reports and other public announcements. The suit is
purportedly brought on behalf of all persons who purchased the Company's Common
Stock during the period from February 23, 1996, the date of its initial public
offering, through January 14, 1997 by named plaintiff Chaile Steinberg. Such
suit seeks compensatory damages of unspecified amounts and other relief.
Although the outcome of this litigation cannot be predicted with certainty,
management believes that the Company has meritorious defenses to the claims
alleged and intends to vigorously defend against this action.

9. MAJOR CUSTOMERS

During the years ended December 31, 1996, 1995 and 1994, sales to one
department store customer in its various regions represented approximately
10.5%, 10.9% and 11.8% of net sales, respectively. While the

30
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

9. MAJOR CUSTOMERS (CONTINUED)
Company believes that purchasing decisions in many cases are made independently
by each department store customer, the trend may be toward more centralized
purchasing decisions. A decision by a significant customer to decrease the
amount purchased from the Company or to cease carrying the Company's products
could have a material adverse effect on the Company's financial condition and
results of operations.

10. ROYALTY INCOME

The Company has licensing agreements with several unrelated companies for
the use of its trademarks and designs. Royalty payments are due on a monthly or
quarterly basis and range from 4% to 11% of the licensee's sales. Royalty income
for the years ended December 31, 1996, 1995 and 1994 was $3,919,000, $3,413,000
and $2,375,000, respectively.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's consolidated balance sheets include the following financial
instruments: cash and cash equivalents, accounts receivable, amounts due to and
from its factor and long-term debt. The carrying value of long-term debt
approximates fair value as it bears interest at rates currently available to the
Company. The Company considers the carrying amounts in the financial statements
to approximate fair value for cash and cash equivalents, accounts receivable and
amounts due to and from its factor, because of the relatively short period of
time between origination and their expected realization.

12. STOCKHOLDERS' EQUITY

In February 1996, the Company completed an initial public offering of
2,000,000 shares of the Company's common stock for $18.00 per share, generating
proceeds to the Company after underwriting discounts and expenses of
approximately $32,100,000.

In conjunction with its initial public offering, the Company terminated its
S corporation status and distributed to its stockholder $17,600,000,
representing previously earned and undistributed taxable S corporation earnings
in the form of promissory notes (S distribution notes). The estimated remaining
amount payable to stockholder for previously earned and undistributed taxable S
corporation earnings under the S distribution notes was $427,000 at December 31,
1996.

In accordance with a regulation of the Securities and Exchange Commission,
the Company reclassified $1,901,000 from additional paid-in capital for that
portion of the previously earned and undistributed taxable S corporation
earnings which was in excess of the balance of retained earnings at the date of
termination of the Company's S corporation status.

1995 STOCK OPTION PLAN

In December 1995, 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 certain advisors or consultants to the Company. A total of
1,500,000 shares have been reserved for issuance under the 1995 Plan. At
December 31, 1996, no

31
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

12. STOCKHOLDERS' EQUITY (CONTINUED)
stock options were exercisable. The following is a summary of stock option
activity related to the 1995 Plan for the year ended December 31, 1996:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
OPTION SHARES PER SHARE PRICE
------------- ------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1996............................................ --
Grants.................................................................... 368,500 $ 18.00
40,000 $ 30.25
Cancelled................................................................. (4,000) $ 18.00
Exercised................................................................. --
-------------
Outstanding at December 31, 1996.......................................... 404,500 $ 19.21
------------- -----------
------------- -----------
</TABLE>

1995 NON-EMPLOYEE DIRECTORS STOCK OPTION 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. Options granted
thereunder have an exercise price equal to the fair market value of the common
stock on the date of grant.

