<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, 2000
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)
2016 BROADWAY
SANTA MONICA, CALIFORNIA 90404
(Address of principal (Zip Code)
executive offices)
(310) 460-0040
(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 15,080,042
$.001 per share (Outstanding on November 8, 2000)
(Class)
Exhibit Index on Page 17
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MOSSIMO, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements:
<S> <C>
Condensed consolidated balance sheets as of September 30, 2000 (unaudited) and December 31, 1999... 2
Condensed consolidated statements of operations for the three and nine months
ended September 30, 2000 and 1999 (unaudited) ................................................. 3
Condensed consolidated statements of cash flows for the nine months
ended September 30, 2000 and 1999 (unaudited) ................................................. 4
Notes to condensed consolidated financial statements .............................................. 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .... 9
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk ................................ 14
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings ........................................................................ 15
ITEM 6 - Exhibits and Reports on Form 8-K ......................................................... 15
SIGNATURES ........................................................................................ 16
INDEX TO EXHIBITS ................................................................................. 17
</TABLE>
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MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................... $ 369 $ 473
Accounts receivable, net ..................................... 212 787
Inventories .................................................. -- 5,682
Prepaid expenses and other current assets .................... 472 502
-------- --------
Total current assets ....................................... 1,053 7,444
PROPERTY AND EQUIPMENT, net .................................... 283 3,097
OTHER ASSETS ................................................... 129 195
-------- --------
$ 1,465 $ 10,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Due to factor, net ........................................... $ 784 $ 1,298
Line of credit ............................................... 6,594 2,135
Accounts payable ............................................. 809 3,178
Accrued liabilities .......................................... 1,439 1,290
Current portion of long-term debt ............................ 4 8
S distribution note .......................................... 255 215
Current portion of deferred royalty income ................... 106 --
-------- --------
Total current liabilities .................................. 9,991 8,124
DEFERRED ROYALTY INCOME ........................................ -- 213
LONG-TERM DEBT, net of current portion ......................... -- 3
LONG-TERM PAYABLES ............................................. 1,491 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
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 15,080,042 - September 30, 2000
and 15,077,253 - December 31, 1999 ......................... 15 15
Additional paid-in capital ................................... 38,273 38,126
Accumulated deficit .......................................... (48,305) (35,745)
-------- --------
Total stockholders' equity (deficit) ....................... (10,017) 2,396
-------- --------
$ 1,465 $ 10,736
======== ========
</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 DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ................................. $ 32 $ 20,322 $ 24,150 $ 40,009
Cost of sales ............................. 53 13,511 21,061 27,123
-------- -------- -------- --------
Gross profit .......................... (21) 6,811 3,089 12,886
Royalty income, net ....................... 299 672 2,323 2,799
-------- -------- -------- --------
278 7,483 5,412 15,685
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative ... 1,384 6,134 14,981 14,964
Non-cash insurance premium ............ -- -- -- 6,100
Restructuring ......................... 10 -- 3,538 --
Vendor discounts, net ................. 159 -- (452) --
-------- -------- -------- --------
Total operating expenses .......... 1,553 6,134 18,067 21,064
-------- -------- -------- --------
Operating income (loss) ................... (1,275) 1,349 (12,655) (5,379)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Other, net ............................ 750 -- 750 (3)
Interest, net ......................... (195) (308) (655) (603)
-------- -------- -------- --------
Net other income (expense) ........ 555 (308) 95 (606)
-------- -------- -------- --------
Net income (loss) ......................... $ (720) $ 1,041 $(12,560) $ (5,985)
======== ======== ======== ========
Net income (loss) per common share:
Basic ................................. $ (0.05) $ 0.07 $ (0.83) $ (0.40)
======== ======== ======== ========
Diluted ............................... $ (0.05) $ 0.07 $ (0.83) $ (0.40)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic ................................. 15,080 15,046 15,080 15,045
======== ======== ======== ========
Diluted ............................... 15,080 15,672 15,080 15,045
======== ======== ======== ========
</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 NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................. $(12,560) $ (5,985)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 466 1,028
Write-down of property and equipment ................................. 2,336 --
Gain on disposition of property and equipment ........................ (154) --
Provision for doubtful receivables ................................... 4,730 49
Restructuring charge ................................................. 1,356 --
