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 June 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 August 13, 1997)
(Class)
Exhibit Index on Page 18
Page 1 of 44
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MOSSIMO, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 (unaudited) .................................. 3
Consolidated Statements of Operations for the three-month and
six-month periods ended June 30, 1997 and 1996 (unaudited) ......... 4
Consolidated Statements of Cash Flows for the six-month period
ended June 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 ........................................... 15
ITEM 4 - Submission of Matters to a Vote of Security Holders ......... 15
ITEM 6 - Exhibits and Reports on Form 8-K ............................ 16
SIGNATURES ........................................................... 17
EXHIBIT INDEX ........................................................ 18
EXHIBITS ............................................................. 19
Page 2 of 44
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MOSSIMO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
JUNE 30, DECEMBER 31,
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,091 $ 7,007
Accounts receivable, net 3,068 2,831
Due from factor 8,062 13,561
Refundable taxes 1,849 1,346
Inventories 19,951 17,415
Prepaid expenses and other current assets 1,546 869
Deferred taxes 1,359 1,455
------- -------
Total current assets 37,926 44,484
PROPERTY AND EQUIPMENT, net 9,130 4,859
OTHER ASSETS 1,344 1,411
------- -------
$48,400 $50,754
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,509 $ 6,701
Accrued liabilities 1,672 1,118
Current portion of long-term debt 49 86
S distribution note 362 427
------- -------
Total current liabilities 6,592 8,332
DEFERRED ROYALTY INCOME 990 1,100
DEFERRED RENT 88 106
LONG-TERM DEBT, net of current portion 52 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
15,000,000 shares 15 15
Additional paid-in capital 31,386 31,386
Retained earnings 9,277 9,730
------- -------
Total stockholders' equity 40,678 41,131
------- -------
$48,400 $50,754
======= =======
See accompanying notes to consolidated financial statements.
Page 3 of 44
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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 Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $ 17,979 $ 25,601 $ 42,567 $ 50,002
COST OF SALES 11,698 14,503 28,629 28,376
-------- -------- -------- --------
GROSS PROFIT 6,281 11,098 13,938 21,626
ROYALTY INCOME 1,183 911 2,608 2,193
-------- -------- -------- --------
7,464 12,009 16,546 23,819
OPERATING EXPENSES:
General and administrative 2,820 1,940 6,274 3,619
Selling 2,210 2,065 5,335 4,293
Marketing 1,559 1,043 3,786 1,705
Design 770 432 1,916 885
-------- -------- -------- --------
7,359 5,480 17,311 10,502
-------- -------- -------- --------
OPERATING INCOME (LOSS) 105 6,529 (765) 13,317
OTHER (EXPENSE) INCOME:
Other (14) (1) (14) 1
Interest, net (16) 109 24 47
-------- -------- -------- --------
(30) 108 10 48
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES 75 6,637 (755) 13,365
PROVISION (CREDIT) FOR
INCOME TAXES 30 2,671 (302) 3,581
-------- -------- -------- --------
NET INCOME (LOSS) $ 45 $ 3,966 $ (453) $ 9,784
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $ .00 $ .26 ($ .03)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 15,020 15,210 15,000
======== ======== ========
See accompanying notes to consolidated financial statements.
Page 4 of 44
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MOSSIMO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For The Six Months
Ended June 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (453) $ 9,784
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 687 233
Loss on disposition of property and equipment 20 2
Deferred rent (14) (10)
Provision for doubtful receivables 135 36
Deferred income taxes 96 --
Changes in:
Accounts receivable, net (372) (2,434)
Due from factor 5,499 (8,330)
Inventories (2,536) (6,138)
Prepaid expenses and other current assets (677) (687)
Other assets (43) (128)
Accounts payable (2,192) 622
Accrued liabilities 485 2,630
Refundable taxes (503) 659
-------- --------
Net cash provided by (used in) operating
activities 132 (3,761)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY -
Payments for acquisition of property and
equipment (4,978) (638)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (70) (36)
Net change in factor advances -- (3,773)
Dividends paid -- (17,208)
Net proceeds from issuance of common stock -- 32,140
-------- --------
Net cash (used in) provided by financing
activities (70) 11,123
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,916) 6,724
CASH AND CASH EQUIVALENTS, beginning of period 7,007 481
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,091 $ 7,205
======== ========
Page 5 of 44
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 82 $ 131
======== ========
Income taxes $ 142 $ 2,913
======== ========
SCHEDULE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Contractual obligations incurred for
the acquisition of equipment $ -- $ 100
======== ========
S distribution note payable to stockholder $ -- $ 150
======== ========
See accompanying notes to consolidated financial statements.
Page 6 of 44
<PAGE>
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 June 30, 1997 and December 31, 1996, and the consolidated statements of
operations and the consolidated statements of cash flows for the six months
ended June 30, 1997 and 1996. Operating results for the three and six months
ended June 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.
Page 7 of 44
<PAGE>
3. Credit Facilities
-----------------
In July 1997, the Company entered into a $20,000,000 revolving credit
agreement which is collateralized by inventory and receivables. The Company's
borrowings under the agreement are limited to 50% of eligible inventory plus 85%
of eligible receivables. Advances under the agreement bear interest at the prime
rate. The agreement also provides a letter of credit facility to facilitate the
purchase of goods from various companies overseas. The agreement continues in
force from year to year, but may be terminated by the Company with 60 days prior
written notice with a prepayment penalty for the first three years, or by the
creditor as of any anniversary date with 60 days prior written notice.
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 nonrecourse accounts receivable. In
conjunction with the execution of the revolving credit agreement described
above, the advance facility associated with the factoring agreement has been
terminated. 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.
4. Commitments and Contingencies
-----------------------------
LITIGATION - 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, 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, analysts 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 plaintiffs, Chaile Steinberg and Igor Glaudnikov, Cara Debra Marks and
Lois Burke, respectively. Such suits seek 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.
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.
Page 8 of 44
<PAGE>
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 six months ended June 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.
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
-------------- --------------
(in thousands) (in thousands)
1997 1996 1997 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 17,979 100.0% $ 25,601 100.0% $ 42,567 100.0% $ 50,002 100.0%
Cost of Sales 11,698 65.1 14,503 56.7 28,629 67.3 28,376 56.7
-------- ----- -------- ----- -------- ----- -------- -----
Gross Profit 6,281 34.9 11,098 43.3 13,938 32.7 21,626 43.3
Royalty Income 1,183 6.6 911 3.6 2,608 6.1 2,193 4.4
Operating Expenses:
General and administrative 2,820 15.7 1,940 7.6 6,274 14.7 3,619 7.2
Selling 2,210 12.3 2,065 8.1 5,335 12.5 4,293 8.6
Marketing 1,559 8.7 1,043 4.1 3,786 8.9 1,705 3.4
Design 770 4.3 432 1.6 1,916 4.5 885 1.8
-------- ----- -------- ----- -------- ----- -------- -----
7,359 40.9 5,480 21.4 17,311 40.7 10,502 21.0
-------- ----- -------- ----- -------- ----- -------- -----
Operating Income (Loss) 105 .6 6,529 25.5 (765) (1.8) 13,317 26.7
Other (Expense) Income (30) (.2) 108 0.4 10 0.0 48 0.1
-------- ----- -------- ----- -------- ----- -------- -----
Income (Loss) Before
Income Taxes 75 .4 6,637 25.9 (755) (1.8) 13,365 26.8
Provision (Credit) for
Income Taxes 30 .2 2,671 10.4 (302) (.7) 3,581 7.2
-------- ----- -------- ----- -------- ----- -------- -----
Net Income (Loss) $ 45 .2% $ 3,966 15.5% $ (453) (1.1)% $ 9,784 19.6%
======== ===== ======== ===== ======== ===== ======== =====
Pro Forma Provision for
Income Taxes $ 5,429 10.9%
======== =====
Pro Forma Net Income $ 7,936 15.9%
======== =====
</TABLE>
Page 9 of 44
<PAGE>
Three Months Ended June 30, 1997 and 1996
- -----------------------------------------
Net sales decreased to $18.0 million in 1997 from $25.6 million in 1996.
The decrease in net sales was principally driven by a decline in sales of men's
activewear of 57.8%, offset by an increase in sales of women's sportswear. Net
sales of the women's sportswear line, which represented approximately 24.0% of
the Company's net sales for the three months ended June 30, 1997, increased to
$4.3 million in 1997 from $2.6 million in 1996. The women's sportswear line was
launched in the comparable period in 1996. The decrease in net sales of men's
activewear in 1997, which represented approximately 30.2% of the Company's net
sales for the quarter, was primarily the result of continuing softness in sales
of screenprinted tee-shirts. Net sales of men's sportswear, which represented
approximately 34.1% of the Company's net sales for the quarter, decreased
approximately 31.9% over such sales in 1996, primarily as a result of a decrease
in sales of knit tops. The decrease in sales of knit tops reflected the
overstock of prior season merchandise by department store customers. Net sales
of the Company's eyewear increased approximately 20.0% to $1.2 million in 1997
from $1 million in the comparable period in 1996.
Gross profit decreased to $6.3 million in 1997 from $11.1 million in 1996.
Gross profit as a percentage of net sales decreased to 34.9% in 1997, from 43.3%
in 1996. The decrease resulted primarily from the aforementioned decrease in
sales of high margined men's activewear and off-price sales of certain
out-of-season merchandise.
Royalty income increased 29.9%, to $1.2 million in 1997 from $911,000 in
1996, primarily due to increased sales by the Company's women's swimwear and
bodywear licensee.
