**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K/A**

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**ý**           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

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**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005**

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**OR**

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**o**           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934

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**FOR THE TRANSITION PERIOD FROM                   TO                  **

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**COMMISSION FILE NUMBER: 1-14208**

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**MOSSIMO, INC.**

(Exactname 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  executive offices) |       | (Zip Code)               |

 

**(310) 460-0040**

(Registrant’stelephone number, including area code)

 

Securities registered pursuant toSection 12(b) of the Act:** None**

 

Securities registered pursuant toSection 12(g) of the Act:** Common stock, parvalue $.001 per share**

 

Indicate bycheck mark if the Registrant is a well-known seasonal issuer, as defined inrule 405 of the Securities Act. Yes oNo ý

 

Indicate bycheck mark if the Registrant is not required to file reports pursuant toSection 13 or Section 15(d) of Act. Yes oNo ý

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference and Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer   o | Accelerated filer   o | Non-accelerated filer   ý |
|---------------------------------------|---------------------------------|------------------------------------------|

 

Indicate bycheck mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No ý

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant on June 30, 2005, the last business day of the registrant’smost recently completed second quarter was approximately $24,759,000 (based onthe closing sales price of the registrant’s common stock on that date).

 

Theregistrant had 15,899,749 shares of common stock, par value $.001 per shareoutstanding at February 28, 2006.

 

 

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**REASON FOR AMENDMENT TO FORM 10-K**

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The registrant no longer expects to fileits definitive proxy statement with the Securities and Exchange Commissionwithin 120 days after its fiscal year end. This Amendment to the registrant’sForm 10-K is being filed to include all of the information required byPart III of the Form 10-K.

 

**FORWARD LOOKING INFORMATION**

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This report on Form 10-K containscertain forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward looking statements relate tomatters such as the Company’s future operating results, the success andlongevity of its licensing program with Target in the United States, and otherlicensees, and the Company’s success in executing its business plan for ModernAmusement. Such forward-looking statements are based on the beliefs of theCompany’s management as well as assumptions made by and information currentlyavailable 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 termsas they relate to the Company or its management when used in this document, areintended to identify such forward-looking statements. In particular, theforward looking statements in this Form 10-K include, among other things,statements regarding or expectations about our future revenues and earnings.Forward looking statements include known or unknown risks and uncertaintiesthat may cause our results, performance and stock price to be materiallydifferent from the forward looking statements. Such statements are based onmanagement’s current expectations and are subject to certain risks,uncertainties and assumptions, including those described in “Business—RiskFactors”. Should one or more risks or uncertainties materialize, or shouldunderlying assumptions prove incorrect, the Company’s actual results,performance or achievements could differ materially from those expressed in, orimplied by such forward-looking statements. The Company’s future operations,financial performance, business and share price may be affected by a number offactors, including but not limited to the financial condition of the apparelindustry and the retail industry, the overall level of consumer spending, theeffect of intense competition from other apparel lines, within and outside ofTarget Stores, adverse changes in licensee or consumer acceptance of productsbearing the Mossimo or Modern Amusement name as a result of fashion trends orotherwise, the ability and/or commitment of Target and our other licensees tomanufacture and market Mossimo branded products, our dependence on Target formost of our revenue, our dependence on key management personnel and the otherfactors described in “Business-Risk Factors.” Accordingly, undue relianceshould not be placed on these forward-looking statements.

 

**PART I**

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**ITEM 1—BUSINESS**

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**GENERAL**

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Mossimo, Inc. (the “Company”) is aDelaware corporation formed in November 1995, and presently operates as adesigner and licensor of apparel and related products under the “Mossimo” brandand other brands it owns or may acquire. The Company licenses the Mossimo brandto third parties domestically and internationally, our primary domesticlicensee is Target Corporation. Our design and licensing strategy is operatedwith the understanding that almost all aspects of moderately priced apparel andaccessories can be sourced more effectively by large retailers who interactdaily with the end consumer and who operate with significant economies ofscale. By direct sourcing, stocking and selling widely recognized brand nameslicensed from others, these retailers in general may be able to obtain highergross margins and increase store traffic, than through carrying only private labelgoods or brands, from third-party vendors.

