SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ____________ To _____________
Commission File Number: 1-14208
MOSSIMO, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0684524
------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
9 Pasteur
Irvine, California 92618
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
(714) 789-0200
--------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ..X.. No .....
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, par value 15,000,000
$.001 per share (Outstanding on November 11, 1997)
(Class)
Exhibit Index on Page 19
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MOSSIMO, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 (unaudited) ................................... 3
Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1997 and 1996 (unaudited) .... 4
Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 1997 and 1996 (unaudited) ....................... 5
Notes to Consolidated Financial Statements ............................ 7
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................... 9
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings ............................................ 17
ITEM 6 - Exhibits and Reports on Form 8-K ............................. 17
SIGNATURES ............................................................ 18
EXHIBIT INDEX ......................................................... 19
EXHIBITS .............................................................. 20
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MOSSIMO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 397 $ 7,007
Accounts receivable, net 3,944 2,831
Due from factor 7,752 13,561
Refundable taxes 3,739 1,346
Inventories 20,094 17,415
Prepaid expenses and other current assets 1,245 869
Deferred income taxes 1,359 1,455
------- -------
Total current assets 38,530 44,484
PROPERTY AND EQUIPMENT, net 9,592 4,859
OTHER ASSETS 1,253 1,411
------- -------
$49,375 $50,754
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 5,580 $ --
Accounts payable 4,650 6,701
Accrued liabilities 1,821 1,118
Current portion of long-term debt 40 86
S distribution note 356 427
------- -------
Total current liabilities 12,447 8,332
DEFERRED ROYALTY INCOME 935 1,100
DEFERRED RENT 78 106
LONG-TERM DEBT, net of current portion 42 85
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001; authorized
shares 3,000,000, no shares issued or outstanding -- --
Common stock, par value $.001; authorized shares,
30,000,000, issued and outstanding shares,
15,000,000 15 15
Additional paid-in capital 31,386 31,386
Retained earnings 4,472 9,730
------- -------
Total stockholders' equity 35,873 41,131
------- -------
$49,375 $50,754
======= =======
See accompanying notes to consolidated financial statements.
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MOSSIMO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $ 17,113 $ 31,913 $ 59,680 $ 81,915
COST OF SALES 17,026 21,792 45,655 50,168
-------- -------- -------- --------
GROSS PROFIT 87 10,121 14,025 31,747
ROYALTY INCOME 625 843 3,233 3,036
-------- -------- -------- --------
712 10,964 17,258 34,783
OPERATING EXPENSES:
General and administrative 3,005 2,897 9,279 6,516
Selling 2,751 2,444 8,086 6,737
Marketing 1,607 1,360 5,393 3,065
Design 1,087 504 3,003 1,389
-------- -------- -------- --------
8,450 7,205 25,761 17,707
-------- -------- -------- --------
OPERATING INCOME (LOSS) (7,738) 3,759 (8,503) 17,076
OTHER INCOME (EXPENSE):
Other (185) 6 (199) 53
Interest, net (85) 130 (61) 131
-------- -------- -------- --------
(270) 136 (260) 184
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (8,008) 3,895 (8,763) 17,260
PROVISION (BENEFIT) FOR
INCOME TAXES (3,203) 1,597 (3,505) 5,178
-------- -------- -------- --------
NET INCOME (LOSS) $ (4,805) $ 2,298 $ (5,258) $ 12,082
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.32) $ .15 ($ .35)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 15,000 15,208 15,000
======== ======== ========
See accompanying notes to consolidated financial statements.
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MOSSIMO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months
Ended September 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,258) $ 12,082
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,211 399
Loss on disposition of property and equipment 87 2
Deferred rent (22) 22
Provision for doubtful receivables 130 260
Deferred income taxes 96 --
Changes in:
Accounts receivable, net (1,243) (6,219)
Due from factor 5,809 (8,402)
Inventories (2,679) (4,371)
Prepaid expenses and other current assets (376) 99
Other assets (7) (1,265)
Accounts payable (2,051) 3,204
Accrued liabilities 626 (255)
Refundable taxes (2,393) (352)
Deferred royalty income -- 1,100
-------- --------
Net cash used in operating activities (6,070) (3,696)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY -
Payments for acquisition of property and equipment (6,031) (2,614)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 5,580 --
Repayment of long-term debt (89) (79)
Net change in factor advances -- (3,917)
Dividends paid -- (17,208)
Net proceeds from issuance of common stock -- 32,140
-------- --------
Net cash provided by financing activities 5,491 10,936
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,610) 4,626
CASH AND CASH EQUIVALENTS, beginning of period 7,007 481
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 397 $ 5,107
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 138 $ 146
======== ========
Income taxes $ 142 $ 5,482
======== ========
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SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS:
Contractual obligations incurred for
the acquisition of equipment $ -- $ 120
======== ========
S distribution note payable to stockholder $ -- $ 150
======== ========
See accompanying notes to consolidated financial statements.