Operating expenses increased in all categories to $7.4 million in 1997
from $5.5 million in 1996. General and administrative expense increased to $2.8
million in 1997 compared to $1.9 million in 1996, primarily as a result of
salary costs reflecting increased staffing over the comparable period a year
earlier and costs related to the Company's move to its new headquarters and
distribution center. Selling expense increased to $2.2 million in 1997 from $2.1
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. Marketing expense
increased to $1.6 million in 1997 from $1 million in 1996, primarily due to
increased advertising expenses. Design expense increased to $770,000 in 1997
compared to $432,000 in 1996, primarily as a result of increases in staffing
levels necessary to support the development and expansion of the Company's
product offerings.
Net interest expense was $16,000 in 1997 compared to net interest income
of $109,000 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 second quarter of 1997.
The Company recorded a tax provision of $30,000 in 1997 compared with a
tax provision of $2.7 million in 1996.
Page 10 of 44
<PAGE>
Six Months Ended June 30, 1997 and 1996
- ---------------------------------------
Net sales decreased to $42.6 million in 1997 from $50.0 million in 1996.
The decrease in net sales was principally driven by a decline in sales of men's
activewear of 51.0%, offset by an increase in sales of women's sportswear. Net
sales of the women's sportswear line, which represented approximately 26.6% of
the Company's net sales for the six months ended June 30, 1997, increased to
$11.3 million in 1997 from $2.7 million in 1996. The women's sportswear line was
launched in the 1996 period. The decrease in net sales of men's activewear in
1997, which represented approximately 29.9% and 51.9% of the Company's net sales
for the six months ended June 30, 1997 and 1996, respectively, was primarily the
result of continuing softness in sales of screenprinted tee-shirts. Net sales of
men's sportswear, which represented approximately 35.9% of the Company's net
sales for 1997, decreased approximately 21.0% over such sales in 1996, primarily
as a result of a decrease in sales of knit tops. The decrease in sales of knit
tops reflected the overstock of prior season merchandise by department store
customers. Net sales of the Company's eyewear increased approximately 12.5% to
$1.8 million in 1997 from $1.6 million in the comparable period in 1996.
Gross profit decreased to $13.9 million in 1997 from $21.6 million in
1996. Gross profit as a percentage of net sales decreased to 32.7% in 1997, from
43.3% in 1996. The decrease resulted primarily from the aforementioned decrease
in sales of high margined men's activewear, off-price sales of certain
out-of-season merchandise and the write-off of the Company's discontinued time
division.
Royalty income increased 18.2%, to $2.6 million in 1997 from $2.2 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 $17.3 million in 1997
from $10.5 million in 1996. General and administrative expense increased to $6.3
million in 1997 compared to $3.6 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 $5.3 million in 1997 from $4.3 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. Marketing expense increased to $3.8 million in
1997 from $1.7 million in 1996, primarily due to increased advertising expenses
and the cost of the Company's first runway fashion show. Design expense
increased to $1.9 million in 1997 compared to $885,000 in 1996, primarily as a
result of increases in staffing levels necessary to support the development and
expansion of the Company's product offerings.
Net interest income decreased to $24,000 in 1997 compared to net interest
income of $47,000 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.
Page 11 of 44
<PAGE>
The Company recorded a tax benefit of $302,000 in 1997 as a result of its
pretax loss compared with a tax provision of $3.6 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 provided by operating activities totaled
approximately $132,000 for the six months ended June 30, 1997. At June 30, 1997,
working capital was approximately $31.3 million as compared to $36.6 million at
June 30, 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 account receivables. The
Company's borrowings under the agreement are limited to 50% of eligible
inventory plus 85% of eligible receivables. 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. In conjunction
with the new credit agreement, the advance feature of the Company's factoring
agreement, which allowed the Company to request advances against a percentage of
qualifying receivables, was deleted.
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 cost of tenant improvements and
equipment for the Company's new leased headquarters/distribution facility and
the construction of in-store shops for the foreseeable future.
Cash flows used in investing activities totaled $5.0 million for the six
months ended June 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 $4.0 million, of which
approximately $2.9 million was spent during the six months ended June 30, 1997
and $700,000 anticipated over the balance of 1997.
Page 12 of 44
<PAGE>
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 been
determined, the Company believes it will incur up to $500,000 related to this
project in 1997.
In April 1997, the Company consolidated and/or eliminated a number of
functions as part of a workforce reduction and has initiated other cost-cutting
measures that collectively are expected to result in annualized savings of at
least $3.3 million.
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
$453,000 for the six months ended June 30, 1997. The Company anticipates
continued softness in its men's activewear and sportswear business throughout
the remainder of 1997. 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.
The Company believes 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 growth in women's sportswear, a trend that the Company
anticipates will continue in the near term. As a result, the Company currently
believes it will continue to experience a revenue decline over the balance 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.
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 16 new shops during the quarter ended June
30, 1997. The Company's original goal for 1997 was to install a total of 125
shops, however, given the Company's first and second quarter results and the
outlook for the remainder of 1997, the shop installation estimate has been
revised to installation of up to 75 shops. The actual number of installations
will be dependent, to some degree, on the Company's performance at retail over
the balance of 1997.
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, past
quarterly sales and profit trends have not reflected the normal apparel industry
seasonality. For the balance of 1997 and future years, the Company expects that
its sales may reflect greater seasonal trends.
Page 13 of 44
<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 sales, the expectation of a revenue
decline over the balance of 1997, 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 six months ended June 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.
Page 14 of 44
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (See Footnote 5 to Financial Statements)
In the shareholder class action litigation previously reported in the
Company's Form 10-K for the year ended December 31, 1996 and Form 10-Q for
the quarter ended March 31, 1997 (the "Steinberg Shareholder Class
Action"), the Company and the other named defendants filed demurrers and
other motions challenging the allegations contained in the complaints and,
in addition, seeking a stay or, alternatively, a staging of discovery in
the case. On June 26, 1997, the Orange County Superior Court sustained the
demurrers as to all causes of action on the ground that they do not state
facts sufficient to constitute causes of action. The demurrers were
sustained as to the first through fourth causes of action with leave to
amend, and as to the fifth cause of action (for alleged violation of
Business and Professions Code Sections 17200 and 17500) without leave to
amend. The court also referred the motion seeking a stay or staging of
discovery to a referee.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting:
The annual meeting of stockholders of Mossimo, Inc. was held on
May 28, 1997.
(b) Election of Directors:
The following Class II Director nominee was elected at the annual
meeting:
Eric R. Hohl
The Directors whose terms of office continue are:
Robert Martini
John H. Stafford
Mossimo G. Giannulli
Francesca Ruiz De Luzuriaga
(c) The matters voted upon at the meeting and the results of each vote
are as follows:
Votes Votes Shares
For Against Abstaining
--- ------- ----------
For Directors:
Eric R. Hohl 14,312,302 308,475 -0-
Votes Votes Shares Broker
For Against Abstaining Non-Votes
--- ------- ---------- ---------
Approval of
Company's
Employee Stock
Purchase Plan 14,266,959 320,388 33,430 -0-
Page 15 of 44
<PAGE>
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*
4.2 Financing agreement dated as of July 15, 1997 between the
Company and the CIT Group/Commercial Services, Inc.
11 Computation of Net Income per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K was filed May 27, 1997, reporting the
resignation of the Company's public accountants and was amended by a
current report on Form 8-K/A filed June 13, 1997.
A current report on Form 8-K was filed June 18, 1997 reporting the
appointment of Arthur Andersen LLP as the Company's principal
accountants.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File Number 33-80597)
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<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.
August 13, 1997 /s/ Mossimo Giannulli
-----------------------------------
Mossimo Giannulli
Chairman of the Board,
Chief Executive Officer,
President (authorized officer)
August 13, 1997 /s/ John D. Bower
-----------------------------------
John D. Bower
Vice President - Finance
(principal financial and accounting officer)
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<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- -------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
4.2 Financing agreement dated as of July 15, 1997 between the Company
and the CIT Group/Commercial Services, Inc.
11 Computation of Net Income per Share
27 Financial Data Schedule
* (Incorporated by reference from the Company's
Registration Statement on Form S-1,File Number 33-80597)
Page 18 of 44
<PAGE>
EXHIBIT 4.2
FINANCING AGREEMENT
THE CIT GROUP/COMMERCIAL SERVICES, INC.
(AS LENDER)
AND
Mossimo, Inc.
(as Borrower)
DATED: JULY 15, 1997
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<PAGE>
THE CIT GROUP/COMMERCIAL SERVICES, INC., a New York corporation,
("CIT") with offices located at 300 South Grand Avenue, Second Floor, Los
Angeles, CA 90071, is pleased to confirm the terms and conditions under which
CIT shall make revolving loans, advances and other financial accommodations to
MOSSIMO, INC. (the "Company"), a Delaware corporation with a principal place of
business at 15320 Barranca Parkway, Irvine, CA 92718.
SECTION 1. DEFINITIONS
ACCOUNTS shall mean all of the Company's now existing and future: (a) accounts
receivable (including accounts factored by CIT (the "Factored Accounts")
pursuant to the Factoring Agreement), (whether or not specifically listed on
schedules furnished to CIT), and any and all instruments, documents, contract
rights, chattel paper, general intangibles, including, without limitation, all
accounts created by or arising from all of the Company's sales of goods or
rendition of services to its customers, and all accounts arising from sales or
rendition of services made under any of the Company's trade names or styles, or
through any of the Company's divisions; (b) unpaid seller's rights (including
rescission, replevin, reclamation and stoppage in transit) relating to the
foregoing or arising therefrom; (c) rights to any goods represented by any of
the foregoing, including rights to returned or repossessed goods; (d) reserves
and credit balances arising hereunder; (e) guarantees or collateral for any of
the foregoing; (f) insurance policies or rights relating to any of the
foregoing; and (g) cash and non-cash proceeds of any and all the foregoing.