 

In addition to the Target Agreement, theCompany also licenses its Mossimo trademarks and provides design servicesoutside of the United States, and also licenses its Mossimo trademarks for usein collections of eyewear and women’s swimwear and bodywear sold in Targetstores in the United States.

 

As of March 31, 2006, the Company enteredinto an agreement and plan of merger by and among the Company, Iconix BrandGroup, Inc., Moss Acquisition Corp., a wholly-owned subsidiary of Iconix, andMossimo Giannulli, the Chairman and Co-Chief Executive Officer and 64.6%stockholder of the Company.  Pursuant tothe agreement, the Company expects to merge with and into Moss AcquisitionCorp. which would be the surviving company. The proposed merger is described in Item 13 – CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS and in the Company’s Current Report on Form 8-K filed withthe Securities and Exchange Commission on April 6, 2006.

 

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**MODERN AMUSEMENT**

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In January 2004, the Company acquiredModern Amusement, which is focused on design and distribution of premiumbranded west coast-lifestyle casual sportswear apparel and related accessoriesfor young men and young women under the Modern Amusement brand. The productsare offered at moderate to upper price points through traditional specialtystores and better department store distribution channels. The Modern Amusementbusiness includes sourcing manufactured products, wholesale distribution,inventory management, marketing, promoting, and advertising of apparel andrelated accessories under the Modern Amusement brand. While the ModernAmusement business is relatively small, as the Company expands into thewholesale products business, it will encounter increased exposure to excess andobsolete inventories, potential delays and cancellations from sourcingmanufactured products domestically and internationally, and product returns andallowances from retail customers, as well as marketing, promotion andadvertising expenditures that may not result in successful campaigns.

 

The Company’s strategy in developingModern Amusement is to diversify the Company’s current design and licensingbusinesses through the development of mass wholesale distribution channels.

 

**DESIGN AND MERCHANDISING**

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The cornerstone of the Company’s businessis its ability to design products embodying the image of a contemporary,active, and youthful lifestyle. The Company’s designs are inspired by subtlechanges in culture and society including such areas as music, television,cinema, architecture and other forms of artistic expression, and appeal to thecontemporary consumer. The work of the Company’s design staff reflects theCompany’s fashion conscious consumer as they consistently monitor changes infashion, style, culture and society, and develop designs that interpret suchtrends considering the targeted consumer group. The Company’s product designand merchandising services provided to licensees, along with the right toapprove design, advertising, and promotional materials are an important aspectfor continuity of product quality, maintaining and enhancing the Company’sdistinctive image and the value of its Mossimo trademark.

 

**LICENSING**

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*Domestic Licensing*

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The Company entered into a multi-yearlicensing and design services agreement with Target in March 2000 whichwas subsequently amended in April 2002, and in February, June 2003 andMarch, 2006 (hereinafter referred to as the “Target Agreement”). Under theterms of the Target Agreement, Target has the exclusive license, for productionand distribution through Target stores, of substantially all Mossimo brandedproducts sold in the United States. The Company, therefore can not enter intoany other wholesale or retail licensing agreements in the United States withrespect to the Mossimo brand.

 

Under the Target Agreement, the Companyprovides design services and has approval rights for product design, marketingand advertising materials. Target collaborates on product design and isresponsible for product development, sourcing, quality control and inventorymanagement with respect to the Target licensed product line.

 

The Company and Target Brands, Inc.restated the Target Agreement as of March 31, 2006.  A copy of the restated Target Agreement isattached as Exhibit 10.13 to this Amendment No. 1 to Mossimo’s Annual Report onForm 10-K and is incorporated herein by reference.  The description of the Target Agreement inthis amended annual report is qualified in its entirety by reference to thefull text of the Target Agreement attached as Exhibit 10.13.

