<PAGE>
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, 1998
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 -2215
(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 15,011,529
$.001 per share (Outstanding on August 13, 1998)
(Class)
Exhibit Index on Page 13
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MOSSIMO, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements:
Condensed consolidated balance sheets as of June 30, 1998 (unaudited) and December 31, 1997...... 2
Condensed consolidated statements of operations for the three months and
six months ended June 30, 1998 and 1997 (unaudited) ......................................... 3
Condensed consolidated statements of cash flows for the six months
ended June 30, 1998 and 1997 (unaudited) .................................................... 4
Notes to condensed consolidated financial statements ............................................ 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .. 7
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings ...................................................................... 12
ITEM 4 - Submission of Matters to a Vote of Security Holders..................................... 12
ITEM 6 - Exhibits and Reports on Form 8-K ....................................................... 12
SIGNATURES ...................................................................................... 13
EXHIBIT INDEX ................................................................................... 14
EXHIBITS ........................................................................................ 15
</TABLE>
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 364 $ 655
Accounts receivable, net................................... 1,694 2,473
Due from factor, net....................................... 4,993 4,001
Refundable taxes........................................... 346 5,505
Inventories................................................ 12,783 14,437
Prepaid expenses and other current assets.................. 386 296
--------- ----------
Total current assets..................................... 20,566 27,367
PROPERTY AND EQUIPMENT, net.................................. 5,534 9,182
OTHER ASSETS................................................. 191 275
---------- ----------
$26,291 $36,824
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................. $ 5,660 $ 6,962
Accounts payable........................................... 2,267 4,126
Accrued liabilities........................................ 2,896 2,389
Current portion of long-term debt.......................... 34 41
S distribution note........................................ 310 362
--------- --------
Total current liabilities................................ 11,167 13,880
DEFERRED ROYALTY INCOME...................................... 387 450
DEFERRED RENT................................................ 39 68
LONG-TERM DEBT, net of current portion....................... 17 31
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
15,008,592 - 1998 and 15,000,000 - 1997.................. 15 15
Additional paid-in capital................................. 31,417 31,386
Accumulated deficit ....................................... (16,751) (9,006)
---------- ---------
Total stockholders' equity............................... 14,681 22,395
-------- --------
$26,291 $36,824
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .................................. $ 11,494 $ 17,611 $ 25,930 $ 41,627
Cost of sales .............................. 9,497 11,698 20,185 28,629
-------- -------- -------- --------
Gross profit ........................... 1,997 5,913 5,745 12,998
Royalty income, net ........................ 722 1,183 1,831 2,608
-------- -------- -------- --------
2,719 7,096 7,576 15,606
-------- -------- -------- --------
OPERATING EXPENSES:
General and administrative ............. 2,661 2,820 5,633 6,274
Selling ................................ 1,198 1,842 3,173 4,395
Marketing .............................. 475 1,559 1,052 3,786
Design ................................. 508 770 1,282 1,916
Lease Restructuring .................... 3,798 - 3,798 -
-------- -------- -------- --------
Total operating expenses ........... 8,640 6,991 14,938 16,371
-------- -------- -------- --------
Operating income (loss) ............ (5,921) 105 (7,362) (765)
-------- -------- -------- --------
OTHER (EXPENSE) INCOME:
Other, net ............................. (25) (14) (73) (14)
Interest, net .......................... (132) (16) (310) 24
-------- -------- -------- --------
Net other (expense) income ......... (157) (30) (383) 10
-------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes ....................... (6,078) 75 (7,745) (755)
Provision (benefit) for income taxes ....... - 30 - (302)
-------- -------- -------- --------
Net income (loss) .......................... $ (6,078) $ 45 $ (7,745) $ (453)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per common share -
Basic and diluted ...................... $ (.41) $ - $ (.52) $ (.03)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding -
Basic and diluted ...................... 15,009 15,020 15,009 15,000
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1998 1997
------ ------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................... $(7,745) $ (453)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................................... 1,056 687
Loss on disposition of property and equipment .......................... 2,863 20
Deferred rent .......................................................... (29) (14)
Provision for doubtful receivables ..................................... 140 135
Deferred income taxes .................................................. - 96
Changes in:
Accounts receivable ................................................ 639 (372)
Due from factor .................................................... (992) 5,499
Inventories ........................................................ 1,654 (2,536)
Refundable taxes ................................................... 5,159 (503)
Prepaid expenses and other current assets .......................... (90) (677)
Other assets ....................................................... (31) (43)
Accounts payable ................................................... (1,859) (2,192)
Accrued liabilities ................................................ 507 485
------ ------
Net cash provided by operating activities .................................. 1,272 132
------ ------
CASH FLOWS FROM INVESTING ACTIVITITES:
Payments for acquisition of property and equipment ......................... (271) (4,978)
------ ------
Net cash used in investing activities .............................. (271) (4,978)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit ............................................... (1,302) -
Proceeds from issuance of common stock ..................................... 31 -
Repayment of long-term debt ................................................ (21) (70)
------ ------
Net cash provided by financing activities .......................... (1,292) (70)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................... (291) (4,916)
CASH AND CASH EQUIVALENTS, beginning of period ............................. 655 7,007
------ ------
CASH AND CASH EQUIVALENTS, end of period ................................... $ 364 $2,091
------ ------
------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ........................................................... $ 238 $ 82
------ ------
------ ------
Income taxes ....................................................... $ - $ 142
------ ------
------ ------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MOSSIMO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Accounting Policies
Organization
- ------------
Mossimo Inc. and subsidiary ("Mossimo" or the "Company") designs,
sources and markets a lifestyle collection of contemporary men's and women's
denim based sportswear with fashion elements, and men's activewear 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, men's tailored clothing, men's
hosiery and men's and women's accessories. The Company distributes its
products to a diversified account base, including department stores,
specialty retailers, and sports and activewear stores located throughout the
United States, as well as one signature retail store and one outlet store 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 ("GAAP") for complete
financial statements. The accompanying unaudited interim condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31,
1997 on Form 10-K.
