<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 MARCH 31, 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)
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 15,080,042
$.001 per share (Outstanding on May 9, 2000)
(Class)
Exhibit Index on Page 15
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MOSSIMO, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION ----
<S> <C>
ITEM 1 - Financial Statements:
Condensed consolidated balance sheets as of March 31, 2000 (unaudited) and December 31, 1999........ 2
Condensed consolidated statements of operations for the three months
ended March 31, 2000 and 1999 (unaudited) ...................................................... 3
Condensed consolidated statements of cash flows for the three months
ended March 31, 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 ................................. 12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings ......................................................................... 13
ITEM 6 - Exhibits and Reports on Form 8-K .......................................................... 13
SIGNATURES ......................................................................................... 14
INDEX TO EXHIBITS .................................................................................. 15
</TABLE>
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................................... $ 316 $ 473
Accounts receivable, net ........................................................... 762 787
Due from factor, net ............................................................... 2,529 --
Inventories ........................................................................ 3,536 5,682
Prepaid expenses and other current assets .......................................... 1,000 502
-------- --------
Total current assets ............................................................. 8,143 7,444
PROPERTY AND EQUIPMENT, net .......................................................... 512 3,097
OTHER ASSETS ......................................................................... 195 195
-------- --------
$ 8,850 $ 10,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Due to factor, net.................................................................. $ -- $ 1,298
Line of credit ..................................................................... 8,029 2,135
Accounts payable ................................................................... 3,629 3,178
Accrued liabilities ................................................................ 3,215 1,290
Current portion of long-term debt .................................................. 7 8
S distribution note ................................................................ 215 215
-------- --------
Total current liabilities ........................................................ 15,095 8,124
DEFERRED ROYALTY INCOME .............................................................. 213 213
LONG-TERM DEBT, net of current portion ............................................... 1 3
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 - March 31, 2000
and 15,077,253 - December 31, 1999 ............................................... 15 15
Additional paid-in capital ......................................................... 38,223 38,126
Accumulated deficit ................................................................ (44,697) (35,745)
-------- --------
Total stockholders' equity (deficit) ............................................. (6,459) 2,396
-------- --------
$ 8,850 $ 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
ENDED MARCH 31,
----------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales ................................. $ 18,100 $ 8,286
Cost of sales ............................. 13,890 6,278
-------- --------
Gross profit .......................... 4,210 2,008
Royalty income, net ....................... 1,448 1,308
-------- --------
5,658 3,316
-------- --------
OPERATING EXPENSES:
Selling, general and administrative ... 10,326 4,733
Restructuring ......................... 4,055 --
-------- --------
Total operating expenses .......... 14,381 4,733
-------- --------
Operating loss ............................ (8,723) (1,417)
-------- --------
OTHER EXPENSE:
Other, net ............................ -- (3)
Interest, net ......................... (229) (131)
-------- --------
Net other expense ................. (229) (134)
-------- --------
Net loss .................................. $ (8,952) $ (1,551)
======== ========
Net loss per common share:
Basic and diluted ..................... $ (0.59) $ (0.10)
======== ========
Weighted average common shares outstanding:
Basic and diluted ..................... 15,079 15,021
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ................................................................. $(8,952) $(1,551)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 317 340
Write-down of property and equipment ................................. 2,291 --
Provision for doubtful receivables ................................... 4,058 20
Restructuring charge ................................................. 1,764 --
Deferred royalty income .............................................. -- (37)
Non-cash compensation expense ........................................ 75 75
Changes in:
Accounts receivable, net ......................................... (83) 400
Due from/to factor, net .......................................... (7,777) (2,218)
Inventories ...................................................... 2,146 1,871
Refundable taxes ................................................. -- 171
Prepaid expenses and other current assets ........................ (498) (145)
Other assets ..................................................... -- 36
Accounts payable ................................................. 451 4
Accrued liabilities ............................................. 161 (209)
S distribution note ............................................. -- (6)
------- -------
Net cash used in operating activities ........................... (6,047) (1,249)
------- -------
CASH FLOWS FROM INVESTING ACTIVITITES:
Payments for acquisition of property and equipment ....................... (23) (55)
------- -------
Net cash used in investing activities ............................ (23) (55)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit ............................................. 5,894 1,343
Proceeds from issuance of common stock ................................... 22 110
Repayment of long-term debt .............................................. (3) (8)
------- -------
Net cash provided by financing activities ........................ 5,913 1,445
------- -------
NET INCREASE (DECREASE) IN CASH .......................................... (157) 141
CASH, beginning of period ................................................ 473 176
------- -------
CASH, end of period ...................................................... $ 316 $ 317
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................. $ 237 $ 135
======= =======
</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 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,
women's swimwear and bodywear, men's hosiery and men's tailored suits and dress
shirts. 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 ending December 31, 1996, the Company has experienced a significant decline
in revenues, resulting in operating losses, negative cash flow and a working
capital deficit. As of March 31, 2000, the Company was in violation of one
covenant of its credit facility that is used to fund operations.
