<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 SEPTEMBER 30, 1999
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)
2450 WHITE ROAD, 2ND FLOOR
IRVINE, CALIFORNIA 92614 - 6250
(Address of principal (Zip Code)
executive offices)
(949) 797-0200
(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 15,057,853
$.001 per share (Outstanding on November 2, 1999)
(Class)
Exhibit Index on Page 16
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<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements:
Condensed consolidated balance sheets as of September 30, 1999 (unaudited) and December 31, 1998......... 2
Condensed consolidated statements of operations for the three and nine months
ended September 30, 1999 and 1998 (unaudited) .......................................................... 3
Condensed consolidated statements of cash flows for the nine months
ended September 30, 1999 and 1998 (unaudited) .......................................................... 4
Notes to condensed consolidated financial statements .................................................... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 8
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk ...................................... 13
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings .............................................................................. 14
ITEM 6 - Exhibits and Reports on Form 8-K ............................................................... 14
SIGNATURES .............................................................................................. 15
INDEX TO EXHIBITS ....................................................................................... 16
</TABLE>
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<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................... $ 45 $ 176
Accounts receivable, net........................................................... 423 979
Due from factor, net............................................................... 11,960 3,064
Inventories........................................................................ 4,647 8,325
Refundable taxes................................................................... - 171
Prepaid expenses and other current assets.......................................... 307 202
------- -------
Total current assets............................................................. 17,382 12,917
PROPERTY AND EQUIPMENT, net.......................................................... 3,380 4,207
OTHER ASSETS......................................................................... 199 235
------- -------
$20,961 $17,359
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..................................................................... $ 7,592 $ 4,759
Accounts payable................................................................... 2,432 1,505
Accrued liabilities................................................................ 1,352 1,834
Current portion of long-term debt.................................................. 10 21
S distribution note................................................................ 215 266
------- -------
Total current liabilities........................................................ 11,601 8,385
DEFERRED ROYALTY INCOME.............................................................. 213 325
LONG-TERM DEBT, net of current portion............................................... 4 10
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 15,046,853 - September 30, 1999
and 15,011,529 - December 31, 1998............................................... 15 15
Additional paid-in capital......................................................... 37,917 31,428
Accumulated deficit................................................................ (28,789) (22,804)
------- -------
Total stockholders' equity....................................................... 9,143 8,639
------- -------
$20,961 $17,359
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.......................................... $20,322 $11,001 $40,009 $ 36,931
Cost of sales...................................... 13,511 9,360 27,123 29,545
------- ------- ------- --------
Gross profit..................................... 6,811 1,641 12,886 7,386
Royalty income, net................................ 672 627 2,799 2,458
------- ------- ------- --------
7,483 2,268 15,685 9,844
------- ------- ------- --------
OPERATING EXPENSES:
Selling, general and administrative.............. 6,134 5,494 14,964 16,634
Non-cash insurance premium....................... - - 6,100 -
Lease restructuring.............................. - - - 3,798
------- ------- ------- --------
Total operating expenses....................... 6,134 5,494 21,064 20,432
------- ------- ------- --------
Operating income (loss)............................ 1,349 (3,226) (5,379) (10,588)
------- ------- ------- --------
OTHER EXPENSE:
Other, net....................................... - (54) (3) (127)
Interest, net.................................... (308) (157) (603) (467)
------- ------- ------- --------
Net other expense.............................. (308) (211) (606) (594)
------- ------- ------- --------
Net income (loss).................................. $ 1,041 $(3,437) $(5,985) $(11,182)
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per common share:
Basic............................................ $ .07 $ (.23) $ (.40) $ (.75)
------- ------- ------- --------
------- ------- ------- --------
Diluted.......................................... $ .07 $ (.23) $ (.40) $ (.75)
------- ------- ------- --------
------- ------- ------- --------
Weighted average common shares outstanding:
Basic............................................ 15,046 15,011 15,045 15,011
------- ------- ------- --------
------- ------- ------- --------
Diluted.......................................... 15,672 15,011 15,045 15,011
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $(5,985) $(11,182)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................................... 1,028 1,398