In the opinion of management, the unaudited condensed 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, 1998 and December 31, 1997, the consolidated
statements of operations for the three months and six months ended June 30,
1998 and 1997, and the consolidated statements of cash flows for the six
months ended June 30, 1998 and 1997. Operating results for the three and six
months ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the entire fiscal year ending December 31, 1998.
Certain reclassifications have been made in the audited consolidated
1997 financial statements to conform to the 1998 presentation.
Income (Loss) Per Share
- -----------------------
The company computes income (loss) per share pursuant to SFAS No. 128,
EARNINGS PER SHARE, which requires the dual presentation of Basic and Diluted
Earnings per share. The Company adopted this pronouncement in fiscal 1997 and
has restated prior periods to reflect the adoption of SFAS No. 128. Common
stock equivalents consisted of outstanding stock options totaling 576,333 and
512,100 as of June 30, 1998 and 1997, respectively. Common stock equivalents
have not been included in the calculation of diluted loss per share as their
effect would have been anti-dilutive for all periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1998 1997
------ -----
<S> <C> <C>
Basic weighted average shares outstanding during the period 15,009 15,000
Dilutive effect of stock options .......................... - -
------- ------
Weighted average common shares outstanding
Basic and diluted ............................... 15,009 15,000
------- ------
------- ------
</TABLE>
5
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2. Credit Facility
In April 1998, the Company's credit facility was amended to provide for
a $15.0 million revolving credit line, which is collateralized by inventory,
receivables, machinery and equipment and tradenames. The Company's borrowings
under the amended agreement are limited to eligible inventory and
receivables. Advances under the amended agreement bear interest at the prime
rate plus 0.5%. The Company's revolving line is committed through January 1,
1999 with an extension through March 31, 1999, subject to certain conditions.
Historically, the Company has sold a substantial portion of its trade
accounts receivable to a factor, which assumes the credit risk with respect
to collection of nonrecourse accounts receivable in exchange for a fee. The
factor approves the credit of the Company's customers prior to sale. If the
factor disapproves of a sale to a customer and the Company decides to proceed
with the sale, the Company bears the credit risk. The factoring agreement is
in force until June 1, 2000.
3. Lease Restructuring
During the quarter ended June 30, 1998, the Company completed a lease
restructure resulting in a charge of $3.8 million. The lease restructure
charge includes (i) $2.7 million in corporate lease restructuring expenses
and costs, including the write-down of certain fixed assets; (ii) $900,000
for the discontinuation of the Company's screen printing business; and (iii)
$200,000 for closing the Company's Pasadena retail store.
4. Commitments and Contingencies
LITIGATION - On January 23, 1997, plaintiff Chaile Steinberg filed a
purported class action suit against the Company and certain other defendants
on behalf of individuals who purchased the Company's common stock in the
initial public offering pursuant to the Registration Statement and Prospectus
("Prospectus"), dated February 22, 1996, and on the open market from February
22, 1996 through January 14, 1997 (the "Class Period"). In addition to naming
the Company, the plaintiffs Igor Glaudnikov, Cara Debra Marks and Lois Burke
filed a second related action against the same defendants. The two cases were
subsequently consolidated by court order, dated May 19, 1997. Both Steinberg
and Glaudnikov (collectively, the "State Actions") contain identical factual
allegations, and only differ in the number of shares purchased by plaintiffs
and the California residence of two of the plaintiffs in the Glaudnikov
action.
The State Actions allege that defendants made false and misleading
statements and intentionally concealed material negative information in the
Prospectus and afterward during the Class Period, which artificially inflated
prices for the Company's common stock. Plaintiffs contend that the class was
damaged in an unspecified amount as a result of this artificial inflation of
the Company's stock price.
On September 23, 1997, a federal class action complaint was filed on
behalf of plaintiff James Frenkil by the same law firm that represents the
plaintiffs in the State Actions. One of the named plaintiffs in the federal
action is a plaintiff in the State Actions. The class period and
precipitating events are the same as in the State Actions, but the federal
complaint purports to allege violations of certain federal securities laws.
On October 17, 1997, the judge stayed the federal action pending further
development in the State Actions.
Defendants filed demurrers in the State Actions, challenging the legal
sufficiency of the complaints. On June 26, 1997, the judge sustained the
defendant's general demurrer to the complaints in the State Actions, finding
that neither complaint pleaded facts sufficient to constitute causes of
action against the defendants. The judge sustained the demurrer as to four of
the causes of action with leave to amend, and as to the fifth cause of action
for unlawful, unfair or fraudulent business practices and false or misleading
advertising without leave to amend. On July 9, 1998, plaintiffs filed their
first amended consolidated complaint. Defendants must file their response to
that complaint on or before September 22, 1998.
6
<PAGE>
Although the outcome of the litigation cannot be predicted, management
believes that the Company has meritorious defenses and intends to defend this
action with vigor.
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.
7
<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, 1997 on Form 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales decreased to $11.5 million during the second quarter of 1998
from $17.6 million in the corresponding quarter in 1997. The decrease in net
sales was primarily due to a 64% decline in sales for the men's line. Net
sales of the men's line, which represented 38% of the Company's net sales for
the three months ended June 30, 1998, decreased to $4.3 million in 1998 from
$11.9 million in 1997. The reduction was primarily in activewear sales to
specialty stores and chains. This correlates with the Company's strategy to
narrow its product base and emphasize the denim based sportswear business,
which offers the strongest growth potential. Net sales of the women's line,
which represents 37% of the Company's net sales for the three months ended
June 30, 1998, increased to $4.2 million in 1998 from $3.9 million in 1997.
Net sales of the Company's eyewear decreased approximately 50% to $600,000 in
1998 from $1.2 million in 1997. This was primarily due to a decrease in sales
of the Moss line.