Vendor discounts, net ................................................ (452) --
Deferred royalty income .............................................. (107) (112)
Non-cash compensation expense ........................................ 125 225
Non-cash insurance premium ........................................... -- 6,100
Changes in:
Accounts receivable, net ......................................... 410 507
Due from/to factor, net .......................................... (5,079) (8,896)
Inventories ...................................................... 5,682 3,678
Refundable taxes ................................................. -- 171
Prepaid expenses and other current assets ........................ 30 (105)
Other assets ..................................................... 5 36
Accounts payable ................................................. (426) 927
Accrued liabilities .............................................. (1,146) (482)
S distribution note .............................................. -- (51)
-------- --------
Net cash used in operating activities ........................... (4,784) (2,910)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITITES:
Proceeds from disposition of property and equipment ...................... 329 --
Payments for acquisition of property and equipment ....................... (123) (201)
-------- --------
Net cash provided by (used in) investing activities .............. 206 (201)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit ............................................. 4,459 2,833
Proceeds from issuance of common stock ................................... 22 164
Repayment of long-term debt .............................................. (7) (17)
-------- --------
Net cash provided by financing activities ........................ 4,474 2,980
-------- --------
NET DECREASE IN CASH ..................................................... (104) (131)
CASH, beginning of period ................................................ 473 176
-------- --------
CASH, end of period ...................................................... $ 369 $ 45
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................. $ 675 $ 614
======== ========
Non-cash acquisition of property and equipment ....................... $ 40 $ --
======== ========
Reclassification of accounts payable to long-term payables ........... $ 1,491 $ --
======== ========
</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
DESCRIPTION OF BUSINESS - On March 28, 2000, Mossimo, Inc. ("Mossimo" or
the "Company") entered into a multi-year licensing agreement (the "Target
Agreement") with Target Corporation ("Target"). Under terms of the Target
Agreement, Target will have the exclusive United States license for production
and distribution through Target stores of substantially all Mossimo products
sold in the United States, other than those covered under existing Mossimo
licensing arrangements. The Target licensed product line will initially include
men's and women's apparel and is scheduled to be launched in February 2001. This
licensed product line may be expanded to include all soft line categories,
fragrances, other accessories and house wares.
The Target Agreement provides that the Company will contribute, and will
cause Mossimo Giannulli, its President, Chief Executive Officer and principal
designer, to contribute, design services and will have approval rights for
product design and marketing and advertising materials. Target will collaborate
on design and will be responsible for product development, sourcing, quality
control and inventory management with respect to the Target licensed product
line. Under the Target Agreement, Target is obligated to pay the Company a
royalty based upon a percentage of its net sales of Mossimo brand products, with
a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million
over the initial three-year term of the agreement. The Company is obligated to
pay 15% of all royalties received from Target to a third party who assisted the
Company in connection with entering into the Target Agreement. The Target
Agreement is subject to early termination under certain circumstances. If Target
is current in its payments of the minimum guaranteed royalty amount, Target has
the right to renew the Target Agreement, on the same terms and conditions, for
additional terms of two years each.
The Company also licenses its trademarks for use in collections of eyewear
and women's swimwear and bodywear. Currently, Mossimo has four additional
license agreements pursuant to which third party licensees have the exclusive
right to manufacture and distribute certain products bearing the Company's
trademarks according to designs furnished or approved by the Company in
specified territories outside of the United States. Mossimo products are
characterized by quality workmanship and are targeted towards the fashion
conscious consumer generally age 30 or under.
Prior to entering into the Target Agreement, the Company's primary line of
business was designing, sourcing and marketing a lifestyle collection of
designer men's and women's sportswear and activewear, including knit and woven
shirts, outerwear, denim and related products, dresses, pants, sweatshirts,
tee-shirts and shorts. The products were distributed 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.
Mossimo is a Delaware corporation formed in November 1995 to succeed to the
assets and liabilities of Mossimo, Inc., a California corporation, which was
organized in 1988 to continue the business founded by Mossimo Giannulli in 1987
as a sole proprietorship. References herein to the "Company" and "Mossimo" refer
to Mossimo, Inc. and, unless the context otherwise indicates, its subsidiary and
predecessors.
GOING CONCERN MATTERS - The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Since the
year ended December 31, 1996, the Company has experienced a significant decline
in revenues, resulting in operating losses, negative cash flow and a working
capital deficit.