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MOSSIMO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES
Mossimo, Inc. and subsidiary ("Mossimo" or the "Company") designs,
sources and markets a lifestyle collection of contemporary men's activewear
and men's and women's sportswear bearing Mossimo(R) trademarks. The Company
also designs, sources and markets men's and women's eyewear, and licenses its
trademarks for use in collections of women's swimwear and bodywear, men's
neckwear, and men's and women's shoes and 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.
The accompanying unaudited interim consolidated financial statements of
the Company have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") for reporting on Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The accompanying unaudited interim consolidated financial statements should be
read in conjunction with the Company's consolidated financial statements for
the year ended December 31, 1996 on Form 10-K.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the consolidated balance sheets
as of September 30, 1997 and December 31, 1996, and the consolidated
statements of operations and the consolidated statements of cash flows for the
nine months ended September 30, 1997 and 1996. Operating results for the
three and nine months ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the entire fiscal year ending
December 31, 1997.
Certain reclassifications have been made in the unaudited consolidated
financial statements to conform to the fiscal year 1997 presentation.
2. INCOME TAXES
Prior to February 27, 1996, the Company had elected to be taxed as an S
corporation under the provisions of the Internal Revenue Code and similar
statutes in the State of California. Accordingly, the Company's taxable
income was treated as if it were distributed to the sole stockholder, who was
responsible for payment of taxes thereon. In addition, the Company was
subject to a California franchise tax rate of 1.5%. Effective February 27,
1996, the Company converted to a C corporation and became subject to Federal
and State income taxes on an ongoing basis.
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3. COMMITMENTS AND CONTINGENCIES
On January 24, 1997 and April 7, 1997, shareholder class action
complaints were filed in the Superior Court for Orange County, California
alleging violations of the California Corporations Code and other California
state law claims 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, analysts
reports and other public announcements. The suits are 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 plaintiffs, Chaile Steinberg and Igor
Glaudnikov, Cara Debra Marks and Lois Burke, respectively. On September 23,
1997, a shareholder class action complaint was filed in federal court in Santa
Ana. One of the named plaintiffs in this federal action is a plaintiff in the
pending state court actions. The class period and precipitating events are
the same as in the state court actions. The federal action asserts claims
under Section 11 of the 1933 Securities Act and Section 10 of the 1934
Securities Exchange Act. The judge in the federal action has stayed the
matter pending resolution of the state court actions. All such actions seek
compensatory damages of unspecified amounts and other relief. Although the
outcome of these actions cannot be predicted with certainty, management
believes that the Company has meritorious defenses to the claims alleged and
intends to vigorously defend against these actions.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion includes the operations of Mossimo, Inc. and
subsidiary for each of the periods discussed. This discussion and analysis
should be read in conjunction with the Company's consolidated financial
statements for the year ended December 31, 1996 on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth operating results (as a percentage of net
sales) for the periods indicated. Pro forma provisions reflect adjustments to
historical operating results for the nine months ended September 30, 1996 for
Federal and State income taxes as if the Company had been taxed as a C
corporation rather than an S corporation for the entire period.