Gross profit decreased to $2.0 million during the second quarter of 1998
from $5.9 million in the corresponding quarter in 1997. Gross profit as a
percentage of net sales decreased to 17% in this period from 34% in the
second quarter of 1997. The decrease in gross profit resulted primarily from
sales of excessive inventory at discounted prices. However, gross profit as a
percentage of net sales, excluding excessive inventory sales, decreased to
32% from 37% in 1997. This reduction in gross profit is primarily due to
lower sales of higher margin activewear products, such as T-shirts and walk
shorts.
Royalty income decreased 39%, to $700,000 during the second quarter of
1998 from $1.2 million in the corresponding quarter in 1997. The decrease was
primarily attributed to reduced sales by the Company's licensees that carry
swimwear, bodywear and accessory product categories. Management believes that
sales of the Company's swimwear licensee were negatively impacted, in part,
by poor weather conditions on the West Coast. Sales of the Company's
accessory licensee declined due to a reduction in product categories offered
in 1998 compared to 1997. This decline reflects the company's strategic
decision to restructure its accessory product offerings by finding new, more
aggressive licensees with the ability to market at a department store level.
This decision is in line with the Company's overall goal to focus on
department store accounts which the Company believes may provide a more solid
base for future growth.
Operating expenses increased to $8.6 million in 1998 from $7.0 million
in 1997. The increase was primarily due to a lease restructuring charge of
$3.8 million, which was finalized in the second quarter of 1998. The lease
restructure charge includes (i) $2.7 million in corporate lease restructuring
expenses and costs, including the write-down of certain fixed assets; (ii)
$900,000 for the discontinuation of the Company's screen printing business;
and (iii) $200,000 for closing the Company's Pasadena retail store.
During 1998, the Company has reevaluated its office and facilities
requirements and has agreed to relinquish its existing space for its
corporate headquarters and approximately half of the space for its
warehouse/distribution. This lease restructuring relieves the Company of
annual rental obligations of approximately $1.0 million. The Company is
currently negotiating for new offices with approximately 15,000 to 20,000
square feet and a lease term obligation of less than 3 years with total
annual rent of approximately $300,000. The Company, accordingly, anticipates
a reduction in annual rental obligations of approximately $700,000.
8
<PAGE>
Operating expenses, excluding the lease restructuring charge, decreased
to $4.8 million during the second quarter of 1998 from $7.0 million during
the second quarter of 1997. Such decrease was primarily due to reduced sales
commissions, reduced staffing, a reduction in print advertising and overall
cost cutting measures; offset by increased salary expense for in house sales
representatives.
Net interest expense increased to $132,000 during the second quarter of
1998 from $16,000 during the second quarter of 1997. In 1998, the Company
increased borrowings on the Company's credit facility primarily due to the
loss sustained by the Company in fiscal 1997.
The Company recorded no tax benefit in 1998 as a result of its pretax
loss compared with a tax provision of $30,000 in 1997. A tax benefit will be
recorded only to the extent the company can apply for carryback claims in its
income tax returns.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales decreased to $25.9 million during the six months ended June
30, 1998 from $41.6 million during the six months ended June 30, 1997. The
decrease in net sales was primarily due to a 62% decline in sales for the
men's line and a 17% decline in women's sales. Net sales of the men's line,
which represented 42% of the Company's net sales for the six months ended
June 30, 1998, decreased to $10.8 million in 1998 from $28.1 million in 1997.
The reduction was primarily in activewear sales to specialty stores and
chains. This correlates with the Company's strategy to narrow its product
base and emphasize the denim based sportswear business, which offers the
strongest growth potential. The decline in the men's line was partially
offset by sales of the Moss line totaling $2.1 million. Net sales of the
women's line, which represented approximately 34% of the Company's net sales
for the six months ended June 30, 1998, decreased to $8.8 million in 1998
from $10.7 million in 1997. Net sales of the Company's eyewear decreased
approximately 34% to $1.2 million during the first half of 1998 from $1.8
million in the same period last year. This was primarily due to a decrease in
sales of the Moss line.
Gross profit decreased to $5.7 million during the first half of 1998
from $13.0 million during the first half of 1997. Gross profit as a
percentage of net sales decreased to 22% during this period from 31% during
this period in 1997. The decrease in gross profit resulted primarily from
sales of excessive inventory at discounted prices. However, gross profit as a
percentage of net sales, excluding excessive inventory sales, decreased to
32% during this period from 35% during this period in 1997. This reduction in
gross profit is primarily due to lower sales of higher margin activewear
products, such as T-shirts and walk shorts.
Royalty income decreased 30%, to $1.8 million during the first half of
1998 from $2.6 million during the fist half of 1997. The decrease was
primarily attributed to reduced sales by the Company's licensees that carry
swimwear, bodywear and accessory product categories. Management believes that
sales of the Company's swimwear licensee were negatively impacted, in part,
by poor weather conditions on the West Coast. Sales of the Company's
accessory licensee declined due to a reduction in product categories offered
during this period in 1998 compared to the corresponding period in 1997. This
decline reflects the company's strategic decision to restructure its
accessory product offerings by finding new, more aggressive licensees with
the ability to market at a department store level. This decision is in line
with the Company's overall goal to focus on department store accounts which
the Company believes may provide a more solid base for future growth.
Operating expenses decreased to $17.9 million during the first six
months of 1998 from $16.4 million during the first six months of 1997.
Included in the 1998 operating expenses is a lease restructuring charge of
$3.8 million, which was finalized in the second quarter of 1998. The lease
restructure charge includes (i) $2.7 million in corporate lease restructuring
expenses and costs, including the write-down of certain fixed assets; (ii)
$900,000 for the discontinuation of the Company's screen printing business;
and (iii) $200,000 for closing the Company's Pasadena retail store.
During 1998, the Company has reevaluated its office and facilities
requirements and has agreed to relinquish
9
<PAGE>
its existing space for its corporate headquarters and approximately half of
the space for its warehouse/distribution. This lease restructuring relieves
the Company of annual rental obligations of approximately $1.0 million. The
Company is currently negotiating for new offices with approximately 15,000 to
20,000 square feet and a lease term obligation of less than 3 years with
total annual rent of approximately $300,000. The Company, accordingly,
anticipates a reduction in annual rental obligations of approximately
$700,000.