In response to these declining financial conditions, the Company began cost
cutting measures during the latter part of 1997 and restructured its management
team in the fourth quarter of 1998. Despite these efforts, the Company reported
an operating loss for the year ended December 31, 1999 and the nine months ended
September 30, 2000.
5
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Under the Target Agreement, Target is obligated to pay the Company a
royalty based upon a percentage of its net sales of Mossimo brand products, with
a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million
over the initial three-year term of the agreement. The Company is obligated to
pay 15% of all royalties received from Target to a third party who assisted the
Company in connection with entering into the Target Agreement. The Target
Agreement is subject to early termination under certain circumstances.
As a result of entering into the Target Agreement, management has
implemented and will continue to implement several changes to the Company's
operations during the period from March 28, 2000 to the commencement of royalty
payments under the Target Agreement in May 2001 (the "Restructuring Period").
The most significant changes include a work force reduction of approximately 90%
of all employees, closure of the Company's showrooms, signature retail store and
outlet store, termination of all sourcing, production and sales operations and
termination of relationships with substantially all existing customers and
suppliers. During the Restructuring Period, the Company has and will continue to
suffer the elimination of all wholesale and retail sales and the continuation of
operating losses and negative cash flows. In addition, the Company may
experience increased difficulties in collecting its accounts receivable and
maintaining its licensing revenues. The Company recorded a restructuring charge
of $3.5 million during the nine months ended September 30, 2000 as a result of
the foregoing changes to its business (Note 3).
On May 16, 2000, an involuntary petition for Chapter 7 bankruptcy relief
under the United States Bankruptcy Code was filed against the Company by three
of its vendor creditors. The petition was dismissed on July 25, 2000 (Note 5).
Due to the declining financial conditions and anticipated changes resulting
from entering into the Target Agreement, prior to the filing of the involuntary
bankruptcy petition, the Company developed a creditor plan to give certain of
its unsecured vendor creditors two repayment options: (i) a single cash payment
of 50 cents on the dollar for the first $10,000 and 35 cents on the dollar for
amounts in excess of $10,000 or (ii) a 10 percent cash payment with the balance
to be paid in 36 equal monthly installments beginning June 15, 2001. The Company
has substantially completed its implementation of the creditor plan and recorded
vendor discounts of $917,000, offset by related professional fees of $465,000,
during the second and third quarters of 2000.
In July 2000, the Company's credit facility was amended to provide for a
$9.0 million revolving credit line which is collateralized by inventory,
receivables, machinery and equipment and intangibles. The revolving credit line
includes a $5.0 million personal guaranty by the Company's Chairman of the
Board, President and Chief Executive Officer. Advances under the amended
agreement bear interest at the prime rate plus 1.5%. The revolving credit line
shall be reduced at the rate of $1,000,000 per quarter beginning on June 1, 2001
and terminates on June 1, 2003.
Due to the restructuring of the Company's business, potential difficulties
in collecting accounts receivable, potential liabilities associated with
disputed markdown reimbursements claimed by certain customers (Note 5) and
potential liabilities to the Company's former warehouse facility landlord (Note
5), available borrowings under the current credit facility may not be adequate
to meet the Company's obligations on a timely basis. Should the Company
experience such shortfalls, efforts would need to be made to obtain additional
funds which may not be available to the Company.
These factors, among others, indicate that there is substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent upon
its ability to (a) generate sufficient cash flow to meet its obligations on a
timely basis, (b) obtain additional financing as may be required and (c)
ultimately attain profitability. The Company has been advised by its independent
public accountants that if the Company is unable to achieve the above objectives
prior to the completion of their audit of the Company's financial statements for
the year ending December 31, 2000, their auditors' report on those financial
statements may be modified as to the Company's ability to continue as a going
concern.
6
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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 contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
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, 2000 and December 31, 1999, the consolidated
statements of operations for the three and nine months ended September 30, 2000
and 1999 and the consolidated statements of cash flows for the nine months ended
September 30, 2000 and 1999. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the entire fiscal year ending December 31, 2000.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1999
condensed consolidated financial statements to conform to the 2000 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. For the three and nine
months ended September 30, 2000 and 1999, there was no dilution from outstanding
options. Potential dilution from outstanding stock options for the three months
ended September 30, 2000 and 1999 was 12,000 and 627,000 shares, respectively.