Loss on disposition of property and equipment...................................... - 2,917
Write-down of in-store fixtures.................................................... - 463
Provision for doubtful receivables................................................. 49 278
Deferred royalty income............................................................ (112) (94)
Non-cash compensation expense...................................................... 225 -
Non-cash insurance premium......................................................... 6,100 -
Changes in:
Accounts receivable, net......................................................... 507 794
Due from factor, net............................................................. (8,896) 958
Inventories...................................................................... 3,678 4,605
Refundable taxes................................................................. 171 5,159
Prepaid expenses and other current assets........................................ (105) (16)
Other assets..................................................................... 36 53
Accounts payable................................................................. 927 (2,263)
Accrued liabilities.............................................................. (482) (70)
S distribution note.............................................................. (51) (55)
------- --------
Net cash provided by (used in) operating activities.............................. (2,910) 2,945
------- --------
CASH FLOWS FROM INVESTING ACTIVITITES:
Proceeds from sales of property and equipment........................................ - 500
Payments for acquisition of property and equipment................................... (201) (319)
------- --------
Net cash provided by (used in) investing activities.............................. (201) 181
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit......................................................... 2,833 (3,696)
Proceeds from issuance of common stock............................................... 164 42
Repayment of long-term debt.......................................................... (17) (30)
------- --------
Net cash provided by (used in) financing activities.............................. 2,980 (3,684)
------- --------
NET DECREASE IN CASH................................................................. (131) (558)
CASH, beginning of period............................................................ 176 655
------- --------
CASH, end of period.................................................................. $ 45 $ 97
------- --------
------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 614 $ 374
------- --------
------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Mossimo, Inc. ("Mossimo" or the "Company")
designs, sources and markets a lifestyle collection of designer men's and
women's sportswear and activewear bearing Mossimo-Registered Trademark-
trademarks that project the Company's image of a contemporary lifestyle. The
Company's apparel offerings include knit and woven shirts, outerwear, denim
products, sweatshirts, tee-shirts and shorts. The Company also licenses its
trademarks for use in collections of eyewear, women's swimwear and bodywear,
men's neckwear, men's tailored suits and dress shirts and men's hosiery.
Mossimo products are characterized by quality workmanship and are targeted
towards the fashion conscious consumer, generally age 35 and under. 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.
PRINCIPLES OF CONSOLIDATION - The accompanying unaudited interim condensed
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, 1998
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 September 30, 1999 and December 31, 1998, the consolidated
statements of operations for the three and nine months ended September 30, 1999
and 1998 and the consolidated statements of cash flows for the nine months ended
September 30, 1999 and 1998. Operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the entire fiscal year ending December 31, 1999.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1998
condensed consolidated financial statements to conform to the 1999 presentation.
SEGMENT AND GEOGRAPHIC INFORMATION - The Company operates in one principal
business segment across domestic and international markets. International sales
are primarily made through the Company's licensees in their respective
territories.
EARNINGS (LOSS) PER SHARE - The Company calculates earnings (loss) per
share in accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share". This statement requires the presentation of both
basic and diluted net income (loss) per share. Basic net income (loss) per share
is computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding. Diluted net income (loss)
per share includes the effect of potential shares outstanding, including
dilutive stock options, using the treasury stock method.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding - basic 15,046,000 15,011,000 15,045,000 15,011,000
Dilutive effect of outstanding stock options 626,000 - - -
---------- ---------- ---------- ----------
Weighted average common shares outstanding - diluted 15,672,000 15,011,000 15,045,000 15,011,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
5
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<PAGE>
During 1998, the Company issued stock options to Edwin Lewis, Chief
Executive Officer and President, under the Stock Option Plan for Edwin Lewis.
The shares of common stock to be issued upon exercise of these options will be
contributed to the Company by Mossimo Giannulli, Chairman of the Board, under a
Contribution Agreement. Accordingly, these shares are included in basic weighted
average shares outstanding as of September 30, 1999.
COMPREHENSIVE INCOME (LOSS) - As of January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. There are no items of comprehensive income (loss) that the
Company is required to report.