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 quarter ended
March 31, 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 Target Agreement is
subject to early termination under certain circumstances.
As a result of entering into the Target Agreement, management will be
implementing 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
will 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 will suffer the elimination of all
wholesale and retail sales and 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 approximately $4.1 million during the
quarter ended March 31, 2000 as a result of the foregoing changes to its
business (Note 3).
The Company's current credit facility includes a $15.0 million revolving
credit line, collateralized by inventory, receivables, machinery and equipment
and intangibles, bearing interest at the prime rate plus 1.0%. Borrowings are
limited to 50% of eligible inventory and 85% of eligible receivables. The
facility also allows for up to approximately $6.0 million in letters of credit.
Due to the restructuring of the Company's business, available borrowings
under the current credit facility are expected to be substantially eliminated by
June 2000. The Company is actively seeking financing to cover anticipated
shortfalls and is in the process of renegotiating its credit facility, including
its factoring agreement. Should these efforts be unsuccessful, additional funds
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.
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, 1999
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 March 31, 2000 and December 31, 1999, the consolidated
statements of operations for the three months ended March 31, 2000 and 1999 and
the consolidated statements of cash flows for the three months ended March 31,
2000 and 1999. Operating results for the three months ended March 31, 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.
6
<PAGE>
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 months
ended March 31, 2000 and 1999, there was no dilution from outstanding options.
Potential dilution from outstanding stock options as of March 31, 2000 and 1999
was 359,000 and 706,000 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. Accordingly, these shares are
included in basic weighted average shares outstanding as of March 31, 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
The Company's current credit facility includes a $15.0 million revolving
credit line, collateralized by inventory, receivables, machinery and equipment
and intangibles, bearing interest at the prime rate plus 1.0%. Borrowings are
limited to 50% of eligible inventory and 85% of eligible receivables. The
facility also allows for up to approximately $6.0 million in letters of credit.
As of March 31, 2000, the Company was in violation of one covenant of its credit
facility.
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.
Due to the restructuring of the Company's business, available borrowings
under the current credit facility are expected to be substantially eliminated by
June 2000. The Company is actively seeking financing to cover anticipated
shortfalls and is in the process of renegotiating its credit facility, including
its factoring agreement.
3. RESTRUCTURING
As a result of entering into the Target Agreement, a restructuring of the
Company's business was initiated during the quarter ended March 31, 2000. This
resulted in a charge of approximately $4.1 million which included (i) a
write-down of property and equipment of approximately $2.3 million; (ii) an
accrual for lease obligations of approximately $1.1 million and (iii) severance
expense of approximately $636,000.
7
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
On January 23, 1997, plaintiff Chaile Steinberg filed a purported class
action suit against the Company and certain other defendants on behalf of
individuals who purchased the Company's common stock in the initial public
offering pursuant to the Registration Statement and Prospectus (Prospectus),
dated February 22, 1996, and on the open market from February 22, 1996 through
January 14, 1997 (the "Class Period"). 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.
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 demurer 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.
On March 20, 2000, District Court Judge Gary L. Taylor approved a $13.0
million settlement of the State Actions and Federal Action. There were no
objections to the settlement. The settlement was funded by the Company's
insurance coverage, a portion of which the Company obtained during the second
quarter of 1999. On April 19, 2000, the settlement became final.
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 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, 1999 on Form 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net sales increased to $18.1 million during the first quarter of 2000 from
$8.3 million in the corresponding quarter in 1999. Net sales of the men's and
women's lines, which represented 99% of the Company's net sales for the three
months ended March 31, 2000, increased to $17.9 million in the first quarter of
2000 from $8.0 million in the corresponding quarter in 1999. The increase in net
sales of the men's and women's lines in 2000 was primarily due to 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 increased to $4.2 million during the first quarter of 2000
from $2.0 million in the corresponding quarter in 1999. Gross profit as a
percentage of net sales decreased to 23% during the first quarter of 2000 from
24% in the corresponding quarter in 1999. The decrease was primarily due to
increased inventory write-downs during the first quarter of 2000, partially
offset by better inventory management and increased men's and women's
regular-priced sales during the first quarter of 2000 as compared to the first
quarter of 1999.
Royalty income increased to $1.4 million in the first quarter of 2000 from
$1.3 million in the corresponding quarter in 1999. The increase was primarily
due to increased royalties from some of the Company's domestic licensees, which
were offset in part by reduced royalties from some of the Company's foreign
licensees.