Potential dilution from outstanding stock options for the nine months ended
September 30, 2000 and 1999 was 295,000 and 637,000 shares, respectively.
During 1998, the Company issued stock options to Edwin Lewis, former
President and Chief Executive Officer, under the Stock Option Plan for Edwin
Lewis (the "Lewis Plan"). In the event of exercise of options issued under the
Lewis Plan, the shares of common stock to be issued were to be contributed to
the Company by Mossimo Giannulli, Chairman of the Board, President and Chief
Executive Officer, under a Contribution Agreement. These shares are included in
basic weighted average shares outstanding as of September 30, 2000 and 1999. On
March 28, 2000, Edwin Lewis resigned from his positions as President, Chief
Executive Officer and Director of the Company. In connection with his
resignation, Mossimo Giannulli was appointed as President and Chief Executive
Officer of the Company, all options granted under the Lewis Plan were canceled
and the Lewis Plan and Contribution Agreement were terminated.
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
In July 2000, the Company's credit facility was amended to provide for a
$9.0 million revolving credit line which is collateralized by inventory,
receivables, machinery and equipment and intangibles. The revolving credit line
includes a $5.0 million personal guaranty by the Company's Chairman of the
Board, President and Chief Executive Officer. Advances under the amended
agreement bear interest at the prime rate plus 1.5%. The
7
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revolving credit line shall be reduced at the rate of $1,000,000 per quarter
beginning on June 1, 2001 and terminates on June 1, 2003.
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.
3. RESTRUCTURING
As a result of entering into the Target Agreement, a restructuring of the
Company's business was initiated during the first quarter of 2000. This resulted
in a charge during the nine months ended September 30, 2000 of $3.5 million,
which included (i) a write-down of property and equipment of $2.3 million; (ii)
an accrual for lease obligations of $611,000; (iii) severance expense of
$591,000; (iv) $93,000 of legal and professional services expenses; (v) a
write-off of security deposits of $61,000 and (vi) a gain on disposal of
property and equipment previously written down of ($154,000). During the three
and nine months ended September 30, 2000, the Company paid $133,000 and
$577,000, respectively, for severance obligations.
4. VENDOR DISCOUNTS
Due to the declining financial conditions and anticipated changes resulting
from entering into the Target Agreement, prior to the filing of the involuntary
bankruptcy petition (Note 5), the Company developed a creditor plan to give
certain of its unsecured vendor creditors two repayment options: (i) a single
cash payment of 50 cents on the dollar for the first $10,000 and 35 cents on the
dollar for amounts in excess of $10,000 or (ii) a 10 percent cash payment with
the balance to be paid in 36 equal monthly installments beginning June 15, 2001.
The Company has substantially completed its implementation of the creditor plan
and recorded vendor discounts of $917,000, offset by related professional fees
of $465,000, during the second and third quarters of 2000.
5. COMMITMENTS AND CONTINGENCIES
On May 16, 2000, three vendor creditors of the Company, Caeco Enterprises,
Inc., Pacific Apparel Resources, Inc. and Wilmar Concepts, filed a petition with
the United States Bankruptcy Court for the Central District of California, Santa
Ana Division, seeking to institute an involuntary bankruptcy proceeding against
the Company under Chapter 7 of the United States Bankruptcy Code on the basis
that the Company was not generally paying its debts as they became due. The
petition was dismissed by the United States Bankruptcy Court on July 25, 2000.
Two of the Company's retail customers have demanded payment by the Company
of certain alleged markdown reimbursements. The aggregate amount of these
alleged reimbursements is approximately $3.5 million. The Company has disputed
these alleged markdown reimbursements and intends to vigorously contest the
customers' demands. Management is currently unable to estimate the ultimate
outcome of this matter.
The Company is the defendant in an action entitled THE IRVINE COMPANY V.
MOSSIMO, INC., filed in the Superior Court of the State of California for the
County of Orange on October 20, 2000. Plaintiff The Irvine Company alleges that
it leased industrial warehouse space to the Company, and that the Company
breached the lease by failing to pay rent and vacating the leased premises prior
to the lease's expiration in 2007. The Irvine Company seeks damages of
approximately $4.5 million, being the total of all rental payments through the
expiration date, plus interest and costs. The Company intends to contest this
action. No provision has been recorded in the financial statements as of
September 30, 2000 in connection with this action. Management is currently
unable to estimate the ultimate outcome of this matter.