2. CREDIT FACILITY
The Company maintains a $15.0 million revolving credit line, collateralized
by inventory, receivables, machinery and equipment and intangibles, bearing
interest at the prime rate plus 0.5%. Borrowings under the amended agreement are
limited to 50% of eligible inventory and 85% of eligible receivables. The
facility allows for up to $6.0 million in letters of credit. In March 1999, the
agreement was amended to commit the revolving line of credit through April 1,
2000 and to allow the Company to borrow amounts in excess of its advance rates
in varying monthly amounts from approximately $1.5 million to $5.5 million. The
amendment also extends the Company's factoring agreement and line of credit
through June 30, 2002.
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 continues in
force from year to year and may be terminated by the Company on June 30, 2002
with 60 days prior written notice or by the factor at any time after April 1,
2000 with 180 days prior written notice.
3. COMMITMENTS AND CONTINGENCIES
On January 23, 1997, plaintiff Chaile Steinberg filed a purported class
action 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"). On April 7, 1997, 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 (the "Federal Action"). 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 resolution of the
State Actions.
6
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<PAGE>
Defendants filed a general demurrer in the State Actions, challenging the
legal sufficiency of the complaints. On June 26, 1997, the judge sustained the
defendants' demurrer, 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 against the same defendants, alleging three causes of action. On
September 22, 1998, defendants filed a general demurrer to the first amended
consolidated complaint. On March 16, 1999, the judge sustained the demurrer as
to the Company with respect to two of the three causes of action with leave to
amend. As to the third cause of action, the judge sustained the demurrer as to
the Company with respect to three of the five plaintiffs with leave to amend,
and overruled the demurrer with respect to the other two plaintiffs. On April
14, 1999, plaintiffs filed their second amended consolidated complaint, alleging
one cause of action. Thereafter, plaintiffs expressed a desire to file a third
amended consolidated complaint. On June 24, 1999, the parties stipulated that
plaintiffs must file a third amended consolidated complaint on or before July
30, 1999. Plaintiffs did not file a third amended consolidated complaint.
During the second quarter of 1999, the Company obtained excess insurance
coverage, which the Company believes should be sufficient to cover an adverse
outcome or settlement in this litigation. In addition, the parties have reached
an agreement in principle to settle the State Actions and Federal Action for $13
million, subject to final approval by the court. There is no assurance that this
approval will be obtained. If the settlement is not finalized or not approved,
the outcome of the litigation cannot be predicted. However, management believes
that the Company has meritorious defenses to the claims alleged 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
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes the operations of Mossimo, Inc. 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, 1998 on Form 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales increased to $20.3 million during the third quarter of 1999 from
$11.0 million in the corresponding quarter in 1998. Net sales of the men's and
women's lines, which represented 99% of the Company's net sales for the three
months ended September 30, 1999, increased to $20.1 million in the third quarter
of 1999 from $9.7 million in the corresponding quarter in 1998. The increase in
net sales of the men's and women's lines in 1999 was primarily due to additional
business with new customers as a result of the Company's broader product lines
and focused sales efforts.
The Moss and Optics lines were discontinued during 1998, resulting in a
decrease of $111,000 and $296,000, respectively, in net sales during the third
quarter of 1999 compared to the third quarter of 1998. In June 1999, the Company
entered in to an exclusive license agreement for the production and distribution
of the Optics line. Also during 1998, the Company discontinued operations of its
screen printing business, which contributed $505,000 of net sales in the third
quarter of 1998.
Gross profit increased to $6.8 million during the third quarter of 1999
from $1.6 million in the corresponding quarter in 1998. Gross profit as a
percentage of net sales increased to 34% during the third quarter of 1999 from
15% in the corresponding quarter in 1998. The increase was primarily due to
better inventory management and increased men's and women's regular-priced sales
during the third quarter of 1999 as compared to the third quarter of 1998.
Additionally, during the third quarter of 1998, the Company recorded a $1.0
million write-down of its Optics inventory.
Royalty income increased to $672,000 in the third quarter of 1999 from
$627,000 in the corresponding quarter in 1998. The increase was primarily due to
increased royalties from some of the Company's domestic licensees, which were
offset in part by reduced royalties as a result of the termination of the
Company's accessories license agreement as of December 31, 1998.