Agreement shall mean this Financing Agreement.
ANNIVERSARY DATE shall mean the date occurring one (1) year from the date hereof
and the same date in every year thereafter.
AVAILABILITY shall mean at any time the excess of the sum of a) Eligible
Accounts Receivable multiplied by the percentage provided for in clause (a) of
paragraph 1 of Section 3 of this Agreement and b) Eligible Inventory multiplied
by the percentage provided for in clause (b) of paragraph 1 of Section 3 of this
Agreement over the sum of i) the outstanding aggregate amount of all Obligations
of the Company, ii) the Availability Reserve and iii) after the occurrence of an
Event of Default, all payments of the Company to CIT coming due within sixty
(60) days from the date of computation.
AVAILABILITY RESERVE shall mean, at any time of determination, the then
outstanding amount of all Letters of Credit.
BUSINESS DAY shall mean any day on which both CIT and The Chase Manhattan Bank
are open for business.
CAPITAL EXPENDITURES for any period shall mean the aggregate of all expenditures
of the Company during such period that in conformity with GAAP are required to
be included in or reflected by the property, plant or equipment or similar fixed
asset account reflected in the balance sheet of the Company.
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<PAGE>
THE CHASE MANHATTAN BANK RATE shall mean the rate of interest per annum
announced by The Chase Manhattan Bank from time to time as its prime rate in
effect at its principal office in the City of New York. (The prime rate is not
intended to be the lowest rate of interest charged by The Chase Manhattan Bank
to its borrowers).
COLLATERAL shall mean all present and future Accounts, Inventory, Documents of
Title and General Intangibles of the Company.
COLLECTION DAYS shall mean two (2) Business Days to provide for the deposit,
clearance and collection of checks or other instruments representing the
proceeds of Collateral, the amount of which has been credited to the Company's
loan account, and for which interest may be charged on the aggregate amount of
such deposits, at the rate provided for in Paragraph 1 of Section 8 of this
Agreement.
CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for the
Company and its consolidated subsidiaries eliminating all inter-company
transactions and prepared in accordance with GAAP.
CONSOLIDATING BALANCE SHEET shall mean a Consolidated Balance Sheet plus
individual balance sheets for the Company and its subsidiaries showing all
eliminations of inter-company transactions and prepared in accordance with GAAP
and including a balance sheet for the Company exclusively.
CURRENT ASSETS shall mean, wherever used throughout this Agreement, those assets
of the Company which, in accordance with GAAP, are classified as "current".
CURRENT LIABILITIES shall mean, wherever used throughout this Agreement, those
liabilities of the Company which, in accordance with GAAP, are classified as
"current", provided, however, that notwithstanding GAAP, the Revolving Loans
shall be considered "current liabilities".
DEFAULT shall mean any event specified in Section 10 hereof, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, event or act, has been satisfied.
DEFAULT RATE OF INTEREST shall mean a rate of interest per annum equal to the
sum of: a) four percent (4%) and b) The Chase Manhattan Bank Rate, which CIT
shall be entitled to charge the Company on all Obligations due CIT by the
Company to the extent provided in paragraph 2 of Section 10 of this Agreement.
DEPOSITORY ACCOUNT shall mean those accounts owned by CIT and designated for the
deposit of proceeds of Collateral.
DOCUMENTS OF TITLE shall mean all present and future warehouse receipts, bills
of lading, shipping documents, chattel paper, instruments and similar documents,
all whether negotiable or not and all goods and inventory relating thereto and
all cash and non-cash proceeds of the foregoing.
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<PAGE>
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 10 of this
Agreement.
ELIGIBLE ACCOUNTS RECEIVABLE shall mean all CIT credit approved Factored
Accounts plus the gross amount of the Company's accounts receivable that conform
to the warranties contained herein and at all times continue to be acceptable to
CIT in the exercise of its reasonable business judgment, less, without
duplication, the sum of a) any returns, discounts, claims, credits and
allowances of any nature (whether issued, owing, granted or outstanding) and b)
reserves for: i) sales to the United States of America or to any agency,
department or division thereof; ii) foreign sales other than sales secured by
stand-by letters of credit (in form and substance satisfactory to CIT) issued or
confirmed by, and payable at, banks having a place of business in the United
States of America and payable in United States currency, and which sales
otherwise comply with all other criteria for eligibility hereunder; iii)
accounts that remain unpaid more than ninety (90) days from invoice date; iv)
contras; v) sales to any subsidiary, or to any company affiliated with the
Company in any way; vi) bill and hold (deferred shipment) or consignment sales;
vii) sales to any customer which is a) insolvent, b) the debtor in any
bankruptcy, insolvency, arrangement, reorganization, receivership or similar
proceedings under any federal or state law, c) negotiating, or has called a
meeting of its creditors for purposes of negotiating, a compromise of its debts
or d) financially unacceptable to CIT or has a credit rating unacceptable to
CIT; viii) all sales to any customer if fifty percent (50%) or more of either x)
all outstanding invoices or y) the aggregate dollar amount of all outstanding
invoices, are unpaid more than ninety (90) days from invoice date; ix) any other
reasons deemed necessary by CIT in its reasonable business judgment and which
are customary either in the commercial finance industry or in the lending
practices of CIT; and x) an amount representing, historically, returns,
discounts, claims, credits and allowances.
ELIGIBLE INVENTORY shall mean the gross amount of the Company's inventory that
conform to the warranties contained herein and which at all times continue to be
acceptable to CIT in the exercise of its reasonable business judgment less any
work-in-process, supplies (other than raw material), goods not present in the
United States of America, goods returned or rejected by the Company's customers
other than goods that are undamaged and resealable in the normal course of
business, goods to be returned to the Company's suppliers, goods in transit to
third parties (other than the Company's agents or warehouses) and less any
reserves required by CIT in its reasonable discretion for special order goods,
market value declines, bill and hold (deferred shipment), consignment sales,
damaged goods, out-of-season goods or obsolete goods.
FACTORING AGREEMENT shall mean the Factoring Agreement, dated January 2, 1990
(as amended) between CIT and the Company.
GAAP shall mean generally accepted accounting principles in the United States of
America as in effect from time to time and for the period as to which such
accounting principles are to apply.
4
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<PAGE>
GENERAL INTANGIBLES shall have the meaning set forth in the Uniform Commercial
Code as in effect in the State of California and shall include, without
limitation, all present and future right, title and interest in and to all
patents, licenses, customer lists, distribution agreements, supply agreements
and tax refunds, together with all monies and claims for monies now or hereafter
due and payable in connection with any of the foregoing or otherwise, and all
cash and non-cash proceeds thereof.
INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or
otherwise, which are any of the following: (a) obligations in respect of
borrowed money or for the deferred purchase price of property, services or
assets, other than Inventory, or (b) lease obligations which, in accordance with
GAAP, have been, or which should be capitalized.
INVENTORY shall mean all of the Company's present and hereafter acquired
merchandise, inventory and goods, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and materials
used or usable in manufacturing, processing, packaging or shipping same; in all
stages of production- from raw materials through work-in-process to finished
goods - and all proceeds thereof of whatever sort.
INVENTORY SECURITY AGREEMENT shall mean the Inventory Security Agreement, dated
May 30, 1997, between CIT and the Company.
ISSUING BANK shall mean the bank issuing Letters of Credit for the Company.
LEDGER DEBT shall mean indebtedness owed by the Company to CIT by reason of
CIT's factoring or financing the accounts receivable of entities selling goods
or providing services to the Company.
LETTERS OF CREDIT shall mean all letters of credit issued with the assistance of
CIT by the Issuing Bank for or on behalf of the Company.
LETTER OF CREDIT GUARANTY shall mean the guaranty delivered by CIT to the
Issuing Bank of the Company's reimbursement obligation under the Issuing Bank's
reimbursement agreement, application for letter of credit or other like
document.
LETTER OF CREDIT FEES shall mean the fees CIT may charge the Company under
paragraph 3 of Section 8 of this Agreement.
LINE OF CREDIT shall mean the amount of $20,000,000.00, with (a) a
$10,000,000.00 sublimit for Letters of Credit and (b) a $2,000,000.00 sublimit
for Ledger Debt.
LOAN FACILITY FEE shall mean the fee payable to CIT in accordance with, and
pursuant to, the provisions of paragraph 7 of Section 8 of this Agreement.
OBLIGATIONS shall mean all loans and advances made or to be made by CIT to the
Company or to others for the Company's account; any and all indebtedness and
obligations which may at any time be owing by the Company to CIT howsoever
arising, whether now in existence or incurred by the Company from
5
Page 23 of 44
<PAGE>
time to time hereafter; whether secured by pledge, lien upon or security
interest in any of the Company's assets or property or the assets or property of
any other person, firm, entity or corporation; whether such indebtedness is
absolute or contingent, joint or several, matured or unmatured, direct or
indirect and whether the Company is liable to CIT for such indebtedness as
principal, surety, endorser, guarantor or otherwise. Obligations shall also
include indebtedness owing to CIT by the Company under this Agreement or under
any other agreement or arrangement now or hereafter entered into between the
Company and CIT; the interest computed for the Collection Dates on all deposits
of proceeds of Collateral; indebtedness or obligations incurred by, or imposed
on, CIT as a result of environmental claims arising out of the Company's
operation, premises or waste disposal practices or sites; the Company's
liability to CIT as maker or endorser on any promissory note or other instrument
for the payment of money; the Company' liability to CIT under any instrument of
guaranty or indemnity, or arising under any guaranty, endorsement or undertaking
which CIT may make or issue to others for the Company's account, including any
accommodation extended with respect to applications for Letters of Credit, CIT's
acceptance of drafts or CIT's endorsement of notes or other instruments for the
Company's account and benefit.