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.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales decreased to $32,000 during the third quarter of 2000 from $20.3
million in the corresponding quarter in 1999. The decrease in net sales was
primarily due to the termination of all sourcing, production and sales
operations during the second quarter of 2000 as a result of the Company entering
into the Target Agreement on March 28, 2000. Under the Target Agreement, Target
will have the exclusive right to use certain of the Company's United States
trademarks in connection with the design, manufacture and sale of selected
products in the United States. The Target Agreement provides that Target is
obligated to pay the Company a royalty based upon a percentage of its net sales
of Mossimo brand products, with a minimum guaranteed royalty, beginning in 2001,
of approximately $27.8 million over the initial three-year term of the
agreement. The Company is obligated to pay 15% of all royalties received from
Target to a third party who assisted the Company in connection with entering
into the Target Agreement. The Target Agreement is subject to early termination
under certain circumstances.
Gross profit decreased to ($21,000) during the third quarter of 2000 from
$6.8 million in the corresponding quarter in 1999. Gross profit as a percentage
of net sales decreased to (66%) in 2000 from 34% in 1999. The decrease was
primarily due to the termination of all sourcing, production and sales
operations during the second quarter of 2000 as a result of the Company entering
into the Target Agreement. This termination of certain operations substantially
eliminated regular-priced sales of the Company's men's and women's lines during
the third quarter of 2000.
Royalty income decreased to $299,000 in the third quarter of 2000 from
$672,000 in the corresponding quarter in 1999. The decrease was primarily due to
reduced royalties from some of the Company's foreign licensees.
Operating expenses decreased to $1.6 million in the third quarter of 2000
from $6.1 million in the corresponding quarter of 1999. Selling, general and
administrative expenses decreased to $1.4 million in the third quarter of 2000
compared to $6.1 million in the corresponding quarter of 1999. This decrease was
primarily due to reduced staffing levels, reduced rent and marketing
expenditures and decreased legal and professional services expenses.
As a result of entering into the Target Agreement, a restructuring of the
Company's business was initiated during the first quarter of 2000. Management
has implemented and will continue to implement several changes to the Company's
operations during the period from March 28, 2000 to the commencement of royalty
payments under the Target Agreement in May 2001 (the "Restructuring Period").
The most significant changes include a work force reduction of approximately 90%
of all employees, closure of the Company's showrooms, signature retail store and
outlet store, termination of all sourcing, production and sales operations and
termination of relationships with substantially all existing customers and
suppliers. During the Restructuring Period, the Company has and will continue to
suffer the elimination of all wholesale and retail sales. In addition, the
Company may experience increased difficulties in collecting its accounts
receivable and maintaining its licensing revenues. The Company anticipates
implementing the majority of these changes by the end of 2000. Accordingly, the
Company expects to realize a reduction in selling, general and administrative
expenses. Due to the broad changes to the Company's operations, the reduction
cannot be quantified at this time.
During the third quarter of 2000, the Company recorded a restructuring
charge of $10,000 as a result of the changes to the Company's business described
above. This charge included (i) $23,000 of legal and professional
9
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services expenses; (ii) an adjustment to severance expense of ($10,000) and
(iii) a gain on disposal of property and equipment previously written down of
($3,000).
Due to the declining financial conditions and anticipated changes resulting
from entering into the Target Agreement, the Company developed a creditor plan
to give certain of its unsecured vendor creditors two repayment options: (i) a
single cash payment of 50 cents on the dollar for the first $10,000 and 35 cents
on the dollar for amounts in excess of $10,000 or (ii) a 10 percent cash payment
with the balance to be paid in 36 equal monthly installments beginning June 15,
2001. The Company has substantially completed its implementation of the creditor
plan and recorded vendor discounts of $173,000, offset by related professional
fees of $332,000, during the third quarter of 2000.
Total operating expenses for the third quarter of 2000, excluding the
restructuring charge and vendor discounts, were $1.4 million compared to total
operating expenses for the third quarter of 1999 of $6.1 million.
During the third quarter of 2000, the Company recorded other income of
$750,000 which represents additional royalties received in connection with the
early termination of the Company's men's tailored suits and dress shirts
license.
The Company had net interest expense of $195,000 in the third quarter of
2000 compared to net interest expense of $308,000 in the corresponding quarter
in 1999. The decrease was due to decreased borrowings on the Company's line of
credit during the third quarter of 2000 as compared to the third quarter of
1999, offset in part by additional fees paid during the third quarter of 2000
associated with continuing the line of credit.