Operating expenses increased to $6.1 million in the third quarter of 1999
from $5.5 million in the corresponding quarter of 1998. This increase was
primarily due to additional marketing expenditures, partially offset by reduced
staffing levels and reduced rent and professional services expenses.
The Company had net interest expense of $308,000 in the third quarter of
1999 compared to net interest expense of $157,000 in the corresponding quarter
in 1998. The increase corresponds to the increase in the Company's line of
credit balance, partially offset by additional fees paid during the third
quarter of 1998 associated with continuing the revolving line of credit.
The Company recorded no tax provision in the three months ended
September 30, 1999 as a result of its federal and state net operating loss
carryforwards. Losses for the three months ended September 30, 1998 were not
benefited due to carryback limitations and uncertainty regarding realization
of the related deferred tax asset.
8
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<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales increased to $40.0 million during the nine months ended September
30, 1999 from $36.9 million in the corresponding period in 1998. Net sales of
the men's and women's lines, which represented 96% of the Company's net sales
for the nine months ended September 30, 1999, increased to $38.4 million during
this period from $29.3 million in the corresponding period in 1998. The increase
in net sales of the men's and women's lines in the nine months ended September
30, 1999 was primarily due to additional business with new customers as a result
of the Company's broader product lines and focused sales efforts in the second
and third quarters, partially offset by narrower product lines and the reduction
of unprofitable accounts during the first quarter.
The Moss and Optics lines were discontinued during 1998, resulting in a
decrease of $2.2 million and $889,000, respectively, in net sales during the
nine months ended September 30, 1999 compared to the nine months ended September
30, 1998. In June 1999, the Company entered in to an exclusive license agreement
for the production and distribution of the Optics line. Also during 1998, the
Company discontinued operations of its screen printing business, which
contributed $2.3 million of net sales in the nine months ended September 30,
1998.
Gross profit increased to $12.9 million during the nine months ended
September 30, 1999 from $7.4 million in the corresponding period in 1998. Gross
profit as a percentage of net sales increased to 32% during the nine months
ended September 30, 1999 from 20% in the corresponding period in 1998. The
increase was primarily due to better inventory management, increased men's and
women's regular-priced sales and increased margins on sales of excess inventory
during the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998. Additionally, during the nine months ended September
30, 1998, the Company recorded write-downs of its excess and Optics inventory.
Royalty income increased to $2.8 million in the nine months ended September
30, 1999 from $2.5 million in the corresponding period in 1998. The increase was
primarily due to increased royalties from some of the Company's domestic
licensees, which were offset in part by reduced royalties as a result of the
termination of the Company's accessories license agreement as of December 31,
1998.
Operating expenses increased to $21.1 million during the nine months ended
September 30, 1999 from $20.4 million in the corresponding period of 1998.
Selling, general and administrative expenses decreased to $15.0 million in the
first nine months of 1999 compared to $16.6 million in the corresponding period
of 1998. This decrease was primarily due to reduced staffing levels and reduced
rent, legal and professional services expenses, partially offset by additional
marketing expenditures.
During the second quarter of 1999, the Company's Chairman of the Board and
principal stockholder personally purchased excess insurance coverage for the
benefit of the Company in connection with its agreement in principle to settle a
class action lawsuit. Accordingly, this one-time, non-cash charge of $6.1
million is included in operating expenses for the nine months ended September
30, 1999 with an offsetting credit to stockholders' equity. This charge does not
impact the Company's cash flow or total stockholders' equity position.
During the second quarter of 1998, the Company recorded a lease
restructuring charge of $3.8 million. This charge included (i) $2.7 million in
corporate lease restructuring expense 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.
Total operating expenses for the nine months ended September 30, 1999,
excluding the non-cash insurance premium, were $15.0 million compared to total
operating expenses for the nine months ended September 30, 1998, excluding the
lease restructuring charge, of $16.6 million.