The following is a summary of stock option activity related to the Directors
Plan for the year ended December 31, 1996:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE PER EXERCISE
OPTION SHARES SHARE PRICE
------------- ----------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1996....................................... --
Grants............................................................... 90,000 $ 23.75 - $25.38
Cancelled............................................................ --
Exercised............................................................ --
------
Outstanding at December 31, 1996..................................... 90,000 $ 24.84
------ -----------
------ -----------
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock and
performance-based awards. Had compensation cost for the Company's other stock
option plans been determined based on the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's pro forma net income and income per share for the
year ended December 31, 1996 would have been reduced by approximately $519,000,
or $.04 per share. The aggregate fair value of the options granted during 1996
was estimated to be $3,600,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: volatility of 30%,
risk-free interest rate of 5.2%, and an expected life of 5 years.

32
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Year ended December 31, 1996:
Net sales........................................................... $ 24,401 $ 25,601 $ 31,913 $ 26,759
Gross profit........................................................ 10,528 11,098 10,121 7,563
Income before provision for income taxes............................ 6,728 6,637 3,895 896
Net income.......................................................... 5,818 3,966 2,298 548
Pro forma income data:
Income before provision for income taxes.......................... $ 6,728 $ -- $ -- $ --
Net income........................................................ 3,970 -- -- --
Year ended December 31, 1995:
Net sales........................................................... $ 16,793 $ 18,196 $ 18,816 $ 18,156
Gross profit........................................................ 7,850 7,963 7,730 7,208
Income before provision for income taxes............................ 5,491 5,326 4,536 4,106
Net income.......................................................... 5,394 5,245 4,484 4,039
Pro forma income data:
Income before provision for income taxes.......................... $ 5,491 $ 5,326 $ 4,536 $ 4,106
Net income........................................................ 3,253 3,157 2,688 2,415
</TABLE>

33
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts......................... $ 415,000 $ 535,000 $ (250,000) $ 700,000
Allowance for sales returns............................. 190,000 7,549,000 (6,574,000) 1,165,000

Year ended December 31, 1995:
Allowance for doubtful accounts......................... $ 162,000 $ 388,000 $ (135,000) $ 415,000
Allowance for sales returns............................. 140,000 2,489,000 (2,439,000) 190,000

Year ended December 31, 1994:
Allowance for doubtful accounts......................... $ 37,000 $ 190,000 $ (65,000) $ 162,000
Allowance for sales returns............................. -- 1,036,000 (896,000) 140,000
</TABLE>

34
<PAGE>
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 day of
March, 1997.

MOSSIMO, INC.

By: /s/ MOSSIMO GIANNULLI
-----------------------------------------
Mossimo Giannulli
CHIEF EXECUTIVE OFFICER AND PRESIDENT

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 day of March, 1997.

SIGNATURE TITLE
- ---------------------------------------- --------------------------------------

/s/ MOSSIMO GIANNULLI Chairman of the Board, Chief Executive
- ---------------------------------------- Officer and President (Principal
Mossimo Giannulli Executive Officer)

/s/ ERIC HOHL Executive Vice President, Chief
- ---------------------------------------- Operating Officer, Secretary and
Eric Hohl Director

/s/ ANTHONY CHERBAK Executive Vice President and Chief
- ---------------------------------------- Financial Officer (Principal
Anthony Cherbak Financial and Accounting Officer)

/s/ FRANCESCA LUZURIAGA
- ---------------------------------------- Director
Francesca Luzuriaga

/s/ ROBERT MARTINI
- ---------------------------------------- Director
Robert Martini

/s/ JOHN STAFFORD
- ---------------------------------------- Director
John Stafford

<PAGE>
EXHIBIT 10.4.3

[CIT GROUP LETTERHEAD]

November 1, 1996

Mossimo, Inc.
15320 Barranca Parkway
Irvine, CA 92718

Gentlemen:

Reference is made to the factoring agreement between you and us (as
successor to The CIT Group/ Factoring Manufacturers Hanover (Del.), Inc.) dated
January 2, 1990, as supplemented and amended (the "Agreement").