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<TABLE>
<CAPTION>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
(in thousands) (in thousands)
1997 1996 1997 1996
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 17,113 100.0% $ 31,913 100.0% $ 59,680 100.0% $ 81,915 100.0%
Cost of Sales 17,026 99.5 21,792 68.3 45,655 76.5 50,168 61.2
-------- ----- -------- ----- -------- ----- -------- -----
Gross Profit 87 .5 10,121 31.7 14,025 23.5 31,747 38.8
Royalty Income 625 3.7 843 2.6 3,233 5.4 3,036 3.7
Operating Expenses:
General and administrative 3,005 17.6 2,897 9.1 9,279 15.5 6,516 8.0
Selling 2,751 16.1 2,444 7.7 8,086 13.6 6,737 8.2
Marketing 1,607 9.4 1,360 4.3 5,393 9.0 3,065 3.7
Design 1,087 6.4 504 1.6 3,003 5.0 1,389 1.7
-------- ----- -------- ----- -------- ----- -------- -----
8,450 49.4 7,205 22.6 25,761 43.2 17,707 21.6
-------- ----- -------- ----- -------- ----- -------- -----
Operating Income (Loss) (7,738) (45.2) 3,759 11.8 (8,503) (14.2) 17,076 20.9
Other Income (Expense) (270) (1.6) 136 .4 (260) (.4) 184 .2
-------- ----- -------- ----- -------- ----- -------- -----
Income (Loss) Before
Income Taxes (8,008) (46.8) 3,895 12.2 (8,763) (14.7) 17,260 21.1
Pro Forma Provision (Benefit)
for Income Taxes (3,203) (18.7) 1,597 5.0 (3,505) (5.9) 7,077 8.7
-------- ----- -------- ----- -------- ----- -------- -----
Pro Forma Net Income (Loss) $ (4,805) (28.1)% $ 2,298 7.2% $ (5,258) (8.8)% $ 10,183 12.4%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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GENERAL
Primarily as a result of softness in its men's activewear and
sportswear business and higher expense levels, the Company reported a
net loss of approximately $4.8 million for the three months ended
September 30, 1997. The Company anticipates continued softness in its
men's activewear and sportswear business throughout the remainder of
1997 and into 1998. In Spring 1998, the Company will launch its new
Moss line of value-priced activewear. The Moss line is being
developed by a segment of the Company's design team chartered with the
task of addressing the needs of Mossimo's specialty account base and
improving activewear product offerings.
Notwithstanding the development of the Moss line, the Company
continues to believe that its greatest future growth opportunity lies
within the status sportswear section of the department store and
continues to transition its business in that direction. This
transition from a predominantly activewear-based resource to a
supplier of finer men's and women's sportswear has been a complex
process that is taking longer than the Company originally anticipated.
Recent softness in men's activewear and sportswear sales has
overshadowed the addition of women's sportswear sales, a trend that
the Company anticipates will continue in the near term. As a result,
the Company currently believes it will experience a revenue decline in
the fourth quarter of 1997 compared to 1996 as it works to
reinvigorate men's activewear sales while continuing to further
establish itself as a finer sportswear label.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales decreased to $17.1 million in the third quarter of 1997
from $31.9 million in the third quarter of 1996. The decrease in net
sales was driven by a decline in sales of men's activewear of 65.9%,
men's sportswear of 47.0% and women's sportswear of 40.0%. Net sales
of men's activewear represented approximately 17.1% of the Company's
net sales for the third quarter of 1997. The decline in net sales of
men's activewear from $8.8 million in 1996 to $3.0 million in 1997 was
primarily the result of continuing softness in sales of screenprinted
tee-shirts and a decline in sales of fleece sweatshirts to activewear
accounts. Men's sportswear represented approximately 41.0% of the
Company's net sales for the third quarter of 1997. Net sales of men's
sportswear declined from $13.2 million in 1996 to $7.0 million in
1997, primarily as a result of a decrease in sales of knit tops, woven
shirts and denim products. The decrease in sales reflected the
overstock of prior season merchandise by department store customers,
resulting in such customers reducing their purchases for the Fall
season in the third quarter. Net sales of the women's sportswear
line, which represented approximately 30.8% of the Company's net sales
for the three months ended September 30, 1997, decreased to
$5.3 million in 1997 from $8.8 million in 1996. Women's sportswear
sales also declined primarily due to the reluctance of department
store buyers to increase purchases after disappointing sell-throughs
and carryover of prior season merchandise. Net sales of the Company's
eyewear increased approximately 36.6%, to $974,000 in 1997 from
$713,000 in the comparable period in 1996.
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Gross profit decreased to $87,000 in 1997 from $10.1 million in
1996. Gross profit as a percentage of net sales decreased to 0.5% in
1997, from 31.7% in 1996. The decrease resulted primarily from the
aforementioned decrease in sales of higher margined men's activewear
and an increase in off-price sales of certain out-of-season
merchandise. Also contributing to the decrease was the reduction of
the carrying cost by $3.1 million of certain inventory styles to net
realizable value. The net realizable value adjustment was
necessitated by recent price resistance within the off-price channel
to absorb the Company's out-of-season merchandise at its carrying
cost. The reduction also resulted to a lesser extent from a physical
inventory shortage of $1.2 million; higher fixed overhead costs for
production and warehousing; and the resolution of certain vendor
disputes for $800,000.