The Company recorded no tax benefit in the three months ended September 30,
2000 and 1999 as a result of its pretax loss. Losses for the three months ended
September 30, 2000 and 1999 were not benefited due to carryback limitations and
uncertainty regarding realization of the related deferred tax asset.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales decreased to $24.2 million during the nine months ended September
30, 2000 from $40.0 million in the corresponding period in 1999. Net sales of
the men's and women's lines, which represented 97% of the Company's net sales
for the nine months ended September 30, 2000, decreased to $23.4 million in 2000
from $38.4 million in 1999. The decrease in net sales was primarily due to the
termination of all sourcing, production and sales operations during the second
quarter of 2000 as a result of the Company entering into the Target Agreement,
partially offset by additional business with new customers as a result of the
Company's broader product lines and focused sales efforts during the first
quarter of 2000.
Gross profit decreased to $3.1 million during the nine months ended
September 30, 2000 from $12.9 million in the corresponding period in 1999. Gross
profit as a percentage of net sales decreased to 13% during the nine months
ended September 30, 2000 from 32% in the corresponding period in 1999. The
decrease was primarily due to the termination of all sourcing, production and
sales operations during the second quarter of 2000 as a result of the Company
entering into the Target Agreement, partially offset by better inventory
management and increased men's and women's regular-priced sales during the first
quarter of 2000. This termination of certain operations substantially eliminated
regular-priced sales of the Company's men's and women's lines during the second
and third quarters of 2000.
Royalty income decreased to $2.3 million in the nine months ended September
30, 2000 from $2.8 million in the corresponding period in 1999. The decrease was
primarily due to reduced royalties from some of the Company's foreign licensees.
Operating expenses decreased to $18.1 million during the nine months ended
September 30, 2000 from $21.1 million in the corresponding period in 1999.
Selling, general and administrative expenses remained constant at $15.0 million
during the nine months ended September 30, 2000 and the corresponding period in
1999. Selling, general and administrative expenses during the nine months ended
September 30, 2000 as compared to the corresponding period in 1999 included an
increased provision for doubtful receivables and increased legal and
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professional services expenses, offset in part by reduced staffing levels and
reduced rent and marketing expenditures.
On March 28, 2000, the Company entered into the Target Agreement under
which Target will have the exclusive right to use certain of the Company's
United States trademarks in connection with the design, manufacture and sale of
selected products in the United States. Under this agreement, Target is
obligated to pay the Company a royalty based upon a percentage of its net sales
of Mossimo brand products, with a minimum guaranteed royalty, beginning in 2001,
of approximately $27.8 million over the initial three-year term of the
agreement. The Company is obligated to pay 15% of all royalties received from
Target to a third party who assisted the Company in connection with entering
into the Target Agreement. The Target Agreement is subject to early termination
under certain circumstances.
As a result of entering into the Target Agreement, a restructuring of the
Company's business was initiated during the first quarter of 2000. Management
has implemented and will continue to implement several changes to the Company's
operations during the period from March 28, 2000 to the commencement of royalty
payments under the Target Agreement in May 2001 (the "Restructuring Period").
The most significant changes include a work force reduction of approximately 90%
of all employees, closure of the Company's showrooms, signature retail store and
outlet store, termination of all sourcing, production and sales operations and
termination of relationships with substantially all existing customers and
suppliers. During the Restructuring Period, the Company has and will continue to
suffer the elimination of all wholesale and retail sales. In addition, the
Company may experience increased difficulties in collecting its accounts
receivable and maintaining its licensing revenues. The Company anticipates
implementing the majority of these changes by the end of 2000. Accordingly, the
Company expects to realize a reduction in selling, general and administrative
expenses. Due to the broad changes to the Company's operations, the reduction
cannot be quantified at this time.
During the nine months ended September 30, 2000, the Company recorded a
restructuring charge of $3.5 million as a result of the changes to the Company's
business described above. This charge included (i) a write-down of property and
equipment of $2.3 million; (ii) an accrual for lease obligations of $611,000;
(iii) severance expense of $591,000; (iv) $93,000 of legal and professional
services expenses; (v) a write-off of security deposits of $61,000 and (vi) a
gain on disposal of property and equipment previously written down of
($154,000).