OUT-OF-POCKET EXPENSES shall mean all of CIT's present and future reasonable
expenses incurred relative to this Agreement, whether incurred heretofore or
hereafter, which reasonable expenses shall include, without being limited to,
the cost of record searches, Inventory appraisals, all costs and expenses
incurred by CIT in opening bank accounts, depositing checks, receiving and
transferring funds, and any charges imposed on CIT due to "insufficient funds"
of deposited checks and CIT's standard fees relating thereto, any amounts paid
by, incurred by or charged to, CIT by the Issuing Bank under the Letter of
Credit Guaranty or the Company's reimbursement agreement, application for letter
of credit or other like document which pertain either directly or indirectly to
such Letters of Credit, and CIT's standard fees relating to the Letters of
Credit and any drafts thereunder, local counsel fees, fees and taxes relative to
the filing of financing statements, and all expenses, costs and fees set forth
in paragraph 3 of Section 10 of this Agreement.
PROMISSORY NOTE shall mean the note, in the form of Exhibit A attached hereto,
delivered by the Company to CIT to evidence the Revolving Loan pursuant to, and
repayable in accordance with, the provisions of Section 3 of this Agreement.
REVOLVING LOANS shall mean the loans and advances made, from time to time, to or
for the account of the Company by CIT pursuant to Section 3 of this Agreement.
TANGIBLE NET WORTH SHALL MEAN THE COMPANY'S TOTAL STOCKHOLDERS EQUITY LESS THE
AGGREGATE OF ANY TREASURY STOCK, ANY INTANGIBLE ASSETS, DEFERRED CHARGES AND ANY
OBLIGATIONS DUE THE COMPANY FROM STOCKHOLDERS, EMPLOYEES OR AFFILIATES.
6
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<PAGE>
TERMINATION PREMIUM shall mean the amount due CIT by the Company upon a
voluntary termination of this Agreement by the Company, and shall be computed by
multiplying $20,000,000.00 by a) One and a half percent (1.5%) if the prepayment
upon termination is made prior to the first Anniversary Date; b) One percent
(1.0%) if the prepayment upon termination is made on or after the first
Anniversary Date but prior to the second Anniversary Date; and c) One half
percent (.5%) if the prepayment upon termination is made on or after the second
Anniversary Date but prior to the third Anniversary Date.
WORKING CAPITAL shall mean Current Assets in excess of Current Liabilities.
SECTION 2. CONDITIONS PRECEDENT
The ability of the Company to borrow loans hereunder is subject to
the satisfaction of, or waiver of, immediately prior to or concurrently with
the making of such loans, the following conditions precedent:
(A) LIEN SEARCHES - CIT shall have received tax, judgment and
Uniform Commercial Code searches satisfactory to CIT for all locations presently
occupied or used by the Company.
(B) CASUALTY INSURANCE - The Company shall have delivered to CIT
evidence satisfactory to CIT that casualty insurance policies listing CIT as
loss payee are in full force and effect, all as set forth in Section 7,
paragraph 5 of this Agreement.
(C) UCC FILINGS - Any documents (including without limitation,
financing statements) required to be filed in order to create, in favor of CIT,
a first and exclusive perfected security interest in the Collateral with respect
to which a security interest may be perfected by a filing under the Uniform
Commercial Code shall have been properly filed in each office in each
jurisdiction required in order to create in favor of CIT a perfected lien on the
Collateral. CIT shall have received acknowledgment copies of all such filings
(or, in lieu thereof, CIT shall have received other evidence satisfactory to CIT
that all such filings have been made); and CIT shall have received evidence that
all necessary filing fees and all taxes or other expenses related to such
filings have been paid in full.
(D) EXAMINATION & VERIFICATION- CIT shall have completed within the
three (3) month period prior to making a loan hereunder, to the reasonable
satisfaction of CIT, an examination and verification of the Accounts, Inventory,
books and records of the Company.
(E) ADDITIONAL DOCUMENTS - The Company shall have executed and
delivered to CIT all loan documents necessary to consummate the lending
arrangement contemplated between the Company and CIT.
(F) BOARD RESOLUTION - CIT shall have received a copy of the
resolutions of the Board of Directors of the Company authorizing the execution,
delivery and performance of (i) this Agreement, and (ii) any related agreements,
in each case certified by the Secretary or Assistant Secretary of the Company as
of the date hereof, together with a certificate
7
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<PAGE>
of the Secretary or Assistant Secretary of the Company as to the incumbency and
signature of the officers of the Company executing this Agreement and any
certificate or other documents to be delivered by it pursuant hereto, together
with evidence of the incumbency of such Secretary or Assistant Secretary.
(G) ABSENCE OF DEFAULT - No Default, Event of Default or material
adverse change in the financial condition, business, prospects, profits,
operations or assets of the Company shall have occurred.
(H) DISBURSEMENT AUTHORIZATION - The Company shall have delivered to
CIT all information necessary for CIT to issue wire transfer instructions on
behalf of the Company for the initial and subsequent loans and/or advances to be
made under this Agreement including, but not limited to, disbursement
authorizations in form acceptable to CIT.
(I) INVENTORY SECURITY AGREEMENT - The Inventory Security Agreement
shall be terminated.
Upon the execution of this Agreement and the initial disbursement of loans
hereunder, all of the above Conditions Precedent shall have been deemed
satisfied except as the Company and CIT shall otherwise agree herein or in a
separate writing.
SECTION 3. REVOLVING LOANS
1. CIT agrees to make, subject to the terms and conditions of this
Agreement from time to time, and within x) the Availability and y) the Line of
Credit, but subject to CIT's right to make "overadvances", loans and advances to
the Company on a revolving basis (i.e. subject to the limitations set forth
herein, the Company may borrow, repay and re-borrow Revolving Loans). Such loans
and advances shall be in amounts up to: a) Eighty-five percent (85%) of the
outstanding Eligible Accounts Receivable of the Company, and b) Fifty percent
(50%) of the aggregate value of Eligible Inventory of the Company as determined
at the lower of cost or market, provided, however, that in no event shall the
outstanding advances under this clause b) exceed $10,000,000.00 in the aggregate
at any one time. All requests for loans and advances must be received by an
officer of CIT no later than 1:00 p.m., Eastern Standard time, of the Business
Day on which such loans and advances are required. Should CIT for any reason
honor requests for advances in excess of the limitations set forth herein, such
advances shall be considered "overadvances" and shall be made in CIT's sole
discretion, subject to any additional terms CIT deems necessary.
2. In furtherance of the continuing assignment and security interest in
the Company's Accounts, the Company will, upon the creation of Accounts, execute
and deliver to CIT in such form and manner as CIT may reasonably require, solely
for CIT's convenience in maintaining records of collateral, such confirmatory
schedules of Accounts as CIT may reasonably request, and such other appropriate
reports designating, identifying and describing the Accounts as CIT may
reasonably require. In addition, upon CIT's request the Company shall provide
CIT with copies of agreements with, or purchase orders
8
Page 26 of 44
<PAGE>
from, the Company's customers, and copies of invoices to customers, proof of
shipment or delivery and such other documentation and information relating to
said Accounts and other collateral as CIT may reasonably require. Failure to
provide CIT with any of the foregoing shall in no way affect, diminish, modify
or otherwise limit the security interests granted herein. The Company hereby
authorizes CIT to regard the Company's printed name or rubber stamp signature on
assignment schedules or invoices as the equivalent of a manual signature by one
of the Company's authorized officers or agents.
3. The Company hereby represents and warrants that: each Account is
based on an actual and bona fide sale and delivery of goods or rendition of
services to customers, made by the Company in the ordinary course of its
business; the Inventory being sold and the Accounts created are the exclusive
property of the Company and are not and shall not be subject to any lien,
consignment arrangement, encumbrance, security interest or financing statement
whatsoever; the invoices evidencing such Accounts are in the name of the
Company; and the customers of the Company have accepted the goods or services,
owe and are obligated to pay the full amounts stated in the invoices according
to their terms, without dispute, offset, defense, counterclaim or contra, except
for disputes and other matters arising in the ordinary course of business of
which the Company has advised CIT pursuant to paragraph 5 of this Section 3. The
Company confirms to CIT that any and all taxes or fees relating to its business,
its sales, the Accounts or goods relating thereto, are its sole responsibility
and that same will be paid by the Company when due and that none of said taxes
or fees represent a lien on or claim against the Accounts. The Company also
warrants and represents that it is a duly and validly existing corporation and
is qualified in all states where the failure to so qualify would have an adverse
effect on the business of the Company or the ability of the Company to enforce
collection of Accounts due from customers residing in that state. The Company
agrees to maintain such books and records regarding Accounts as CIT may
reasonably require and agrees that the books and records of the Company will
reflect CIT's interest in the Accounts. All of the books and records of the
Company will be available to CIT at normal business hours, including any records
handled or maintained for the Company by any other company or entity.