Operating expenses, excluding the lease restructuring charge, decreased
to $11.1 million during the first six months of 1998 from $16.4 million
during the first six months of 1997. Such decrease was primarily due to
reduced sales commissions, reduced staffing, a reduction in print
advertising, the elimination of certain fashion shows and overall cost
cutting measures; offset by increased salary expense for in house sales
representatives
The Company had net interest expense of $310,000 during the first six
months of 1998 compared to net interest income of $24,000 during the first
six months of 1997. In 1998, the Company increased borrowings on the
Company's credit facility primarily due to the loss sustained by the Company
in fiscal 1997.
The Company recorded no tax benefit in 1998 as a result of its pretax
loss compared with a tax benefit of $302,000 in 1997. A tax benefit will be
recorded only to the extent the Company can apply for carryback claims in its
income tax returns.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund the Company's
working capital needs related to inventories, accounts receivable, and
property and equipment acquisitions. Net cash provided by operating
activities totaled $1.3 million for the six months ended June 30, 1998. Cash
utilized in operating activities was comprised of the Company's net loss
during this period of $7.7 million and cash used to pay down accrued
liabilities of $1.4 million, offset by a Federal Tax refund of $5.2 million,
a $1.7 million reduction in inventory and the non-cash charge of $2.8 million
associated with the write-down of assets related to the lease restructuring.
At June 30, 1998, working capital was approximately $9.4 million as compared
to $13.5 million at December 31, 1997. The decline in working capital is due
to a $1.7 million reduction in inventory, the collection of the refundable
taxes and funding of the loss sustained by the Company during the first two
quarters of 1998; partially offset by reductions in current liabilities.
The Company maintains a $15.0 million revolving credit line, which is
collateralized by inventory, receivables, machinery and equipment and
intangibles. The Company's borrowings under the agreement, which was amended
in April 1998, are limited to eligible inventory and receivables. Advances
under the amended agreement bear interest at the prime rate plus 0.5%. The
revolving line is committed through January 1, 1999 with an extension through
March 31, 1999, subject to certain conditions. As of June 30, 1998 the
Company had $3.0 million available on the revolving line of credit. The
Company was also in compliance with all debt covenants.
Historically, the Company has sold a substantial portion of its trade
accounts receivable to a factor, which assumes the credit risk with respect
to collection of nonrecourse accounts receivable in exchange for a fee. The
factor approves the credit of the Company's customers prior to sale. If the
factor disapproves of a sale to a customer and the Company decides to proceed
with the sale, the Company bears the credit risk. The factoring agreement is
in force through June 1, 2000.
In 1997, the Company began cost cutting measures to more align its
expense level with its declining sales. Accordingly, the Company has reduced
staffing levels, reduced compensation to existing staff and is reviewing
other cost cutting measures which are designed to reduce operating expenses
in fiscal 1998.
10
<PAGE>
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 declining sales experienced in 1997 and 1998, operating
trends have not reflected the normal apparel industry seasonality. In future
years, the Company expects that its sales may reflect greater seasonal trends.
FORWARD LOOKING INFORMATION
This report on Form 10-Q contains certain forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. The words
"anticipate", "believe", "may", "estimate" and similar expressions,
variations of such terms or the negative of such terms as they relate to the
Company or its management when used in this document are intended to identify
such forward-looking statements. Such statements are based on management's
current expectations and are subject to certain risks, uncertainties and
assumptions. Should one or more risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in,
or implied by such forward-looking statements.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards Board ("FASB") No. 130, REPORTING COMPREHENSIVE INCOME.
The Company does not have any material amounts of comprehensive income to
report.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
the way public companies report financial information about operating
segments. The Company will adopt SFAS No. 131 in fiscal 1998, as required.
This statement may affect disclosure and presentation in the financial
statements but will not have any impact on the Company's consolidated
financial position, liquidity, cash flows or results of operations.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. This inability to recognize or
properly treat the Year 2000 may cause the Company's systems and applications
to process critical financial and operational information incorrectly.
The Company is currently in the process of investigating whether its
internal accounting systems and other operational systems are Year 2000
compliant. The Company has been informed by the vendor of its internal
accounting software that upgrades that will bring such software into Year
2000 compliance are currently available and will provide them to the Company
under its existing software maintenance agreement. The Company expects to
effect the conversion of its internal accounting system to such upgraded
software by the end of 1998. The Company believes that necessary conversions
of other operational systems can also be accomplished through vendor upgrades
and enhancements as provided under its system maintenance agreements
currently in effect. The Company is in the process of contacting its major
suppliers and vendors to ensure their awareness of the Year 2000 Problem. If
the Company, its suppliers or vendors are unable to resolve issues related to
the year 2000 on a timely basis, it could have a material adverse effect on
the Company's business and results of operations.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (See Note 4 to Financial Statements)
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 21, 1998.
(b) Election of Directors:
The following Director nominees were elected at the Annual
Meeting:
John H. Stafford - Class III
Robert Martini - Class II
The Directors whose terms of office continue are:
Mossimo G. Giannulli - Class I
Francesca Ruiz De Luzuriaga - Class I
(c) The matter voted upon at the meeting and the results of the vote
were as follows:
<TABLE>
<CAPTION>
Votes Votes Shares
For Directors: For Against Abstaining
--------------- ---------- ------- ----------
<S> <C> <C> <C>
John H. Stafford 14,728,505 101,205 -0-
Robert Martini 14,730,935 98,775 -0-
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
10.4.4 Letter Amendment to Factoring Agreement dated May 21,
1998
10.6.1 Amendment to the lease agreement with the Irvine
Company, dated July 10, 1998
10.7.1 Amendment to the Financing Agreement dated April 1,
1998
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
three months ended June 30, 1998.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File Number 33-80597)
12
<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 14, 1998 /s/ John Brincko
-------------------------------------
John Brincko
Chief Executive Officer and President
(Principal Executive Officer)
August 14, 1998 /s/ Thora Thoroddsen
--------------------------------------
Thora Thoroddsen
Secretary, Treasurer and Controller
(Principal Accounting Officer)
13
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
---------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
10.4.4 Letter Amendment to Factoring Agreement dated
May 21, 1998
10.6.1 Amendment to the lease agreement with the Irvine
Company, dated July 10, 1998
10.7.1 Amendment to the Financing Agreement dated
April 1, 1998
27 Financial Data Schedule
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File Number 33-80597)
</TABLE>
14
<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.