Due to the declining financial conditions and anticipated changes resulting
from entering into the Target Agreement, the Company developed a creditor plan
to give certain of its unsecured vendor creditors two repayment options: (i) a
single cash payment of 50 cents on the dollar for the first $10,000 and 35 cents
on the dollar for amounts in excess of $10,000 or (ii) a 10 percent cash payment
with the balance to be paid in 36 equal monthly installments beginning June 15,
2001. The Company has substantially completed its implementation of the creditor
plan and recorded vendor discounts of $917,000, offset by related professional
fees of $465,000, during the second and third quarters of 2000.
During the second quarter of 1999, the Company's President, Chief Executive
Officer and principal stockholder personally purchased excess insurance coverage
for the benefit of the Company. 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 did not impact the Company's cash flow or total stockholders' equity
position.
Total operating expenses for the nine months ended September 30, 2000,
excluding the restructuring charge and vendor discounts, were $15.0 million, and
total operating expenses for the nine months ended September 30, 1999, excluding
the non-cash insurance premium, were $15.0 million.
During the nine months ended September 30, 2000, the Company recorded other
income of $750,000 which represents additional royalties received in connection
with the early termination of the Company's men's tailored suits and dress
shirts license.
The Company had net interest expense of $655,000 in the nine months ended
September 30, 2000 compared to net interest expense of $603,000 in the
corresponding period in 1999. The increase is due to increased interest
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expense corresponding to increased borrowings on the Company's line of credit
and additional fees associated with continuing the line of credit during the
nine months ended September 30, 2000 as compared to the corresponding period in
1999.
The Company recorded no tax benefit in the nine months ended September 30,
2000 and 1999 as a result of its pretax loss. Losses for the nine months ended
September 30, 2000 and 1999 were not benefited due to carryback limitations and
uncertainty regarding realization of the related deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $4.8 million for the nine
months ended September 30, 2000. Cash used in operating activities was comprised
primarily of the Company's net loss of $12.6 million, a $5.1 million decrease in
due from/to factor, net, a $1.1 million decrease in accrued liabilities, net
vendor discounts of $452,000 and a $426,000 decrease in accounts payable, offset
by a $5.7 million decrease in inventory, a provision for doubtful receivables of
$4.7 million, a write-down of property and equipment of $2.3 million, a
restructuring charge of $1.4 million, a $410,000 decrease in accounts
receivable, net and depreciation and amortization expense of $466,000. At
September 30, 2000, working capital (deficit) was approximately ($8.9) million
as compared to ($680,000) at December 31, 1999. The decrease in working capital
is primarily due to a $5.7 million decrease in inventory, a $4.5 million
increase in the Company's line of credit, a $575,000 decrease in accounts
receivable, net, a $149,000 increase in accrued liabilities and a $106,000
increase in current portion of deferred royalty income, partially offset by a
$2.4 million decrease in accounts payable and a $514,000 decrease in due from/to
factor, net during the nine months ended September 30, 2000.
Since the year ended December 31, 1996, the Company has experienced a
significant decline in revenues, resulting in operating losses, negative cash
flow and a working capital deficit.
On March 28, 2000, the Company entered into the Target Agreement under
which Target is obligated to pay the Company a royalty based upon a percentage
of its net sales of Mossimo brand products, with a minimum guaranteed royalty,
beginning in 2001, of approximately $27.8 million over the initial three-year
term of the agreement. The Company is obligated to pay 15% of all royalties
received from Target to a third party who assisted the Company in connection
with entering into the Target Agreement. The Target Agreement is subject to
early termination under certain circumstances.
As a result of entering into the Target Agreement, management has
implemented and will continue to implement several changes to the Company's
operations during the period from March 28, 2000 to the commencement of royalty
payments under the Target Agreement in May 2001 (the "Restructuring Period").
The most significant changes include a work force reduction of approximately 90%
of all employees, closure of the Company's showrooms, signature retail store and
outlet store, termination of all sourcing, production and sales operations and
termination of relationships with substantially all existing customers and
suppliers. During the Restructuring Period, the Company has and will continue to
suffer the elimination of all wholesale and retail sales and the continuation of
operating losses and negative cash flows. In addition, the Company may
experience increased difficulties in collecting its accounts receivable and
maintaining its licensing revenues. The Company recorded a restructuring charge
of $3.5 million during the nine months ended September 30, 2000 as a result of
the foregoing changes to its business.