4. Any checks, cash, notes or other instruments or property received by
the Company with respect to any Accounts shall be held by the Company in trust
for CIT, separate from the Company's own property and funds, and immediately
turned over to CIT with proper assignments or endorsements by deposit to the
Depository Accounts. Subject to the Collection Days, all amounts received by CIT
in payment of Accounts will be credited to the Company's accounts upon CIT's
receipt at CIT's bank account in New York, New York on the Business Day of
receipt if received no later than 1:00 p.m. or on the next succeeding Business
Day if received after 1:00 p.m. No checks, drafts or other instrument received
by CIT shall constitute final payment to CIT unless and until such instruments
have actually been collected.
5. The Company agrees to notify CIT promptly of any matters materially
affecting the value, enforceability or collectibility of any Account and of
all material customer disputes, offsets, defenses, counterclaims, returns,
rejections and all reclaimed or repossessed merchandise or goods. The
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<PAGE>
Company agrees to issue credit memoranda promptly (with duplicates to CIT upon
request) upon accepting returns or granting allowances, and may continue to do
so until CIT has notified the Company that an Event of Default has occurred and
that all future credits or allowances are to be made only after CIT's prior
written approval. Upon the occurrence of an Event of Default and until such time
as such Event of Default is waived and on notice from CIT, the Company agrees
that all returned, reclaimed or repossessed merchandise or goods shall be set
aside by the Company, marked with CIT's name and held by the Company for CIT's
account as owner and assignee.
6. CIT shall maintain a separate account on its books in the Company's
name in which the Company will be charged with loans and advances made by CIT to
it or for its account, and with any other Obligations, including any and all
costs, expenses, interest for Collection Days and reasonable attorney's fees
which CIT may incur in connection with the exercise by or for CIT of any of the
rights or powers herein conferred upon CIT, or in the prosecution or defense of
any action or proceeding to enforce or protect any rights of CIT in connection
with this Agreement or the Collateral assigned hereunder, or any Obligations
owing to CIT by the Company. Subject to the Collection Days, the Company will be
credited with all amounts received by CIT from the Company or from others for
the Company's account, including, as above set forth, all amounts received by
CIT in payment of assigned Accounts and such amounts will be applied to payment
of the Obligations. In no event shall prior recourse to any Accounts or other
security granted to or by the Company be a prerequisite to CIT's right to demand
payment of any Obligation. Further, it is understood that CIT shall have no
obligation whatsoever to perform in any respect any of the Company's contracts
or obligations relating to the Accounts.
7. After the end of each month, CIT shall promptly send the Company a
statement showing the accounting for the charges, loans, advances and other
transactions occurring between CIT and the Company during that month. The
monthly statements shall be deemed correct and binding upon the Company and
shall constitute an account stated between the Company and CIT unless CIT
receives a written statement of the exceptions within thirty (30) days of the
date of the monthly statement.
SECTION 4. INTENTIONALLY LEFT BLANK
SECTION 5. LETTERS OF CREDIT
In order to assist the Company in establishing or opening Letters
of Credit with an Issuing Bank to cover the purchase of imported Inventory,
Equipment or otherwise, the Company has requested CIT to join in the
applications for such Letters of Credit, and/or guarantee payment or performance
of such Letters of Credit and any drafts or acceptances thereunder through the
issuance of the Letters of Credit Guaranty, thereby lending CIT's credit to the
Company and CIT has agreed to do so. These arrangements shall be handled by CIT
subject to the terms and conditions set forth below.
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<PAGE>
1. The amount, purpose and extent of the Letters of Credit and changes
or modifications thereof by the Company and/or the Issuing Bank of the terms and
conditions thereof shall in all respects be subject to the prior approval of CIT
in the exercise of its reasonable discretion provided however, that: a) in no
event may the aggregate amount of all such outstanding Letters of Credit exceed,
in the aggregate, at any one time $10,000,000.00, and b) the Letters of Credit
and all documentation in connection therewith shall be in form and substance
satisfactory to the Company, CIT and the Issuing Bank.
2. CIT shall have the right, without notice to the Company, to charge
the Company's account on CIT's books with the amount of any and all
indebtedness, liability or obligation of any kind incurred by CIT under the
Letters of Credit Guaranty upon payment by CIT under the Letters of Credit
Guaranty. Any amount charged to Company's loan account shall be deemed a
Revolving Loan hereunder and shall incur interest at the rate provided in
Section 8, paragraph 1 of this Agreement.
3. The Company unconditionally indemnifies CIT and holds CIT harmless
from any and all loss, claim or liability incurred by CIT arising from any
transactions or occurrences relating to Letters of Credit established or opened
for the Company's account, the collateral relating thereto and any drafts or
acceptances thereunder, and all Obligations thereunder, including any such loss
or claim due to any action taken by any Issuing Bank, other than for any such
loss, claim or liability arising out of the gross negligence or willful
misconduct by CIT under the Letters of Credit Guaranty. The Company further
agrees to hold CIT harmless from any errors or omission, negligence or
misconduct by the Issuing Bank. The Company's unconditional obligation to CIT
hereunder shall not be modified or diminished for any reason or in any manner
whatsoever, other than as a result of CIT's gross negligence or willful
misconduct. The Company agrees that any charges incurred by CIT for the
Company's account by the Issuing Bank shall be conclusive on CIT and may be
charged to the Company's account.
4. CIT shall not be responsible for: the existence, character, quality,
quantity, condition, packing, value or delivery of the goods purporting to be
represented by any documents; any difference or variation in the character,
quality, quantity, condition, packing, value or delivery of the goods from that
expressed in the documents; the validity, sufficiency or genuineness of any
documents or of any endorsements thereon, even if such documents should in fact
prove to be in any or all respects invalid, insufficient, fraudulent or forged;
the time, place, manner or order in which shipment is made; partial or
incomplete shipment, or failure or omission to ship any or all of the goods
referred to in the Letters of Credit or documents; any deviation from
instructions; delay, default, or fraud by the shipper and/or anyone else in
connection with the Collateral or the shipping thereof; or any breach of
contract between the shipper or vendors and the Company. Furthermore, without
being limited by the foregoing, CIT shall not be responsible for any act or
omission with respect to or in connection with any Collateral.
5. The Company agrees that any action taken by CIT, if taken in good
faith, or any action taken by any Issuing Bank, under or in connection with
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the Letters of Credit, the guarantees, the drafts or acceptances, or the
Collateral, shall be binding on the Company and shall not put CIT in any
resulting liability to the Company. In furtherance thereof but subject to
paragraph 6 below, and upon notice to and the prior consent of the Company
(unless an Event of Default has occurred and is continuing) CIT shall have the
full right and authority to clear and resolve any questions of non-compliance of
documents; to give any instructions as to acceptance or rejection of any
documents or goods; to execute any and all steamship or airways guaranties (and
applications therefore), indemnities or delivery orders; to grant any extensions
of the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances, or documents; and to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances.
6. Without CIT's express consent and endorsement in writing, the
Company agrees: a) not to execute any and all applications for steamship or
airway guaranties, indemnities or delivery orders; to grant any extensions of
the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; or to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances; and b) after the
occurrence of an Event of Default which is not waived by CIT, not to I) clear
and resolve any questions of non-compliance of documents, or ii) give any
instructions as to acceptances or rejection of any documents or goods.
7. The Company agrees that it shall use its best efforts to ensure that
any necessary import, export or other licenses or certificates for the import or
handling of the Collateral will have been promptly procured; all foreign and
domestic governmental laws and regulations in regard to the shipment and
importation of the Collateral, or the financing thereof will have been promptly
and full complied with; and any certificates in that regard that CIT may at any
time request will be promptly furnished. In this connection, the Company
warrants and represents that, to the best of the Company's knowledge, all
shipments made under any such Letters of Credit are in accordance with the laws
and regulations of the countries in which the shipments originate and terminate,
and are not prohibited by any such laws and regulations. The Company assumes all
risk, liability and responsibility for, and agrees to pay and discharge, all
present and future local, state, federal or foreign taxes, duties, or levies.
Any embargo, restriction, laws, customs or regulations of any country, state,
city, or other political subdivision, where the Collateral is or may be located,
or wherein payments are to be made, or wherein drafts may be drawn, negotiated,
accepted, or paid, shall be solely the Company's risk, liability and
responsibility.
8. Upon any payments made to the Issuing Bank under the Letter of
Credit Guaranty, CIT shall acquire by subrogation, any rights, remedies, duties
or obligations granted or undertaken by the Company to the Issuing Bank in any
application for Letters of Credit, any standing agreement relating to Letters of
Credit or otherwise, all of which shall be deemed to
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have been granted to CIT and apply in all respects to CIT and shall be in
addition to any rights, remedies, duties or obligations contained herein.
SECTION 6. COLLATERAL
1. As security for the prompt payment in full of all loans and advances
made and to be made to the Company from time to time by CIT pursuant hereto, as
well as to secure the payment in full of the other Obligations, the Company
hereby pledges and grants to CIT a continuing general lien upon and security
interest in all of its:
(a) present and hereafter acquired Inventory;
(b) present and future Accounts;
(c) present and future Documents of Title;
(d) present and future General Intangibles, including but not
limited to all proceeds or monies due or which may become due the Company under
the Factoring Agreement.