 

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The Target Agreement is subject to earlytermination under certain circumstances, including a material failure byMossimo Giannulli to perform certain services or the termination of employment,death or permanent disability of Mr. Giannulli or a material change in hisownership or control of the Company which is deemed to materially affect theCompany’s ability to perform its obligations under the Target Agreement.

 

The Company has licensed the exclusiveright to manufacture and distribute eyewear bearing its Mossimo trademarksthrough specialty retail stores such as opticians, optical chains and specialtyeyeglass and sunglass stores pursuant to a license agreement with the MarcolinGroup. This agreement ended on December 31, 2004. The Company is in theprocess of negotiating a new agreement with Luxottica Retail. No eyewearroyalty income was earned in 2005.

 

The Company has licensed the exclusiveright to manufacture and distribute women’s swimwear and bodywear bearing itsMossimo trademarks through Target stores in the United States pursuant to alicense agreement with The Lunada Bay Corporation. This agreement extendsthrough September 30, 2006, and is renewable annually.

 

Under license agreements, the Companygrants retailers a license to use its trademarks on certain categories ofmerchandise. The Company provides design directions and to the extent licenseesdesire to modify the designs to accommodate seasonal, regional or categoryneeds, the Company retains approval rights with respect to the design ofproducts, advertising, and marketing. In all cases, all products are subject toour pre-approved packaging, graphics and quality control standards. Theretailer is responsible for manufacturing the merchandise. All payments underthe Target Agreement are due on a quarterly basis and range from one to fourpercent of net sales depending on the volume of sales achieved in each contractyear. Under all other license agreements, royalty payments are due generally ona quarterly basis and range from approximately two to five percent of thelicensee’s net sales.

 

*International Licensing*

* *

The Company enters into internationallicensing agreements of its Mossimo branded products for certain geographicalterritories where the Company believes such arrangements provide effectivemanufacturing, distribution and marketing of such products. The Companygenerally maintains substantial control over the design, quality, advertising,and marketing of its licensed products, and maintains a policy of evaluatingits licensing arrangements to ensure consistent presentation of the Mossimobrand image.

 

InMay 2002, the Company entered into an agreement with Hudson’s Bay Company.Under the agreement, the Company provided product design services, and granteda license for the Mossimo trademark to Hudson’s Bay Company exclusively inCanada, in return for license royalties and design service fees. Hudson’s BayCompany collaborated on product design, and was responsible for manufacturing,importing, marketing, advertising, selling and distributing merchandise bearingthe Mossimo trademark. The initial term of the agreement was three years beginningin May 2002. The agreement expired in May of 2005, we expect toreceive royalty payments through the third quarter of 2006. There are no plansto renew the agreement.

 

**PRODUCTS**

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MEN’S, WOMEN’S AND CHILDREN’S APPAREL ANDACCESSORIES.   Mossimo branded apparel encompass a variety of products,including: knit and woven tops, including polo shirts and collared, button-downshirts; outerwear, including sweaters and jackets; denim and related products,including jeans, shirts and jackets; dresses; pants; screenprinted andembroidered sweatshirts and tee-shirts; and shorts. These products are designedexclusively for distribution under the Company’s licensing agreements. Theinitial Target licensed product lines were launched in Target’s stores in theFall of 2000. The Company complements its apparel product lines with footwearand other fashion accessories such as jewelry, watches, handbags, belts,neckwear and gloves.

 

OPTICS LINE.   TheCompany had an exclusive license agreement with the Marcolin Group for theproduction and distribution of the Mossimo branded product line of eyewear,including sunglasses, sport glasses and optical frames. Marcolin sells Mossimobranded eyewear through specialty retail stores such as opticians,

 

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optical chains and specialty eyeglass andsunglass stores. This agreement, however, permits Target to sell Mossimobranded eyewear in Target stores. The license agreement expired onDecember 31, 2004. The Company is negotiating a licensing agreement withLuxottica Retail for the production and distribution of the Mossimo brandedproduct line of optical frames. The Company expects Luxottica Retail will sellMossimo branded eyewear through Target stores.