Royalty income decreased 25.9%, to $625,000 in 1997 from $843,000
in 1996, primarily due to decreased sales by the Company's women's
swimwear and bodywear licensee, accessories licensee and Canadian and
Australian licensees, and increased licensing expenses. Sales of the
Company's two primary domestic licensees (swimwear and accessories)
have been impacted by the decrease in sales of the Company's products
at retail.
Operating expenses increased in all categories to $8.4 million in
1997 from $7.2 million in 1996. General and administrative expense
increased to $3.0 million in 1997 compared to $2.9 million in 1996,
primarily as a result of salary costs reflecting increased staffing
over the comparable period a year earlier and higher costs related to
the Company's new headquarters and distribution center. Selling
expense increased to $2.8 million in 1997 from $2.4 million in 1996,
primarily as a result of the accrual of costs associated with certain
promotional programs with the Company's retail customers and increases
in staffing levels over the comparable period a year ago, offset by
decreases in commission expense. Marketing expense increased to
$1.6 million in 1997 from $1.4 million in 1996, primarily due to
increased advertising expenses and increased depreciation expense
related to the Company's expanded number of in-store shops. Design
expense increased to $1.1 million in 1997 compared to $504,000 in
1996, primarily as a result of increases in staffing levels necessary
to support the development and expansion of the Company's product
offerings and the early receipt of certain samples relating to future
selling seasons.
Net interest expense was $85,000 in 1997 compared to net interest
income of $130,000 in 1996. The increase in net interest expense
related to the Company's utilization of its line of credit facility
for working capital purposes during the third quarter of 1997.
The Company recorded a tax benefit of $3.2 million in 1997 as a
result of its third quarter loss compared with a tax provision of
$1.6 million in 1996.
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NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales decreased to $59.7 million in 1997 from $81.9 million
in 1996. The decrease in net sales was driven by a decline in sales
of men's activewear of 55.0% and men's sportswear of 31.6%, offset by
an increase in sales of women's sportswear of 44.3% (women's
sportswear line was formally launched in the third quarter of 1996).
Net sales of men's activewear in 1997 represented approximately 26.2%
of the Company's net sales for the nine months ended September 30,
1997. The decline in net sales from $34.7 million in 1996 to
$15.6 million in 1997 was primarily the result of continuing softness
in sales of screenprinted tee-shirts and a decline in sales of fleece
sweatshirts to activewear accounts. Men's sportswear represented
approximately 37.4% of the Company's net sales for the nine months
ended September 30, 1997. Net sales of men's sportswear declined from
$32.6 million in 1996 to $22.3 million in 1997, primarily as a result
of a decrease in sales of knit tops, woven shirts and denim products.
The decrease in sales reflected the overstock of prior season
merchandise by department store customers resulting in such customers
reducing their purchases. Net sales of the women's sportswear line,
which represented approximately 27.8% of the Company's net sales for
the nine months ended September 30, 1997, increased to $16.6 million
in 1997 from $11.5 million in 1996. Women's sportswear sales also
declined primarily due to the reluctance of department store buyers to
increase purchases after disappointing sell-throughs and carryover of
prior season merchandise. Net sales of the Company's eyewear
increased approximately 17.4% to $2.7 million in 1997 from
$2.3 million in the comparable period in 1996.
Gross profit decreased to $14.0 million in 1997 from
$31.7 million in 1996. Gross profit as a percentage of net sales
decreased to 23.5% in 1997, from 38.8% in 1996. The decrease resulted
primarily from the aforementioned decrease in sales of higher margined
men's activewear and an increase in off-price sales of certain out-of-
season merchandise. Also contributing to the decrease was the
reduction of the carrying cost by $3.1 million of certain inventory
styles to net realizable value. The net realizable value adjustment
was necessitated by recent price resistance within the off-price
channel to absorb the Company's out-of-season merchandise at its
carrying cost. The reduction also resulted to a lesser extent from a
physical inventory shortage of $1.2 million; higher fixed overhead
costs for production and warehousing; and the resolution of certain
vendor disputes for $800,000.
Royalty income increased 6.7%, to $3.2 million in 1997 from
$3.0 million in 1996, primarily due to increased sales by the
Company's women's swimwear and bodywear licensee.