2. The security interests granted hereunder shall extend and attach to:
(a) All Collateral which is presently in existence and which is
owned by the Company or in which the Company has any interest, whether held by
the Company or others for its account; and
(b) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either CIT or the Company from the
Company's customers, as well as to all supplies, goods, incidentals, packaging
materials, labels and any other items which contribute to the finished goods or
products manufactured or processed by the Company, or to the sale, promotion or
shipment thereof.
3. The Company agrees to safeguard, protect and hold all Inventory for
CIT's account and make no disposition thereof except in the regular course of
the business of the Company as herein provided. Inventory may only be sold and
shipped by the Company to its customers in the ordinary course of the Company's
business, on open account and on terms currently being extended by the Company
to its customers, provided that all proceeds of all sales (including cash,
accounts receivable, checks, notes, instruments for the payment of money and
similar proceeds) are forthwith transferred, endorsed, and turned over and
delivered to CIT by deposit in the Depository Accounts. Cash sales or sales of
Inventory in which a lien upon, or security interest in, Inventory is retained
by the Company shall be made by the Company only with the approval of CIT, and
the proceeds of such sales or sales of Inventory for cash shall not be
commingled with the Company's other property, but shall be segregated, held by
the Company in trust for CIT as CIT's exclusive property, and shall be delivered
immediately by the Company to CIT in the identical form received by the Company
by deposit to the Depository Accounts. Upon the sale, exchange, or other
disposition of Inventory, as
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herein provided, the security interest in the Company's Inventory provided for
herein shall, without break in continuity and without further formality or act,
continue in, and attach to, all proceeds, including any instruments for the
payment of money, accounts receivable, contract rights, documents of title,
shipping documents, chattel paper and all other cash and non-cash proceeds of
such sale, exchange or disposition. As to any such sale, exchange or other
disposition, CIT shall have all of the rights of an unpaid seller, including
stoppage in transit, replevin, rescission and reclamation.
4. The rights and security interests granted to CIT hereunder are to
continue in full force and effect, notwithstanding the termination of this
Agreement or the fact that the account maintained in the Company's name on the
books of CIT may from time to time be temporarily in a credit position, until
the final payment in full to CIT of all Obligations and the termination of this
Agreement. Any delay, or omission by CIT to exercise any right hereunder, shall
not be deemed a waiver thereof, or be deemed a waiver of any other right, unless
such waiver be in writing and signed by CIT. A waiver on any one occasion shall
not be construed as a bar to or waiver of any right or remedy on any future
occasion.
5. To the extent that the Obligations are now or hereafter secured by
any assets or property other than the Collateral or by the guarantee,
endorsement, assets or property of any other person, then CIT shall have the
right in its sole discretion to determine which rights, security, liens,
security interests or remedies CIT shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of CIT's rights
hereunder.
6. Any reserves or balances to the credit of the Company and any other
property or assets of the Company in the possession of CIT may be held by CIT as
security for any Obligations and applied in whole or partial satisfaction of
such Obligations when due. The liens and security interests granted herein and
any other lien or security interest CIT may have in any other assets of the
Company, shall secure payment and performance of all now existing and future
Obligations. CIT may in its discretion charge any or all of the Obligations to
the account of the Company when due.
SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS
1. The Company hereby warrants and represents and/or covenants that:
i) to the best of the Company's knowledge, the fair value of the Company's
assets exceeds the book value of the Company's liabilities; ii) the Company is
generally able to pay its debts as they become due and payable; and iii) the
Company does not have unreasonably small capital to carry on its business as it
is currently conducted absent extraordinary and unforeseen circumstances. The
Company further warrants and represents that the security interests granted
herein constitute and shall at all times constitute the first and only liens on
the Collateral; that the Company is or will be at the time additional Collateral
is acquired by it, the absolute owner of the Collateral with full right to
pledge, sell, consign, transfer and create a security interest therein, free and
clear of any and all claims or liens in favor of
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others; that the Inventory is not, and will not be, subject to a consignment
arrangement; that the Company will at its expense forever warrant and, at CIT's
request, defend the same from any and all claims and demands of any other
person; that the Company will not grant, create or permit to exist, any lien
upon or security interest in the Collateral, or any proceeds thereof, in favor
of any other person.
2. The Company agrees to maintain books and records pertaining to the
Collateral in such detail, form and scope as CIT shall reasonably require. The
Company agrees that CIT or its agents may enter upon the Company's premises at
any time during normal business hours, and from time to time, for the purpose of
inspecting the Collateral, and any and all records pertaining thereto. The
Company agrees to afford CIT prior written notice of any change in the location
of any Collateral, other than to locations, that as of the date hereof, are
known to CIT and at which CIT has filed financing statements and otherwise fully
perfected its liens thereon. The Company is also to advise CIT promptly, in
sufficient detail, of any material adverse change relating to the type, quantity
or quality of the Collateral or on the security interests granted to CIT
therein.
3. The Company agrees to: execute and deliver to CIT, from time to
time, solely for CIT's convenience in maintaining a record of the Collateral,
such written statements, and schedules as CIT may reasonably require,
designating, identifying or describing the Collateral pledged to CIT hereunder.
The Company's failure, however, to promptly give CIT such statements, or
schedules shall not affect, diminish, modify or otherwise limit CIT's security
interests in the Collateral.
4. The Company agrees to comply with the requirements of all state and
federal laws in order to grant to CIT valid and perfected first security
interests in the Collateral, CIT is hereby authorized by the Company to file any
financing statements covering the Collateral whether or not the Company's
signature appears thereon. The Company agrees to do whatever CIT may reasonably
request, from time to time, by way of: filing notices of liens, financing
statements, amendments, renewals and continuations thereof; cooperating with
CIT's agents and employees; keeping Collateral records; transferring proceeds of
Collateral to CIT's possession; and performing such further acts as CIT may
reasonably require in order to effect the purposes of this Agreement.
5. (a) The Company agrees to maintain insurance on the Inventory under
such policies of insurance, with such insurance companies, in such reasonable
amounts and covering such insurable risks as are at all times reasonably
satisfactory to CIT. All policies covering the Inventory are to be made payable
to CIT, in case of loss, under a standard non-contributory "lender" or "secured
party" clause and are to contain such other provisions as CIT may require to
fully protect CIT's interest in the Inventory and to any payments to be made
under such policies. All original policies or true copies thereof are to be
delivered to CIT, premium prepaid, with the loss payable endorsement in CIT's
favor, and shall provide for not less than thirty (30) days prior written notice
to CIT of the exercise of any right of cancellation. At the Company's request,
or if the Company fails to maintain such insurance, CIT may arrange for such
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insurance, but at the Company's expense and without any responsibility on CIT's
part for: obtaining the insurance, the solvency of the insurance companies, the
adequacy of the coverage, or the collection of claims. Upon the occurrence of an
Event of Default which is not waived, CIT shall have the sole right, in the name
of CIT or the Company, to file claims under any insurance policies, to receive,
receipt and give acquittance for any payments that may be payable thereunder,
and to execute any and all endorsements, receipts, releases, assignments,
reassignments or other documents that may be necessary to effect the collection,
compromise or settlement of any claims under any such insurance policies.
(b) In the event of any loss or damage by fire or other casualty,
insurance proceeds relating to Inventory shall reduce the Company's Revolving
Loan.
6. The Company agrees to pay, when due, all taxes, assessments, claims
and other charges (herein "taxes") lawfully levied or assessed upon the Company
or the Collateral and if such taxes remain unpaid after the date fixed for the
payment thereof unless such taxes are being diligently contested in good faith
by the Company by appropriate proceedings or if any lien shall be claimed
thereunder x) for taxes due the United States of America or y) which in CIT's
opinion might create a valid obligation having priority over the rights granted
to CIT herein, CIT may, on the Company's behalf, pay such taxes, and the amount
thereof shall be an Obligation secured hereby and due to CIT on demand.
7. The Company: (a) agrees that it will use its best efforts to comply
with all acts, rules, regulations and orders of any legislative, administrative
or judicial body or official, which the failure to comply with would have a
material and adverse impact on the Collateral, or any material part thereof, or
on the operation of the Company's business, provided that the Company may
contest any acts, rules, regulations, orders and directions of such bodies or
officials in any reasonable manner which will not, in CIT's reasonable opinion,
materially and adversely effect CIT's rights or priority in the Collateral; (b)
agrees that it will use its best efforts to comply with all environmental
statutes, acts, rules, regulations or orders as presently existing or as adopted
or amended in the future, applicable to the ownership and/or use of its real
property and operation of its business, which the failure to comply with would
have a material and adverse impact on the Collateral, or any material part
thereof, or on the operation of the business of the Company. The Company hereby
indemnifies CIT and agrees to defend and hold CIT harmless from and against any
and all loss, damage, claim, liability, injury or expense which CIT may sustain
or incur in connection with: any claim or expense asserted against CIT as a
result of any environmental pollution, hazardous material or environmental
clean-up of the Company's real property; or any claim or expense which results
from the Company's operations (including, but not limited to, the Company's
off-site disposal practices) and the Company further agrees that this
indemnification shall survive termination of this Agreement as well as the
payment of all Obligations or amounts payable hereunder; and (c) shall not be
deemed to have breached any provision of this paragraph 7 if (i) the failure to
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comply with the requirements of this paragraph 7 resulted from good faith error
or innocent omission, (ii) the Company promptly commences and diligently pursues
a cure of such breach and (iii) such failure is cured within fifteen (15)
Business Days following the Company's receipt of notice of such failure.