 

WOMEN’S SWIMWEAR AND BODYWEAR.   TheMossimo branded product line of women’s swimwear and bodywear is manufacturedand distributed through Target stores in the United States under an exclusivelicense agreement with The Lunada Bay Corporation. The high quality swimwearproducts include one-piece and two-piece swimsuits which are fashion-orientedand targeted towards youthful-minded, body-conscious women. The line of women’sbodywear is a collection of fashionable fitness active wear which is designedand manufactured using materials such as lycra, tactel and flexcel nylon thatstretch and compensate for body movements during strenuous exercise. Thelicense agreement extends through September 30, 2006, and is renewableannually.

 

MODERN AMUSEMENT BRANDED PRODUCTS.   ModernAmusement is focused on design and distribution of premium branded westcoast-lifestyle casual sportswear apparel and related accessories for young menunder the Modern Amusement trademarked brand.

 

**SOURCING, MANUFACTURING, AND DISTRIBUTION**

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*Design andLicensing.*   Underthe Company’s retail licensing agreement, the retailer is responsible forproduct development, sourcing, manufacturing, quality control, distribution,and inventory management.

 

*Modern Amusement.*   The Modern Amusement business includes sourcingmanufactured products, distribution, and inventory management of apparel andrelated accessories under the Modern Amusement trademarked brand. We currentlypurchase most of our product from international vendors. We supply themanufacturers with the product design and fabric selection. We do not maintainany long-term or exclusive commitments or arrangements to purchase merchandisefrom any single supplier, and there are many vendors who could supply ourmerchandise. We warehouse and distribute our finished goods through afulfillment company. Write downs are taken as required affecting the sale ofslow-moving inventory. Written down merchandise that remain unsold is sold to aclearance company.

 

**MARKETING AND ADVERTISING**

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*Design andLicensing.*   TheCompany has developed a distinctive image of a contemporary, active, andyouthful lifestyle and strives to maintain consistency through the coordinationof product merchandising, advertising, and marketing promotions.

 

Under its Licensing Agreements, theCompany primarily relies on its licensees to advertise the Mossimo brandedproduct and intends to continue to promote a positive brand image throughlicensee-sponsored advertising and marketing promotions. The Company hasapproval rights for marketing and advertising materials.

 

*ModernAmusement.*   TheModern Amusement business includes marketing and advertising of apparel andrelated accessories under the Modern Amusement brand through tradeshows, aswell as promoting the Modern Amusement brand.

 

**TRADEMARKS**

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The Company utilizes a variety of trademarks,including the script Mossimo (signature), MOSS, MOSSIMO (in block lettering),Baby Moss, M (in a box design), and Mossimo Giannulli trademarks. Currently,the Company has 14 registrations and 2 pending applications for its trademarksin the United States, and approximately 350 trademark registrations andapplications in over 70 other countries.

 

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In connection with the Modern Amusementbusiness, the Company acquired worldwide trademark rights for Modern Amusementand the Crow Design marks, except for the Asia territory. The current ModernAmusement trademark portfolio includes 17 registrations and 5 pendingapplications in eleven nations.

 

The Company regards its trademarks andother proprietary rights as valuable assets and believes they have significantvalue in the sales and marketing of its products. The Company vigorouslyprotects its trademarks against infringement by using, among other things,cease-and-desist letters, administrative proceedings, and applicable legalaction.

 

**PERSONNEL**

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The Company currently employs twenty-twofull time employees, of whom nine are employed by Modern Amusement. Fouradditional employees are employed by Target on the Company’s behalf. Thesalaries for the employees employed by Target are deducted from Target Royaltypayments to the Company. The Company also employs temporary personnel on an asneeded basis. A substantial number of the Company’s personnel and resources arededicated to providing design services. The Company believes that it is able torecruit and retain the high level of creative personnel to continue to providethe necessary design services to maintain the continuity of product quality,the Company’s distinctive image, and the value of its trademarks. None of theCompany’s employees are covered by collective bargaining agreements. TheCompany considers its relations with its employees to be satisfactory.