9
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<PAGE>
The Company had net interest expense of $603,000 in the nine months ended
September 30, 1999 compared to net interest expense of $467,000 in the
corresponding period in 1998. The increase is due to increased interest expense
corresponding to the increase in the Company's line of credit balance during the
nine months ended September 30, 1999, partially offset by additional fees paid
during the nine months ended September 30, 1998 associated with continuing the
revolving line of credit.
The Company recorded no tax benefit in the nine months ended September 30,
1999 and 1998 as a result of its pretax loss. Losses for the nine months ended
September 30, 1999 and 1998 were not benefited due to carryback limitations and
uncertainty regarding realization of the related deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund its working capital
needs related to inventories and accounts receivable. Net cash used in operating
activities totaled approximately $2.9 million for the nine months ended
September 30, 1999. Cash used in operating activities was comprised primarily of
the Company's net loss of $6.0 million and an increase of $8.4 million in
receivables, offset by a non-cash insurance premium of $6.1 million, a $3.7
million reduction in inventory and depreciation and amortization expense of $1.0
million. At September 30, 1999, working capital was approximately $5.8 million
as compared to $4.5 million at December 31, 1998. The increase in working
capital is primarily due to a $8.4 million increase in receivables, offset in
part by a $2.8 million increase in the Company's line of credit, a $3.7 million
decrease in inventories and a $927,000 increase in accounts payable during the
nine months ended September 30, 1999.
The Company maintains a $15.0 million revolving credit line, collateralized
by inventory, receivables, machinery and equipment and intangibles, bearing
interest at the prime rate plus 0.5%. Borrowings under the amended agreement are
limited to 50% of eligible inventory and 85% of eligible receivables. The
facility allows for up to $6.0 million in letters of credit. In March 1999, the
agreement was amended to commit the revolving line of credit through April 1,
2000 and to allow the Company to borrow amounts in excess of its advance rates
in varying monthly amounts from approximately $1.5 million to $5.5 million. The
amendment also extends the Company's factoring agreement and line of credit
through June 30, 2002.
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 continues in
force from year to year and may be terminated by the Company on June 30, 2002
with 60 days prior written notice or by the factor at any time after April 1,
2000 with 180 days prior written notice.
The Company believes that current cash and the revolving line of credit
will be sufficient to meet its anticipated cash needs for at least the next 12
months. However, any projections of future cash needs and cash flows are subject
to uncertainty.
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, 1998 and the first six
months of 1999, past quarterly sales and operating trends have not reflected the
normal apparel industry seasonality. In future years, the Company expects that
its sales may reflect greater seasonal trends.
10
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<PAGE>
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", "plan", "expect", "future", "intend", "will",
"should", "continue" and similar expressions, variations of such terms or the
negative of such terms as they relate to the Company or its management when used
in this document, are intended to identify such forward-looking statements. Such
statements are based on management's current expectations and are subject to
certain risks, uncertainties and assumptions. Should one or more risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual results, performance or achievements could differ materially
from those expressed in, or implied by such forward-looking statements. The
Company's future operations, financial performance, business and share price may
be affected by a number of factors, including changes in consumer demands and
preferences, competition from other lines, risks generally associated with
product introductions and shifting trends in the overall retail and apparel
retailing markets and the other factors listed in "Risk Factors" in the
Company's Form 10-K filing for the year ending December 31, 1998. Accordingly,
undue reliance should not be placed on these forward-looking statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". SFAS No. 137 delays the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company does not expect
that the adoption of SFAS Nos. 133 and 137 will have a material impact on its
consolidated financial statements because the Company does not currently hold
any derivative instruments.
YEAR 2000
GENERAL
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment, software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, and engage in similar normal business
activities.
The Company has assessed how it may be impacted by the Year 2000 issue and
has formulated and commenced implementation of a plan to address the known
aspects of the issue.
THE PLAN
The Company's plan encompasses its information systems, production and
facilities equipment that utilize date/time oriented software of computer chips,
products, vendors and customers. The plan is being carried out in four phases:
1) assessment and development of a plan; 2) remediation; 3) testing; and 4)
implementation.