8. Until termination of this Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that, unless CIT shall have
otherwise consented in writing, the Company will furnish to CIT, within ninety
(90) days after the end of each fiscal year of the Company, a Consolidated
Balance Sheet and a Consolidating Balance Sheet as at the close of such year,
and statements of profit and loss, cash flow and reconciliation of surplus of
the Company and its subsidiaries for such year, audited by independent public
accountants selected by the Company and satisfactory to CIT; and within sixty
(60) days after the end of each fiscal quarter a Consolidated Balance Sheet as
at the end of such period and statements of profit and loss, cash flow and
surplus of the Company and all subsidiaries for such period, certified by an
authorized financial or accounting officer of the Company; and from time to
time, such further information regarding the business affairs and financial
condition of the Company as CIT may reasonably request, including without
limitation annual cash flow projections and an aging of its Accounts, all in
form satisfactory to CIT. Each financial statement which the Company is required
to submit hereunder must be accompanied by an officer's certificate, signed by
the President, Vice President, Controller, or Treasurer, pursuant to which any
one such officer must certify that: (i) the financial statement(s) fairly and
accurately represent(s) the Company's financial condition at the end of the
particular accounting period, as well as the Company's operating results during
such accounting period, subject to year-end audit adjustments; (ii) during the
particular accounting period: (x) there has been no default or condition which,
with the passage of time or notice, or both, would constitute a Default or Event
of Default under this Agreement, provided, however, that if any such officer has
knowledge that any such Default or Event of Default, has occurred during such
period, the existence of and a detailed description of same shall be set forth
in such officer's certificate; and (y) the Company has not received any notice
of cancellation with respect to its property insurance policies; and (iii) the
exhibits attached to such financial statement(s) constitute detailed
calculations showing compliance with all financial covenants contained in this
Agreement.
9. Until termination of this Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that, without the prior
written consent of CIT, except as otherwise herein provided, the Company
will not:
A. Mortgage, assign, pledge, transfer or otherwise permit any
lien, charge, security interest, encumbrance or judgment,
(whether as a result of a purchase money or title retention
transaction, or other security interest, or otherwise) to
exist on any of the Collateral;
B. Borrow any money on the security of the Company's Collateral
from sources other than CIT;
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C. Sell, lease, assign, transfer or otherwise dispose of i)
Collateral, except as otherwise specifically permitted by this
Agreement, or ii) either all or substantially all of the
Company's assets which do not constitute Collateral;
D. Merge, consolidate or otherwise alter or modify its corporate
name, principal place of business, structure, or existence, or
enter into or engage in any operation or activity materially
different from that presently being conducted by the Company;
or
E. Assume, guarantee, endorse, or otherwise become liable upon
the obligations of any person, firm, entity or corporation,
except by the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary
course of business, and except for guaranties issued by the
Company for the benefit of its wholly owned subsidiary.
10. Without the prior written consent of CIT, the Company will not:
contract for, purchase, make expenditures for, lease pursuant to a lease or
otherwise incur obligations with respect to Capital Expenditures (whether
subject to a security interest or otherwise) during any fiscal year in an
aggregate amount in excess of $7,000,000.00.
11. The Company shall maintain at all times during the particular fiscal
periods below, Working Capital of not less than:
FISCAL PERIOD WORKING CAPITAL
From the date hereof through
June 30, 1997 $28,064,000.00
For the fiscal quarter ending
September 30, 1997 $28,977,000.00
For the fiscal year ending
December 31, 1997 and at all times
thereafter. $30,057,000.00
12. The Company shall maintain, at all times during the periods below,
a Tangible Net Worth of not less than:
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Fiscal Period Net Worth
From the date hereof
through June 30, 1997 $39,000,000.00
For the fiscal quarter
ending September 30, 1997 $40,000,000.00
For the fiscal year ending
December 31, 1997 and at all
times thereafter $41,000,000.00
13. The Company shall maintain, at all times during the term of this
Agreement, a ratio of Current Assets to Current Liabilities of not less than
2.75 to 1.00.
14. The Company shall maintain, at all times during the periods below,
a total debt (defined as all current and long-term liabilities of the Company)
to equity (defined as the Company's retained earnings, capital stock, and
paid-in-capital) ratio not to exceed:
FISCAL PERIOD RATIO
FROM THE DATE HEREOF
THROUGH JUNE 30, 1997 45%
FOR THE FISCAL QUARTER
ENDING SEPTEMBER 30, 1997 40%
FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1997 AND AT ALL
TIMES THEREAFTER 35%
15. COMMENCING WITH THE CALENDER QUARTER ENDING JUNE 30, 1997, THE
COMPANY SHALL NOT SUFFER A NET LOSS FOR ANY 2 OR MORE CONSECUTIVE FISCAL
QUARTERS.
SECTION 8. INTEREST, FEES AND EXPENSES
1. Interest on the Revolving Loan shall be payable monthly as of the
end of each month and shall be an amount equal to The Chase Manhattan Bank Rate
on the average of the net balances owing by the Company to CIT in the Company's
account at the close of each day during such month. In the event of any change
in said Chase Manhattan Bank Rate, the rate hereunder shall change, as of the
first of the month following any change, so as to remain equal to the Chase
Manhattan Bank Rate. The rate hereunder shall be calculated based on a 360-day
year. CIT shall be entitled to charge the Company's account at the rate provided
for herein when due until all Obligations have been paid in full.
2. In consideration of the Letter of Credit Guaranty of CIT, the
Company shall pay CIT the Letter of Credit Fees which shall be an amount
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equal to (i) one-eighth of one percent (1/8 of 1.0%) of the face amount of each
Letter of Credit opened pursuant hereto and (ii) one-eighth of one percent (1/8
of 1.0%) of the face amount of each Letter of Credit when payment is made on
such Letter or Credit and/or the Letter of Credit expires and is not drawn on.
3. Any charges, fees, commissions, costs and expenses charged to CIT
for the Company's account by any Issuing Bank in connection with or arising out
of Letters of Credit issued pursuant to this Agreement or out of transactions
relating thereto will be charged to the Company's account in full when charged
to or paid by CIT and when made by any such Issuing Bank shall be conclusive on
CIT.
4. The Company shall reimburse or pay CIT, as the case may be, for all
Out-of-Pocket Expenses of CIT.
5. Upon the last Business Day of each month, commencing with June 30,
1997, the Company shall pay CIT interest on the Collection Days. Interest will
be computed at the rate, and in the manner, set forth in Paragraph 1 of this
Agreement.
6. To induce CIT to enter into this Agreement and to extend to the
Company the Revolving Loan, the Company shall pay to CIT a Loan Facility Fee in
the amount of $50,000.00 payable upon execution of this Agreement.
7. Upon the occurrence of an Event of Default, the Company shall pay
CIT's standard charges for, and the fees and expenses of, the CIT personnel used
by CIT for reviewing the books and records of the Company and for verifying,
testing, protecting, safeguarding, preserving or disposing of all or any part of
the Collateral.
8. The Company hereby authorizes CIT to charge the Company's accounts
with CIT with the amount of all payments due hereunder as such payments become
due. The Company confirms that any charges which CIT may so make to the
Company's account as herein provided will be made as an accommodation to the
Company and solely at CIT's discretion.
SECTION 9. POWERS
The Company hereby constitutes CIT or any person or agent CIT may
designate as its attorney-in-fact, at the Company's cost and expense, to
exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all of the Company's Obligations to CIT have been
paid in full:
(a) To receive, take, endorse, sign, assign and deliver, all in the
name of CIT or the Company, any and all checks, notes, drafts, and other
documents or instruments relating to the Collateral;
(b) To receive, open and dispose of all mail addressed to the
Company and to notify postal authorities to change the address for delivery
thereof to such address as CIT may designate;
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(c) To request from customers indebted on Accounts at any time, in
the name of CIT or the Company or that of CIT's assignee, information concerning
the amounts owing on the Accounts;
(d) To transmit to customers indebted on Accounts notice of CIT's
interest therein and to notify customers indebted on Accounts to make payment
directly to CIT for the Company's account; and
(e) To take or bring, in the name of CIT or the Company, all steps,
actions, suits or proceedings deemed by CIT necessary or desirable to enforce or
effect collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the powers
set forth in (b), (d) and (e) above may only be exercised after the occurrence
of an Event of Default and until such time as such Event of Default is waived.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
1. Notwithstanding anything hereinabove to the contrary, CIT may
terminate this Agreement immediately upon the occurrence of any of the following
(subject to any applicable notice and/or cure periods) (herein "Events of
Default"):
a) cessation of the business of the Company or the calling of a
meeting of the creditors of the Company for purposes of
compromising the debts and obligations of the Company;
b) the failure of the Company to generally meet debts as they
mature;
c) the commencement by or against the Company of any bankruptcy,
insolvency, arrangement, reorganization, receivership or
similar proceedings under any federal or state law;
d) breach by the Company of any warranty, representation or
covenant contained herein (other than those referred to in
sub-paragraph e below) or in any other written agreement
between the Company or CIT, provided that such Default by the
Company of any of the warranties, representations or covenants
referred in this clause d shall not be deemed to be an Event
of Default unless and until such Default shall remain
unremedied to CIT's satisfaction for a period of twenty (20)
Business Days from the date of notice to the Company of such
Default;
e) breach by the Company of any warranty, representation or
covenant of Section 3, Paragraphs 3 (other than the third
sentence of paragraph 3) and 4; Section 6, Paragraphs 3 and 4
(other than the first sentence of paragraph 4); Section 7,
Paragraphs 1,5,6, and 9 through 15; or
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f) failure of the Company to pay any of the Obligations within
five (5) Business Days of the due date thereof, provided that
nothing contained herein shall prohibit CIT from charging such
amounts to the Company's account on the due date thereof
(which charge shall cure such Default if sufficient funds
exist within the Line of Credit and the Availability); or
the occurrence of a default or an event of default under the
Factoring Agreement.