/s/ John Brincko
August 14, 1998 --------------------------------------
John Brincko
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Thora Thoroddsen
August 14, 1998 ---------------------------------------
Thora Thoroddsen
Secretary, Treasurer and Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT 10.4.4
Date: 5/21/98
Mossimo, Inc.
9 Pasteur
Irvine, CA 92618
Gentlemen:
Reference is made to the Factoring Agreement between us dated January 2,
1990, as supplemented and amended (herein the Agreement ).
Pursuant to mutual understanding, effective April 1, 1998, the Agreement is
amended to provide as follows:
1. Paragraph 13 of the Agreement is deleted in its entirety and the following
is inserted in lieu thereof:
"13. Interest is charged as of the last day of each month based on the
daily debit balances in your Funds In Use account for that month, at a rate
equal to one-half of one percent (.50%) plus the Chase Prime Rate (defined
below) per annum. The Chase Prime Rate is the per annum rate of interest
publicly announced by The Chase Manhattan Bank (or its successor) in New
York, New York from time to time as its prime rate, and is not intended to be
the lowest rate of interest charged by The Chase Manhattan Bank to its
borrowers. Any change in the rate of interest hereunder due to a change in
the Chase Prime Rate will take effect as of the first of the month following
such change in the Chase Prime Rate. Interest will be credited as of the
last day of each month based on the daily credit balances in your Funds In
Use account for that month, at a rate three percent (3%) per annum below the
Chase Prime Rate being used to calculate interest for the period. All
interest is calculated on a 360 day year. In no event will interest charged
hereunder exceed the highest lawful rate. In the event, however, that we do
receive interest in excess of the highest lawful rate, you agree that your
sole remedy would be to seek repayment of such excess, and you irrevocably
waive any and all other rights and remedies which may be available to you
under law or in equity."
2. Paragraph 14 of the Agreement is deleted in its entirety.
3. The commission rate as set forth in paragraph 15 of the Agreement shall be
increased from six-tenths of one percent (.60%) to seven-tenths of one percent
(.70%) on the gross face amount of all Accounts factored with us during each
month, less trade and cash discounts.
4. The fourth sentence of Paragraph 17 of the Agreement is deleted in its
entirety, and the following is inserted in lieu thereof:
"As used herein, the term "Anniversary Date" shall mean June 1, 2000 and the
same date in every year thereafter."
Except as herein specifically provided, no other change in the terms or
provisions of the Agreement is intended or implied. If the foregoing is in
accordance with your understanding of our agreement kindly so indicate by
signing and returning to us the enclosed copy of this letter.
Very truly yours,
THE CIT GROUP/
COMMERCIAL SERVICES, INC.
<PAGE>
By: /s/ James Ezemoli
------------------------------
James Ezemoli, Vice President:
Read and Agreed To:
MOSSIMO, INC.
By: /s/ John Brincko
-------------------------------
Name: John Brincko
Title:
<PAGE>
FIRST AMENDMENT TO LEASE
(MOSSIMO)
This First Amendment to Lease (the "Amendment") dated July 10 , l998, is
entered into by an between THE IRVINE COMPANY, a Delaware corporation
("Landlord"), and MOSSIMO, INC., a California corporation ("Tenant").
RECITALS.
A. On May 3, 1996, Landlord and Tenant entered into that certain
Industrial Lease ("Lease") for space in the buildings located at 5 and 9
Pasteur, Irvine, California ("Premises").
B. Landlord and Tenant now desire to terminate the Lease with respect to
all of the office building located at 9 Pasteur and a portion of the warehouse
building at 5 Pasteur (the "Recaptured Space") and to modify the Lease for the
remaining Premises as set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of mutual covenants, conditions and
agreements contained herein and for other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
agree as follows:
1. EFFECTIVE DATE OF LEASE MODIFICATIONS. The lease modifications set
forth in this Amendment shall be effective only upon the satisfaction of each of
the following conditions (the "Effective Date"):
a. The payment to Landlord concurrently with the execution hereof of
the sum of One Hundred Eighty-One Thousand Two Hundred Twenty-Seven
Dollars and Thirty-Five Cents ($181,227.35) (the "Downsize Fee") which
represents payment of the Preliminary Cost Estimate for Tenant
Improvements to be completed pursuant to the Work Letter attached to
this Amendment as Exhibit B;
b. A payment in the amount of the difference, if any, between the
Downsize Fee and the Completion Cost but subject to Landlord's
obligation to refund the balance of the Downsize Fee, if any, in
excess of the Completion Cost, all as more fully described in the Work
Letter;
c. Landlord shall have entered into a lease for the Recaptured Space with
Draper's Rossmoor, Inc. ("Draper's") upon terms and conditions
reasonably satisfactory to Landlord (the "Draper's Lease") and the
Commencement Date under the Draper's Lease (which shall occur upon
completion of the Tenant Improvements per the Work Letter but not
sooner than October 1, 1998 as set forth more fully in the Draper's
Lease) shall have occurred.
d. Landlord shall have received a release and estoppel letter from CB
Richard Ellis substantially in the form attached hereto as Exhibit C
confirming that Landlord shall have no liability for any brokerage
commissions payable in connection with this Amendment and/or the
Draper's Lease.
Within fifteen (15) days after the Effective Date, Landlord shall prepare
and deliver to Tenant for execution a memorandum confirming the occurrence and
date of the Effective Date.