With regard to information systems, production and facilities equipment
and products, the Company is substantially complete with the assessment and plan
development phase and is approximately 95% complete with its total planned
efforts including remediation, testing and implementation.
11
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<PAGE>
The Company is also reviewing the efforts of its vendors and customers to
become Year 2000 compliant. The Company has divided these vendors and customers
into several groups such as financial institutions, software and system
suppliers, critical customers and manufacturers. Each group was reviewed based
on its level of technological dependence, frequency of interactions and need by
the Company to continue operations. The Company has received approximately 95%
of the responses from the more technologically dependent vendors and customers,
of which 100% responded with written assurances that they expect to address all
of their known significant Year 2000 issues on a timely basis. The Company is
currently contacting its remaining vendors and customers to ensure that they are
Year 2000 compliant. The Company anticipates that these activities will be on
going for the remainder of 1999 and will include follow-up telephone interviews
and on-site meetings as necessary. Although this review is continuing, the
Company is not currently aware of any vendor or customer circumstances that may
have a material adverse impact on the Company. The Company will be seeking
alternative suppliers, if possible, where circumstances warrant. The Company can
provide no assurance that Year 2000 compliance plans will be successfully
completed by suppliers and customers in a timely manner.
COST
The Company has incurred less than $30,000 to date related to Year 2000
compliance and does not anticipate total expenditures to complete the compliance
process to exceed $60,000. Existing maintenance agreements with software
providers covered the majority of costs related to the upgrade of the Company's
internal accounting and proprietary business software. These systems were
upgraded in December 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.
RISK
The Company believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing procedures are not
completed in a timely manner with respect to problems that are identified, there
can be no assurance that the Year 2000 issue will not have a material adverse
impact on the Company's results of operations or adversely affect the Company's
relationships with customers, vendors or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations. The Company
will continue to meet on a bi-weekly basis to evaluate the progress of vendors
and customers related to Year 2000 status and compliance.
CONTINGENCY PLAN
The Company has started a comprehensive analysis of the operational
problems and costs (including loss of revenue) that would be reasonably likely
to result from the failure by the Company and certain third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been finalized for dealing with the most reasonably
likely worst case scenario as such scenario has not yet been clearly identified.
The Company is currently undergoing this analysis during its bi-weekly meetings
to formulate action plans where necessary. Contingency planning was
substantially completed during the third quarter of 1999. Ongoing analysis will
continue through December 1999.
12
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in variable
interest rates on its revolving line of credit and factoring agreement. For
variable rate debt, changes in interest rates generally do not influence fair
market value, but do affect future earnings and cash flows. Holding the variable
rate debt balance constant, a 1% increase in interest rates occurring on October
1, 1999 would result in an increase in interest expense for the following 12
months of approximately $76,000.
The Company does not use interest rate swaps, futures contracts or options
on futures, or other types of derivative financial instruments. The Company does
not believe that future market risks arising from holdings of its financial
instruments will have a material impact on its financial position or results of
operations.
13
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (See Note 3 to Financial Statements)
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*
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
three months ended September 30, 1999.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File No. 33-80597)
14
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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.
November 5, 1999 /s/ Edwin H. Lewis
-------------------
Edwin H. Lewis
Chief Executive Officer and President
November 5, 1999 /s/ Jody L. Love
-----------------
Jody L. Love
Vice President of Finance
(Principal Accounting Officer)
15
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------------------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
27 Financial Data Schedule
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File No. 33-80597)
</TABLE>
16
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 17,159
<ALLOWANCES> 4,776
<INVENTORY> 4,647
<CURRENT-ASSETS> 17,382
<PP&E> 7,618
<DEPRECIATION> 4,238
<TOTAL-ASSETS> 20,961
<CURRENT-LIABILITIES> 11,601
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 9,128
<TOTAL-LIABILITY-AND-EQUITY> 20,961
<SALES> 20,322
<TOTAL-REVENUES> 20,994
<CGS> 13,511
<TOTAL-COSTS> 13,511
<OTHER-EXPENSES> 6,135
<LOSS-PROVISION> 49
<INTEREST-EXPENSE> 308
<INCOME-PRETAX> 1,041
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,041
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