On May 16, 2000, an involuntary petition for Chapter 7 bankruptcy relief
under the United States Bankruptcy Code was filed against the Company by three
of its vendor creditors. The petition was dismissed on July 25, 2000.
Due to the declining financial conditions and anticipated changes resulting
from entering into the Target Agreement, prior to the filing of the involuntary
bankruptcy petition, the Company developed a creditor plan to give certain of
its unsecured vendor creditors two repayment options: (i) a single cash payment
of 50 cents on the dollar for the first $10,000 and 35 cents on the dollar for
amounts in excess of $10,000 or (ii) a 10 percent cash payment with the balance
to be paid in 36 equal monthly installments beginning June 15, 2001. The Company
has substantially completed its implementation of the creditor plan and recorded
vendor discounts of $917,000, offset by related professional fees of $465,000,
during the second and third quarters of 2000.
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Effective January 1, 2000, the Company entered into an endorsement
agreement with David Duval, one of the world's top-ranked golfers, under which
the Company is obligated to pay cash compensation. Future minimum commitments
under this agreement are approximately $2.4 million payable in 2000, of which
$800,000 was paid as of September 30, 2000, and $850,000 payable in each year
from 2001 through 2003. This agreement also has certain performance provisions
that allow for additional cash compensation.
In July 2000, the Company's credit facility was amended to provide for a
$9.0 million revolving credit line which is collateralized by inventory,
receivables, machinery and equipment and intangibles. The revolving credit line
includes a $5.0 million personal guaranty by the Company's Chairman of the
Board, President and Chief Executive Officer. Advances under the amended
agreement bear interest at the prime rate plus 1.5%. The revolving credit line
shall be reduced at the rate of $1,000,000 per quarter beginning on June 1, 2001
and terminates on June 1, 2003.
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.
Effective August 1, 2000, the Company entered into a lease agreement for
its principal office space in Santa Monica, California. Rent obligations under
the lease agreement are approximately $9,000 per month for an initial term of
three years.
Due to the restructuring of the Company's business, potential difficulties
in collecting accounts receivable, potential liabilities associated with
disputed markdown reimbursements claimed by certain customers (Note 5 to
Financial Statements) and potential liabilities to the Company's former
warehouse facility landlord (Note 5 to Financial Statements), available
borrowings under the current credit facility may not be adequate to meet the
Company's obligations on a timely basis. Should the Company experience such
shortfalls, efforts would need to be made to obtain additional funds which may
not be available to the Company.
These factors, among others, indicate that there is substantial doubt about
the Company's ability to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to (a) generate sufficient cash
flow to meet its obligations on a timely basis, (b) obtain additional financing
as may be required and (c) ultimately attain profitability. The Company has been
advised by its independent public accountants that if the Company is unable to
achieve the above objectives prior to the completion of their audit of the
Company's financial statements for the year ending December 31, 2000, their
auditors' report on those financial statements may be modified as to the
Company's ability to continue as a going concern.
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, the first, second
and fourth quarters of 1999 and the second and third quarters of 2000, 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.
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
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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 the Company's ability to execute
its new business strategy, the Company's ability to collect its outstanding
receivables and obtain additional financing to meet its obligations, the demand
for the Company's products in Target stores which have not traditionally sold
the Company's products, 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, 1999. 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 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
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 not encountered any material Year 2000 problems and
believes that it is unlikely that it will. Costs related to Year 2000 compliance
were approximately $35,000.
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 1.0% increase in interest rates occurring
on October 1, 2000 would result in an increase in interest expense for the
following 12 months of approximately $66,000.
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.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (See Note 5 to Financial Statements)
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*
10.17 Lease, dated June 29, 2000, between the Registrant and
Lexington-Broadway Place, LLC
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, 2000.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File No. 33-80597)
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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 14, 2000 /s/ MOSSIMO GIANNULLI
------------------------------------
Mossimo Giannulli
President and Chief Executive
Officer
November 14, 2000 /s/ JODY L. LOVE
------------------------------------
Jody L. Love
Vice President of Finance
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
10.17 Lease, dated July 29, 2000, between the Registrant and
Lexington-Broadway Place, LLC
27 Financial Data Schedule
* (Incorporated by reference from the Company's Registration Statement
on Form S-1, File No. 33-80597)
17