2. AMENDMENT OF BASIC LEASE PROVISIONS. The following Basic Lease
Provisions are amended and restated as of the Effective Date to read as follows
(Numbered paragraphs below refer to the corresponding item number of the Basic
Lease Provisions of the Lease):
1. Address of Building: 5 Pasteur
1
<PAGE>
3. Use of Premises: General office, shipping, warehousing,
manufacturing, fabric cutting, wholesale and off-premises phone or
electronic sales of Tenant's of merchandise, construction and painting
of promotional materials and fixtures, (including without limitation,
tables, stands, racks, displays and trade show booths) and other uses
incidental to Tenant's business which do not violate applicable laws
and restrictions.
6. Basic Rent: Commencing on the date which is Forty-Six (46) days after
the Effective Date (the "Rent Reduction Date"), Tenant's Basic Rent
under this Lease shall be reduced to Forty-one Thousand Forty-four
Dollars ($41,044.00) per month, based on $0.456 per rentable square
foot. During the period from the Effective Date to the Rent Reduction
Date, a portion of Tenant's Basic Rent paid to Landlord under this
Lease, up to an aggregate amount of One Hundred Thirteen Thousand Nine
Hundred Eleven Dollars and Fifty Cents ($113,911.50), shall be
credited towards the rent due for such period for the Recaptured Space
and Draper's shall not be obligated under the Draper's Lease to pay
Basic Rent for such period.
8. Floor Area of Premises: Approximately 90,008 rentable square feet.
9. Security Deposit: $80,000.00 - See Section 4.3 hereof.
11. Additional Insureds: Insignia/ESG of California, Inc.
12. Address for Payments and Notices:
- --------------------------------------------------------------------------------
LANDLORD: TENANT:
Insignia/ESG of California, Inc. Mossimo, Inc.
1 Ada, Suite 270 5 Pasteur
Irvine, CA 92618 Irvine, CA 92618
- --------------------------------------------------------------------------------
with a copy of notices to:
Irvine Industrial Company
P.O. box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial
Operations
- --------------------------------------------------------------------------------
14. Vehicle Parking Spaces: Seventy-eight (78)
15. Plan Approval Date: July 20, 1998
3. MODIFICATION OF OTHER LEASE PROVISIONS. As of the Effective Date, the
following designated sections of the Lease shall be amended, modified or
restated in their entirety (as indicated below) as follows:
1. SECTION 2.1 is restated to read as follows:
SECTION 2.1 LEASED PREMISES. As of the Effective Date, the
Premises shall be as shown in Exhibit A (the "Premises") containing
approximately the floor area set forth in Item 8 of the Basic Lease
Provisions. It is understood that the Premises consists of a
portion of one building (the "Building"). The Premises is a portion
of the project shown in EXHIBIT Y (the "Project").
2
<PAGE>
b. SECTION 3.4. RIGHT TO EXTEND LEASE. Deleted in its entirety.
c. Subparagraph (a) of SECTION 4.2 OPERATING EXPENSES is restated to read
as follows:
(a) Tenant shall pay to Landlord, as additional rent, Tenant's
Share of "Operating Expenses", as defined below, incurred by Landlord
in the operation of the Building and Project. The term "Tenant's
Share" means that portion of an Operating Expense determined by
multiplying the cost of such item by a fraction, the numerator of
which is the rentable floor area of the Premises and the denominator
of which is the total rentable square footage of the area, as of the
date on which the computation is made, to be charged with such
Operating Expense. As of the date of this Amendment, the total
rentable square footage of the Premises is 90,008, the total rentable
square footage of the Building is 164,000 and there are no other
buildings in the Project.
d. The following is added to SECTION 4.3. SECURITY DEPOSIT:
As of the Effective Date, the Security Deposit held by Landlord shall
be reduced to Eighty Thousand Dollars ($80,000) and the balance of
Thirty-One Thousand Six Hundred Ninety-Four Dollars ($31,694.00) (the
"Released Deposit") shall be applied to Basic Rent next coming due
under this Lease.
e. The following is added to SECTION 5.1. USE:
Tenant shall not do or permit anything to be done in or about the
Premises which will in any way interfere with the rights of other
occupants of the Building or the Project, or use or allow the Premises
to be used for any unlawful purpose, nor shall Tenant permit any
nuisance or commit any waste in the Premises or the Project. Tenant
shall not perform any work or conduct any business whatsoever in the
Project other than inside the Premises.
f. SECTION 5.2 is restated to read as follows:
SECTION 5.2 SIGNS. Within thirty (30) days after the Effective Date,
Tenant shall at its sole cost and expense remove all existing signs on
9 Pasteur and 5 Pasteur except for the sign on the exterior wall of 5
Pasteur designated on Exhibit A hereto and to repair any resulting
damage to either building. Landlord acknowledges that Tenant may elect
to cause Draper's to remove Tenant's signs as required by this
Amendment pursuant to a separate written agreement between Tenant and
Draper's but Landlord shall have no obligation with respect to any
such agreement and Tenant shall remain liable to Landlord for the
performance of its obligations under this Section. Thereafter, except
as approved in writing by Landlord, in its reasonable discretion,
Tenant shall have no right to maintain identification signs in any
location in, on or about the Premises, the Building or the Project and
shall not place or erect any signs, displays or other advertising
materials that are visible from the exterior of the Building. The
size, design, graphics, material, style, color and other physical
aspects of any permitted sign shall be subject to Landlord's written
approval prior to installation (which approval may be withheld in
Landlord's discretion), any covenants, conditions or restrictions
encumbering the Premises, Landlord's signage program for the Project,
as in effect from time to time and approved by the City of Irvine
("Signage Criteria"), and any applicable municipal or other
governmental permits and approvals. Tenant acknowledges having
received and reviewed a copy of the current Signage Criteria for the
Project. Tenant shall be responsible for the cost of any permitted
sign, including the fabrication, installation, maintenance and removal
thereof. If Tenant fails to maintain its sign, or if Tenant fails to
remove
3
<PAGE>
same upon termination of this Lease and repair any damage caused by
such removal, Landlord may do so at Tenant's expense.
g. The following is added to SECTION 6.4. PARKING:
There shall be no overnight parking of any vehicles of any kind unless
otherwise authorized by Landlord, and vehicles which have been
abandoned or parked in violation of the terms hereof may be towed away
at the owner's expense. Landlord shall have the right to construct,
maintain and operate lighting facilities within the parking areas; to
change the area, level, location and arrangement of the parking areas
and improvements therein; to impose reasonable restrictions on parking
by tenants, their officers, agents and employees; and to do and
perform such other acts in and to the parking areas and improvements
therein as, in the use of good business judgment, Landlord shall
determine to be advisable. Washing, waxing, cleaning or servicing of
vehicles, or the storage of vehicles for 24 hour periods, is
prohibited unless otherwise authorized by Landlord.
h. SECTION 7.3 ALTERATIONS is restated to read as follows:
SECTION 7.3. ALTERATIONS.