This shall confirm our mutual understanding and agreement that effective
November 1, 1996:

1. With respect to Accounts on which we bear the risk as to credit, the
commission rate referred to in paragraph 15 of the Agreement shall be
reduced from seven-tenths of one percent (.70%) to one-half of one percent
(.50%) on the gross amount of all such Accounts factored with us each month,
less trade and cash discounts, until such time as the difference between the
aggregate amount of commissions that would have been paid by you to us had
the commission rate remained at .70% and the aggregate amount of commissions
that are actually paid by you to us at the lower rate of .50% is equal to
$144,000.00. Thereafter, the commission rate shall increase to six-tenths of
one percent (.60%) on the gross amount of all such Accounts factored with us
during each month, less trade and cash discounts.

2. The collection days set forth in paragraph 6 of the Agreement shall
be reduced from three (3) days to two (2) days.

This shall further confirm our mutual understanding and agreement that, any
provision of the Agreement to the contrary notwithstanding and provided that we
continue to assist you in establishing or opening all Letters of Credit required
by you, effective November 1, 1996, we shall credit your account with any and
all amounts thereafter received by us from customers of your Womenswear Division
which represent discounts to which such customers were entitled but which were
not taken by them ("Forfeited Discounts"), such remittances to be credited to
your account as of the end of each calendar quarter, subject to our right to
apply any amounts due to you in respect of Forfeited Discounts in reduction of
any debt balance in your account and subject to our right to hold such amounts
as security for your indebtedness and obligations to us. The foregoing
notwithstanding, the amount to be credited to your account and remitted to you
by us pursuant to the Agreement in respect of any Account (as defined in the
Agreement) which we have approved as to credit and which remains unpaid solely
because of the financial inability of the customer to pay shall not exceed the
Net Sales (as defined in the Agreement) of such Account.

No other change in the terms and conditions of the Agreement is hereby
intended or implied.
<PAGE>
If the foregoing confirms your understanding of our agreement, please so
indicate by signing and returning to us the enclosed copy of this letter.

Very truly yours,

THE CIT GROUP/COMMERCIAL SERVICES,
INC.

By: /s/
---------------------------------
Name:
Title: V.P.

Read and Agreed to:

MOSSIMO, INC.

By: /s/ TONY CHERBAK
------------------------------
Name: Tony Cherbak
Title: CFO

<PAGE>
EXHIBIT 11.1

MOSSIMO, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<S> <C>
Weighted average shares outstanding during the period.............................. 14,710

Dilutive effect of stock options................................................... 143

Equivalent shares issuable for the outstanding S distribution note................. 24
---------

14,877
---------
---------

Pro forma net income for primary income per share.................................. $ 10,782
---------
---------

Pro forma net income per share..................................................... $ 0.72
---------
---------
</TABLE>

<PAGE>
EXHIBIT 21.1

SUBSIDIARIES

Giannico, Inc.

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
333-10071 of Mossimo, Inc. on Form S-8 of our report, dated February 21, 1997,
appearing in the Annual Report on Form 10-K of Mossimo, Inc. for the year ended
December 31, 1996.

/s/ Deloitte & Touche LLP

Costa Mesa, California
March 24, 1997

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,007
<SECURITIES> 0
<RECEIVABLES> 19,603
<ALLOWANCES> 1,865
<INVENTORY> 17,415
<CURRENT-ASSETS> 44,484
<PP&E> 6,131
<DEPRECIATION> 1,272
<TOTAL-ASSETS> 50,754
<CURRENT-LIABILITIES> 8,332
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 41,116
<TOTAL-LIABILITY-AND-EQUITY> 50,754
<SALES> 108,674
<TOTAL-REVENUES> 108,884
<CGS> 69,364
<TOTAL-COSTS> 25,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,156
<INCOME-TAX> 7,374
<INCOME-CONTINUING> 10,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,782
<EPS-PRIMARY> .72
<EPS-DILUTED> 0

</TABLE>