2. At the option of CIT upon the occurrence of an Event of Default:
i) all Obligations shall become immediately due and payable; ii) CIT may charge
the Company the Default Rate of Interest on all then outstanding or thereafter
incurred Obligations in lieu of the interest provided for in paragraphs one and
two of Section 8 of this Agreement provided a) CIT has given the Company written
notice of the Event of Default, provided, however, that no notice is required if
the Event of Default is the event listed in paragraph 1(c) of this Section 10
and b) the Company has failed to cure the Event of Default within ten (10)
Business Days after x) CIT deposited such notice in the United States mail or y)
the occurrence of the Event of Default listed in paragraph 1(c) of this Section
10; and iii) CIT may immediately terminate this Agreement upon notice to the
Company, provided, however, that no notice of termination is required if the
Event of Default is the event listed in paragraph 1(c) of this Section 10. The
exercise of any option is not exclusive of any other option which may be
exercised at any time by CIT.
3. Immediately upon the occurrence of any Event of Default, CIT may, to
the extent permitted by law: (a) remove from any premises where same may be
located any and all documents, instruments, files and records, and any
receptacles or cabinets containing same, relating to the Accounts, or CIT may
use, at the Company's expense, such of the Company's personnel, supplies or
space at the Company's places of business or otherwise, as may be necessary to
properly administer and control the Accounts or the handling of collections and
realizations thereon; (b) bring suit, in the name of the Company or CIT, and
generally shall have all other rights respecting said Accounts, including
without limitation the right to: accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Company or CIT; (c) sell, assign
and deliver the Collateral and any returned, reclaimed or repossessed
merchandise, with or without advertisement, at public or private sale, for cash,
on credit or otherwise, at CIT's sole option and discretion, and CIT may bid or
become a purchaser at any such sale, free from any right of redemption, which
right is hereby expressly waived by the Company; (d) foreclose the security
interests created herein by any available judicial procedure, or to take
possession of any or all of the Inventory without judicial process, and to enter
any premises where any Inventory may be located for the purpose of taking
possession of or removing the same and (e) exercise any other rights and
remedies provided in law, in equity, by contract or otherwise. CIT shall have
the right, without notice or advertisement, to sell, lease, or otherwise dispose
of all or any part of the Collateral whether in its then condition or after
further preparation or
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processing, in the name of the Company or CIT, or in the name of such other
party as CIT may designate, either at public or private sale or at any broker's
board, in lots or in bulk, for cash or for credit, with or without warranties or
representations, and upon such other terms and conditions as CIT in its sole
discretion may deem advisable, and CIT shall have the right to purchase at any
such sale. If any Inventory shall require rebuilding, repairing, maintenance or
preparation, CIT shall have the right, at its option, to do such of the
aforesaid as is necessary, for the purpose of putting the Inventory in such
saleable form as CIT shall deem appropriate. The Company agrees, at the request
of CIT, to assemble the Inventory and to make it available to CIT at premises of
the Company or elsewhere and to make available to CIT the premises and
facilities of the Company for the purpose of CIT's taking possession of,
removing or putting the Inventory in saleable form. However, if notice of
intended disposition of any Collateral is required by law, it is agreed that ten
(10) Business Days notice shall constitute reasonable notification and full
compliance with the law. The net cash proceeds resulting from CIT's exercise of
any of the foregoing rights, (after deducting all charges, costs and expenses,
including reasonable attorneys' fees) shall be applied by CIT to the payment of
the Company's Obligations, whether due or to become due, in such order as CIT
may elect, and the Company shall remain liable to CIT for any deficiencies, and
CIT in turn agrees to remit to the Company or its successors or assigns, any
surplus resulting therefrom. The enumeration of the foregoing rights is not
intended to be exhaustive and the exercise of any right shall not preclude the
exercise of any other rights, all of which shall be cumulative.
SECTION 11. TERMINATION
Except as otherwise permitted herein, CIT may terminate this Agreement and
the Line of Credit only as of any Anniversary Date and then only by giving the
Company at least sixty (60) days prior written notice of termination.
Notwithstanding the foregoing CIT may terminate the Agreement immediately upon
the occurrence of an Event of Default, provided, however, that if the Event of
Default is an event listed in paragraph 1(c) of Section 10 of this Agreement,
CIT may regard the Agreement as terminated and notice to that effect is not
required. This Agreement, unless terminated as herein provided, shall
automatically continue from Anniversary Date to Anniversary Date. The Company
may terminate this Agreement and the Line of Credit at any time upon at least
sixty (60) days' prior written notice to CIT, provided, however, that if such
termination is on a date other than the third (3rd) Anniversary Date or any
subsequent Anniversary Date that the Company pays to CIT immediately on demand,
the Prepayment Premium. All Obligations shall become due and payable as of any
termination hereunder or under Section 10 hereof and, pending a final
accounting, CIT may withhold any balances in the Company's account (unless
supplied with an indemnity satisfactory to CIT) to cover all of the Company's
Obligations, whether absolute or contingent. All of CIT's rights, liens and
security interests shall continue after any termination until all Obligations
have been paid and satisfied in full.
SECTION 12. MISCELLANEOUS
1. The Company hereby waives diligence, demand, presentment and protest
and any notices thereof as well as notice of nonpayment. No delay or omission of
23
Page 41 of 44
<PAGE>
CIT or the Company to exercise any right or remedy hereunder, whether before or
after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by CIT of any right or remedy precludes any other
or further exercise thereof, or precludes any other right or remedy.
2. Except for the Factoring Agreement, dated June 2, 1990 between the
Company and CIT, as such Factoring Agreement is amended from time-to-time, this
Agreement and the documents executed and delivered in connection therewith
constitute the entire agreement between the Company and CIT; supersede any prior
agreements; can be changed only by a writing signed by both the Company and CIT;
and shall bind and benefit the Company and CIT and their respective successors
and assigns.
3. In no event shall the Company, upon demand by CIT for payment of any
indebtedness relating hereto, by acceleration of the maturity thereof, or
otherwise, be obligated to pay interest and fees in excess of the amount
permitted by law. Regardless of any provision herein or in any agreement made in
connection herewith, CIT shall never be entitled to receive, charge or apply, as
interest on any indebtedness relating hereto, any amount in excess of the
maximum amount of interest permissible under applicable law. If CIT ever
receives, collects or applies any such excess, it shall be deemed a partial
repayment of principal and treated as such; and if principal is paid in full,
any remaining excess shall be refunded to the Company. This paragraph shall
control every other provision hereof and of any other agreement made in
connection herewith.
4. If any provision hereof or of any other agreement made in connection
herewith is held to be illegal or unenforceable, such provision shall be fully
severable, and the remaining provisions of the applicable agreement shall remain
in full force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be added
automatically as a part of the applicable agreement a legal and enforceable
provision as similar in terms to the severed provision as may be possible.
5. THE COMPANY AND CIT EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT. THE COMPANY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF
PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.
6. Except as otherwise herein provided, any notice or other
communication required hereunder shall be in writing, and shall be deemed to
have been validly served, given or delivered when hand delivered or sent by
facsimile, or three Business Days after deposit in the United State mails, with
proper first class postage prepaid and addressed to the party to be notified as
follows:
24
Page 42 of 44
<PAGE>
(A) if to CIT, at:
The CIT Group/Commercial Services, Inc.
300 South Grand Avenue, Second Floor
Los Angeles, CA 90071
Attention: Jim Ezemoli, Vice President
(B) if to the Company at:
Mossimo, Inc.
9 Pasteur
Irvine, CA 92618
Attention: Chief Financial Officer
or to such other address as any party may designate for itself by like
notice.
7. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, agreed to, accepted and delivered in California, by their proper and
duly authorized officers as of the date set forth above.
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: /s/ James E. Ezemoli
----------------------------
Title: Vice President
----------------------------
MOSSIMO, INC.
By: /s/ John D. Bower
----------------------------
Title: Vice President - Finance
----------------------------
25
Page 43 of 44
<PAGE>
EXHIBIT 11
MOSSIMO, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
For The Three Months
Ended June 30,
1997 1996
---- ----
Weighted average shares outstanding
during the period 15,000 15,000
Dilutive effect of stock options -- 202
Equivalent shares issuable for the
outstanding S distribution note 20 8
------- -------
15,020 15,210
Net income for primary earnings per share $ 45 $ 3,966
======= =======
Net income per share $ .00 $ .26
======= =======
For The Six Months
Ended June 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 ($ 453)
=======
Net loss per share ($ .03)
=======
(1) For the six months ended June 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 six months ended June 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.
Page 44 of 44
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,091
<SECURITIES> 0
<RECEIVABLES> 13,314
<ALLOWANCES> 2,184
<INVENTORY> 19,951
<CURRENT-ASSETS> 37,926
<PP&E> 11,008
<DEPRECIATION> 1,878
<TOTAL-ASSETS> 48,400
<CURRENT-LIABILITIES> 6,592
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 40,663
<TOTAL-LIABILITY-AND-EQUITY> 48,400
<SALES> 42,567
<TOTAL-REVENUES> 47,534
<CGS> 28,629
<TOTAL-COSTS> 17,311
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (755)
<INCOME-TAX> (302)
<INCOME-CONTINUING> (453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (453)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