(a) Tenant shall make no alterations, additions or improvements
to the Premises without the prior written consent of Landlord, which
consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably
withhold its consent to any alterations, additions or improvements to
the Premises which cost less than One Dollar ($1.00) per square foot
of the improved portions of the Premises (excluding warehouse square
footage) and do not materially (i) affect the exterior of the Building
or outside areas (or be visible from adjoining sites), or (ii) affect
or penetrate any of the structural portions of the Building, including
but not limited to the roof, or (iii) require any change to the basic
floor plan of the Premises, any substantial change to any structural
or mechanical systems of the Premises, or any governmental permit as a
prerequisite to the construction thereof, or (iv) unreasonably
interfere in any manner with the proper functioning of or Landlord's
access to any mechanical, electrical, plumbing or HVAC systems,
facilities or equipment located in or serving the Building, or
(v) diminish the value of the Premises in Landlord's reasonable
determination. Landlord may impose, as a condition to its consent,
any requirements that Landlord in its discretion may deem reasonable
or desirable, including but not limited to a requirement that all work
be covered by a lien and completion bond satisfactory to Landlord and
requirements as to the manner, time, and contractor for performance of
the work. Tenant shall obtain all required permits for the work and
shall perform the work in compliance with all applicable laws,
regulations and ordinances, all covenants, conditions and restrictions
affecting the Project, and the Rules and Regulations (hereafter
defined). If any governmental entity requires, as a condition to any
proposed alterations, additions or improvements to the Premises by
Tenant, that improvements be made to the Common Areas, and if Landlord
consents to such improvements to the Common Areas, then Tenant shall,
at Tenant's sole expense, make such required improvements to the
Common Areas in such manner, utilizing such materials, and with such
contractors (including, if required by Landlord, Landlord's
contractors) as Landlord may require in its sole discretion. Under no
circumstances shall Tenant make any improvement which incorporates any
Hazardous Materials, including without limitation asbestos-containing
construction materials into the Premises. Any request for Landlord's
consent shall be made in writing and shall contain architectural plans
describing the work in detail reasonably satisfactory to Landlord.
Unless Landlord otherwise agrees in writing, all alterations,
additions or improvements affixed to the Premises (excluding moveable
trade fixtures and
4
<PAGE>
furniture) shall become the property of Landlord and shall be
surrendered with the Premises at the end of the Term, except that
Landlord may, by notice to Tenant, require Tenant to remove by the
Expiration Date, or sooner termination date of this Lease, all or any
alterations, decorations, fixtures, additions, improvements and the
like installed either by Tenant or by Landlord at Tenant's request and
to repair any damage to the Premises arising from that removal.
Except as otherwise provided in this Lease or in any Exhibit to this
Lease, should Landlord make any alteration or improvement to the
Premises at Tenant's request, Landlord shall be entitled to prompt
reimbursement from Tenant for all costs incurred.
(b) As contemplated by that certain letter agreement between
Landlord and Tenant dated October 27, 1997, a copy of which is
attached hereto as Exhibit D, upon Landlord's written request, Tenant
shall remove at its sole cost upon expiration or earlier termination
of this Lease the guard shack at the entry drive to the Project, the
sign wall at the entry arch and all paint grade tenant doors and
replace same with building standard doors.
i. The following is added to ARTICLE XVIII BROKER'S COMMISSION:
Tenant and Landlord each represent and warrant to the other that it
has had no dealings with any real estate broker or agent in connection
with the negotiation of this Amendment and/or the Draper's Lease other
than CB Richard Ellis and Tenant shall be solely responsible for any
commission payable to said broker. Landlord and Tenant shall each
indemnify, defend and hold the other harmless from any cost, expense
or liability (including reasonable attorneys' fees) for any
compensation, commissions or charges claimed by any other real estate
broker or agent employed or claiming to represent or to have been
employed by the indemnifying party in connection with the negotiation
of this Amendment and/or the Draper's Lease.
4. GENERAL PROVISIONS.
a. EFFECT OF AMENDMENTS. The Lease shall remain in full force and effect
to the extent that it is modified by this Amendment. In the event of an
inconsistency between the terms of the Lease and this Amendment, the Lease shall
be construed so as to incorporate the effect of the modifications set forth
herein.
b. ENTIRE AGREEMENT. This Amendment embodies the entire understanding
between Landlord and Tenant with respect to the modifications set forth above
and can be changed only by a writing signed by Landlord and Tenant.
c. COUNTERPARTS. If this Amendment is executed in counterparts, each is
hereby declared to be an original; all, however, shall constitute but one and
the same amendment. In any action or proceeding, any photographic, photostatic,
or other copy of this Amendment may be introduced into evidence without
foundation.
d. DEFINED TERMS. All words commencing with initial capital letters in
this Amendment defined in the Lease shall have the same meaning in this
Amendment as in the Lease, unless they are otherwise defined in this Amendment.
e. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation or
partnership, or is comprised of either or both of them, each individual
executing this Amendment for the corporation or partnership represents that he
or she is duly authorized to execute and deliver this Amendment on behalf of the
corporation or partnership and that this Amendment is binding upon the
corporation or partnership in accordance with its terms.