Operating expenses increased to $14.4 million in the first quarter of 2000
from $4.7 million in the corresponding quarter of 1999.
Selling, general and administrative expenses increased to $10.3 million in
the first quarter of 2000 from $4.7 million in the corresponding quarter of
1999. This increase was primarily due to an increased provision for doubtful
receivables, additional legal and professional services expenses and additional
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 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
will be implementing 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 will 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 will 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 will
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.
9
<PAGE>
During the first quarter of 2000, the Company recorded a restructuring
charge of approximately $4.1 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 approximately $2.3 million; (ii) an accrual for
lease obligations of approximately $1.1 million and (iii) severance expense
of approximately $636,000. Total operating expenses for the first quarter of
2000, excluding the restructuring charge, were $10.3 million compared to
total operating expenses for the first quarter of 1999 of $4.7 million.
The Company had net interest expense of $229,000 in the first quarter of
2000 compared to net interest expense of $131,000 in the corresponding quarter
in 1999. The increase was due to increased interest expense corresponding to
increased borrowings on the Company's line of credit during the first quarter of
2000 as compared to the first quarter of 1999.
The Company recorded no tax benefit in the three months ended March 31,
2000 and 1999 as a result of its pretax loss. Losses for the three months ended
March 31, 2000 and 1999 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 $6.0 million for the three months
ended March 31, 2000. Cash used in operating activities was comprised
primarily of the Company's net loss of $9.0 million, an increase of $7.9
million in receivables and an increase of $498,000 in prepaid expenses and
other current assets, offset by a provision for doubtful receivables of $4.1
million, a write-down of property and equipment of $2.3 million, a
restructuring charge of $1.8 million, a $2.1 million reduction in inventory,
a $612,000 increase in accounts payable and accrued liabilities and
depreciation and amortization expense of $317,000. At March 31, 2000, working
capital (deficit) was approximately ($7.0) million as compared to ($680,000)
at December 31, 1999. The decrease in working capital is primarily due to a
$5.9 million increase in the Company's line of credit, a $2.4 million
increase in accounts payable and accrued liabilities and a $2.1 million
decrease in inventory, partially offset by a $3.8 million increase in
accounts receivable and a $498,000 increase in prepaid expenses and other
current assets during the three months ended March 31, 2000.
Since the year ending December 31, 1996, the Company has experienced a
significant decline in revenues, resulting in operating losses, negative cash
flow and a working capital deficit. As of March 31, 2000, the Company was in
violation of one covenant of its credit facility that is used to fund
operations.
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 Target Agreement is subject to early termination
under certain circumstances.
As a result of entering into the Target Agreement, management will be
implementing 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
will 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 will suffer the elimination of all
wholesale and retail sales and 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 approximately $4.1 million during the
quarter ended March 31, 2000 as a result of the foregoing changes to its
business.
10
<PAGE>
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 and $850,000
payable in each year from 2001 through 2003. This agreement also has certain
performance provisions that allow for additional cash compensation.
The Company's current credit facility includes a $15.0 million revolving
credit line, collateralized by inventory, receivables, machinery and equipment
and intangibles, bearing interest at the prime rate plus 1.0%. Borrowings are
limited to 50% of eligible inventory and 85% of eligible receivables. The
facility also allows for up to approximately $6.0 million in letters of credit.
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.
Due to the restructuring of the Company's business, available borrowings
under the current credit facility are expected to be substantially eliminated by
June 2000. The Company is actively seeking financing to cover anticipated
shortfalls and is in the process of renegotiating its credit facility, including
its factoring agreement. Should these efforts be unsuccessful, additional funds
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.
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, second
and fourth quarters 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.
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 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.
11
<PAGE>
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 April
1, 2000 would result in an increase in interest expense for the following 12
months of approximately $80,000.
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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (See Note 4 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*
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a current report on Form 8-K on March 30,
2000 which related to the Company's license agreement with
Target Corporation and the resignation of Edwin Lewis, the
Company's former President and Chief Executive Officer.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File No. 33-80597)
13
<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.
May 15, 2000 /s/ Mossimo Giannulli
-----------------------------------------
Mossimo Giannulli
President and Chief Executive Officer
May 15, 2000 /s/ Jody L. Love
-----------------------------------------
Jody L. Love
Vice President of Finance
(Principal Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 Certificate 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)
15
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 0
<RECEIVABLES> 11,173
<ALLOWANCES> 7,882
<INVENTORY> 3,536
<CURRENT-ASSETS> 8,143
<PP&E> 7,686
<DEPRECIATION> 7,174
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<CURRENT-LIABILITIES> 15,095
<BONDS> 0
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<SALES> 18,100
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