Operating expenses increased in all categories to $25.8 million
in 1997 from $17.7 million in 1996. General and administrative
expense increased to $9.3 million in 1997 compared to $6.5 million in
1996, primarily as a result of severance costs associated with a 7%
workforce reduction, the accrual of legal fees in connection with
shareholder lawsuits and salary costs reflecting increased staffing
over the comparable period a year earlier. Selling expense increased
to $8.1 million in 1997 from $6.7 million in 1996, primarily as a
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result of the accrual of costs associated with certain promotional
programs with the Company's retail customers and increases in staffing
levels over the comparable period a year ago, offset by decreases in
commission expense. Marketing expense increased to $5.4 million in
1997 from $3.1 million in 1996, primarily due to increased advertising
expenses, the cost of the Company's first runway fashion show, and
increased depreciation expense related to the Company's expanded
number of in-store shops. Design expense increased to $3.0 million in
1997 compared to $1.4 million in 1996, primarily as a result of
increases in staffing levels necessary to support the development and
expansion of the Company's product offerings.
Net interest expense was $61,000 in 1997 compared to net interest
income of $131,000 in 1996. The decrease related to a lower average
balance of cash and cash equivalents during 1997 compared to 1996 and
utilization of the Company's line of credit facility during 1997.
The Company recorded a tax benefit of $3.5 million in 1997 as a
result of its pretax loss compared with a tax provision of
$5.2 million in 1996.
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. Net cash used in operating
activities totaled approximately $6.1 million for the nine months
ended September 30, 1997. At September 30, 1997, working capital was
approximately $26.1 million as compared to approximately $36.2 million
at December 31, 1996. 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 accounts receivable and inventory levels.
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 factor charges a commission on the net
sales factored.
In July 1997, the Company entered into a $20.0 million revolving
credit agreement to be used for general working capital purposes. All
obligations under the credit agreement, which also includes a letter
of credit facility, are collateralized by the Company's inventory and
accounts receivable. The Company's borrowings under the agreement are
limited to 50% of eligible inventory plus 85% of eligible receivables.
At September 30, 1997, the Company had unused borrowing capacity of
approximately $7 million. 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 September 30, 1997, the Company was in violation of two of
its covenants; however, the Company obtained a waiver from its lender.
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The Company is currently evaluating its cash needs for the next
12 months and is considering initiatives to reduce operating expenses
and restructure its marketing and sales efforts to reverse the
declining sales trend. The Company will also seek to amend the
financial covenants of its credit agreement in 1998. If the Company
is successful in implementing its strategies, the Company believes
that available cash, cash flow from operations and available
borrowings will be sufficient to meet operating needs and capital
expenditure requirements, including the construction of in-store
shops, for the next 12 months.
Cash flows used in investing activities totaled approximately
$6.0 million for the nine months ended September 30, 1997 and were
comprised of capital expenditures related primarily to the
construction of in-store shops and tenant improvements and equipment
for the Company's new leased headquarters/distribution facility in
Irvine, California. The Company occupied the facility in June 1997.
The Company currently estimates that its share of the cost to
construct tenant improvements and equip such facility will be
approximately $3.8 million, of which approximately $3.6 million was
spent during the nine months ended September 30, 1997 and $200,000
anticipated over the balance of 1997.
The Company began to evaluate its management information systems
as part of the development of an information technology strategy
during the first half of 1997. The likely result of this evaluation
will be a systems conversion for the Company's core business
processes; however, selection and implementation of a new core package
have been delayed until late 1998 or 1999. The decision to delay
reflects management's decision not to invest cash in significant
capital expenditures at the current time. The ultimate cost of a
systems conversion has not yet been determined.
The Company is currently reviewing its management information
systems for compliance with the Year 2000 issue and the associated
cost. In general, the Year 2000 issue exists because many computer
systems and applications currently use two-digit date fields to
designate a year. As the century date change occurs, date-sensitive
systems may not recognize the year 2000.
A significant component of elevating brand identity and competing
for attention on the department and specialty store floor is the
Company's in-store shop program. The Company installed 22 new shops
during the quarter ended September 30, 1997. The Company expects to
install up to 22 shops over the balance of 1997.
SEASONALITY
The Company's business is impacted by general seasonal trends
that are characteristic of many companies in the apparel industry.