5
<PAGE>
f. ATTORNEYS' FEES. The provisions of the Lease respecting payment of
attorneys' fees shall also apply to this Amendment.
LANDLORD: TENANT:
THE IRVINE COMPANY, Mossimo, Inc.,
a Delaware corporation a California corporation
By /s/ Clarence W. Barker By /s/ John Brincko
---------------------------------- ---------------------------------
Clarence W. Barker, President
Irvine Industrial Company, Title: President
a division of The Irvine Company ---------------------------
By /s/ Richard G. Sim By /s/ Thora Thoroddsen
---------------------------------- ---------------------------------
Richard G. Sim, Group President Title: Secretary and Treasurer
Investment Properties ---------------------------
6
<PAGE>
FIRST AMENDMENT TO FINANCING AGREEMENT
This First Amendment to Financing Agreement, dated and effective as of
April 1, 1998 ("First Amendment"), amends that certain Financing Agreement,
dated July 15, 1997 (as amended, the "Agreement") entered into by and between
The CIT Group/Commercial Services, Inc. ("CIT") and Mossimo, Inc. (the
"Company"). Except as defined herein, terms defined in the Agreement shall have
the same meaning when used in this First Amendment.
For good and valuable consideration, the Company and CIT agree as follows:
1. The definition of "Collateral" set forth in Section 1 of the Agreement is
hereby amended by inserting the word "Equipment," after the word
"Inventory".
2. The following definitions are hereby inserted in Section 1 of the Agreement
in the correct alphabetical order:
EBITDA shall mean, for any period, all earnings before all interest, tax
obligations and depreciation and amortization expense for said period, all
determined in accordance with GAAP on a basis consistent with the latest
audited financial statements of the Company but excluding the effect of
extraordinary and/or non-recurring gains or losses for such period.
EQUIPMENT shall mean all present and hereafter acquired equipment (as
defined in the Uniform Commercial Code) including, without limitation, all
machinery, equipment, furnishings and fixtures, and all additions,
substitutions and replacements thereof, wherever located, together with all
attachments, components, parts, equipment and accessories installed thereon
or affixed thereto and all proceeds of whatever sort.
3. The definition of "General Intangibles" set forth in Section 1 of the
Agreement is hereby amended by inserting the words "tradenames, trademarks
(together with the royalties and goodwill associated therewith)," between
the words "licenses" and "customer lists".
4. The definition of "Line of Credit" is hereby deleted in its entirety, and
the following is inserted in lieu thereof:
"LINE OF CREDIT shall mean the amount of $15,000,000.00 with (a) a
$6,000,000.00 sublimit for Letters of Credit and (b) a $500,000.00 sublimit
for Ledger Debt."
5. The definitions of "Current Assets", "Current Liabilities", "Tangible Net
Worth" and "Working Capital" are hereby deleted from Section 1 of the
Agreement.
<PAGE>
6. Paragraphs 10, 11, 12, 13, 14 and 15 of Section 7 of the Agreement are
hereby deleted in their entirety, and the following are inserted in lieu
thereof:
"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 $2,500,000.00.
11. The Company's EBITDA for the fiscal periods set forth below, shall not
be less than:
<TABLE>
<CAPTION>
FISCAL PERIOD EBITDA
------------- ------
<C> <C>
Fiscal Period Ending March 31, 1998 ($ 920,000.00)
Fiscal Period Ending June 30, 1998 ($3,933,000.00)
Fiscal Period Ending September 30, 1998 ($4,794,000.00)
Fiscal Period Ending December 31, 1998 ($6,064,000.00)
The Company's EBITDA for fiscal periods
ending subsequent to December 31, 1998
will be established annually after CIT's receipt
from the Company (no later than September 30th
of each year) of the Company's internally
prepared cash flow projections for the following
fiscal year.
</TABLE>
12. The Company's exposure in excess of Accounts Receivable Availability
for the fiscal months set forth below, shall not exceed:
<PAGE>
<TABLE>
<CAPTION>
FISCAL MONTHS EXPOSURE IN EXCESS OF ACCOUNTS
------------- RECEIVABLE AVAILABILITY
-----------------------
<S> <C>
March 1998 ($ 5,993,000.00)
April 1998 ($ 5,934,000.00)
May 1998 ($ 7,189,000.00)
June 1998 ($ 6,712,000.00)
July 1998 ($ 7,297,000.00)
August 1998 ($ 7,386,000.00)
September 1998 ($ 7,788,000.00)
October 1998 ($ 8,594,000.00)
November 1998 ($10,000,000.00)
December 1998 ($ 9,992,000.00)"
</TABLE>
The Company's exposure in excess of Accounts
Receivable Availability for fiscal months ending
subsequent to December 1998 will be established
annually after CIT's receipt from the Company
(no later than September 30th of each year) of the
Company's internally prepared cash flow projections
for the following fiscal year.
7. The third sentence of Section 11 of the Agreement is hereby amended by
deleting the words "Prepayment Premium", and inserting the words
"Termination Premium" in lieu thereof.
<PAGE>
8. The Company hereby agrees that it will provide to CIT, no later than
September 30, 1998, the following:
(i) an appraisal of the Company's tradenames and trademarks;
(ii) an appraisal of the Company's inventory to be completed by Alco; and
(iii) the Company's internally prepared cash flow projections for the first
fiscal quarter of 1999.
9. The Company hereby agrees to pay and authorizes CIT to charge to the
Company's account a fee of $75,000.00 in connection with the changed terms
and conditions reflected in this Agreement.
10. Except as expressly modified by this First Amendment, the Agreement and
related documents shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year above written.
MOSSIMO, INC. THE CIT GROUP/
COMMERCIAL SERVICES, INC.
By: /s/ John Brincko By: /s/ James Ezemoli
---------------------- --------------------------
Title: President Title:
------------------- -----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 364
<SECURITIES> 0
<RECEIVABLES> 9,138
<ALLOWANCES> 2,451
<INVENTORY> 12,783
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0
0
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</TABLE>