However, due primarily to the significant growth that the Company has
experienced during 1996 and the declining sales experienced in 1997,
past quarterly sales and profit trends have not reflected normal
apparel industry seasonality. In future years, the Company expects
that its sales may reflect greater seasonal trends.
-15-
<PAGE>
FORWARD LOOKING INFORMATION
The matters discussed herein with respect to the effects of
expected capital expenditures in connection with the Company's new
headquarters and distribution facility, management information system
and in-store shop program, the ongoing softness in its men's
activewear and sportswear sales, the expectation of a revenue decline
over the balance of 1997 and into 1998, its ability to amend its
credit agreement, 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 the ability of the Company's contract
manufacturers to produce sufficient quantities of products in a timely
manner, 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 desired 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,
such as the new Moss line of activewear, and apparel retailing. Such
uncertainties are discussed in greater detail in the Company's
prospectus dated February 22, 1996 filed with the SEC.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE ("SFAS No. 128") which is effective for financial statements
issued for periods ending after December 15, 1997. SFAS No. 128
requires the disclosure of basic and diluted earnings per share. For
the three and nine months ended September 30, 1997, the amount
reported as net income (loss) per common and common equivalent share
is not materially different than that which would have been reported
for basic and diluted earnings per share in accordance with SFAS
No. 128.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (See Footnote 5 to Financial Statements)
The Company previously reported on two class action lawsuits
brought in California state court (the "State Court Actions") in
its Annual Report on Form 10-K for the year ended December 31,
1996 and its Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.
On September 23, 1997, a shareholder class action complaint was
filed in federal court in Santa Ana. The class period and
precipitating events are the same as in the State Court Actions.
One of the named plaintiffs in this federal action is also a
plaintiff in one of the State Court Actions. The federal action
asserts claims under Section 11 of the 1933 Securities Act and
Section 10 of the 1934 Securities Exchange Act. The judge in the
federal action stayed the federal action pending resolution of
the State Court Actions.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
11 Computation of Net Income per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during
the three months ended September 30, 1997.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File Number 33-80597)
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Mossimo, Inc.
November 13, 1997 /s/ Mossimo Giannulli
------------------------------
Mossimo Giannulli
Chairman of the Board,
Chief Executive Officer,
President (authorized officer)
November 13, 1997 /s/ John D. Bower
------------------------------
John D. Bower
Vice President - Finance
(principal financial and accounting
officer)
-18-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
11 Computation of Net Income per Share 20
27 Financial Data Schedule 21
* (Incorporated by reference from the Company's
Registration Statement on Form S-1, File Number 33-80597)
-19-
<PAGE>
EXHIBIT 11
MOSSIMO, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
For The Three Months
Ended September 30,
1997 1996
---- ----
Weighted average shares outstanding
during the period 15,000 15,000
Dilutive effect of stock options (1) -- 200
Equivalent shares issuable for the
outstanding S distribution note (1) -- 8
-------- --------
15,000 15,208
Net income (loss) for primary earnings
per share $ (4,805) $ 2,298
======== ========
Net income (loss) per share $ (.32) $ .15
======== ========
For The Nine Months
Ended September 30,
1997 1996 (2)
---- ----
Weighted average shares outstanding
during the period 15,000
Dilutive effect of stock options (1) --
Equivalent shares issuable for the
outstanding S distribution note (1) --
--------
15,000
Net loss for primary loss per share $(5,258)
========
Net loss per share $(.35)
========
(1) For the three months and nine months ended September 30, 1997,
no amounts have been provided as the effect would be anti-dilutive.
(2) Historical net income for primary earnings per share is not
presented for the nine months ended September 30, 1996 because it
is not indicative of the results of the ongoing entity. Prior to
February 27, 1996, Mossimo, Inc. elected to be treated as an S
corporation under the provisions of the Internal Revenue Code.
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 397
<SECURITIES> 0
<RECEIVABLES> 13,917
<ALLOWANCES> 2,221
<INVENTORY> 20,094
<CURRENT-ASSETS> 38,530
<PP&E> 11,891
<DEPRECIATION> 2,299
<TOTAL-ASSETS> 49,375
<CURRENT-LIABILITIES> 12,447
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 35,858
<TOTAL-LIABILITY-AND-EQUITY> 49,375
<SALES> 59,680
<TOTAL-REVENUES> 62,913
<CGS> 45,655
<TOTAL-COSTS> 25,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,763)
<INCOME-TAX> (3,505)
<INCOME-CONTINUING> (5,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,258)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