 

**CODE OF ETHICS**

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The Company has adopted a Code of Ethicsin accordance with the rules of the Securities and Exchange Commission andNASDAQ. A copy of such a code can be obtained by written request from:

 

Chief Financial OfficerMossimo, Inc.2016 BroadwaySanta Monica, CA 90404

 

**RISK FACTORS**

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In addition to the other informationcontained herein or incorporated by reference, the risks and uncertainties andother factors described below could have a material adverse effect on ourbusiness, financial condition, results of operations, cash flows and shareprice and could also cause our future business, financial condition and resultsof operations and cash flows to differ materially from the results contemplatedby any forward-looking statement we may make herein, in any other document wefile with the Securities Exchange Commission, or in any press release or otherwritten or oral statement we may make.

 

***DEPENDENCE ON THE TARGET STORES LICENSEWHICH ACCOUNTED FOR 69% OF OUR CONSOLIDATED REVENUES IN 2005.***

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The Company’s revenues under the TargetAgreement commenced in November 2000, and represented 69% in 2005, 79% in2004, and 88% in 2003, of total consolidated revenue. The Company expects thatits revenues under the Target Agreement will continue to represent asignificant portion of the Company’s total revenues during the remaining termof the Target Agreement, which has been extended through 2010. Because theamount of the Company’s revenues under the Target Agreement are dependent onthe sales of Mossimo branded products in Target stores, the Company’s revenuepotential is impacted by the number of Target stores and the patronage at thesestores, and Target’s ability and/or commitment to manufacture and marketMossimo branded products. Termination or non-extension of the Target Agreement,or a material adverse change in the business of Target stores, could have amaterial adverse effect on the Company’s business, financial condition, andresults of operations. The term of the Amended Target Agreement currentlyextends until 2010 and, unless Target stores gives us one year’s advance noticeof its intention to terminate the agreement, the Agreement will continue toautomatically renew provided that

 

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Target stores has paid a minimumguaranteed royalty equal to or greater than $9.6 million for the precedingfiscal year. If Target stores elects to terminate the agreement, effectiveafter 2010 or at any other time, it would have a material adverse effect on ourbusiness, financial condition, cash flows and results of operations. There canbe no guarantee that we would be able to replace the Target stores royaltypayments from other sources. The Amended Target Agreement, however, requiresone year’s advance notice of termination by Target stores to prevent automaticrenewal, during which period we believe we could enter into one or morelicensing agreements for the Mossimo brand with either retailers and/orwholesalers, which we expect would enable us to replace some of the lostrevenues from Target stores. Nonetheless, we could suffer substantiallydecreased royalty revenues under the Target Agreement if Target were to reduceits sale of Mossimo branded products while continuing to pay the minimumroyalties required under the agreement.

 

ModernAmusement is in the early stages of development with an unproven business modeland a short operating history, which makes it difficult to evaluate our currentbusiness and future prospects for this segment of our business. The risks anddifficulties we encounter include acceptance of the Modern Amusement brand,manufacturing arrangements, management of inventory and distribution andoverall execution of a successful business model. In 2005, Modern Amusement hadan operating loss of $1.45 million. There is no assurance that the ModernAmusement business will become profitable on an operating basis in the nearterm.

 

***CHANGES IN FASHION TRENDS***

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The apparel industry is subject to rapidlychanging consumer demands and preferences, which may adversely affect companieswhich misjudge such demands and preferences. The Company believes that itssuccess depends on its ability to anticipate, gauge and respond in a timelymanner to changing consumer demands and fashion trends. There can be noassurance that the Company will be successful in this regard. If fashion trendsshift away from the Company’s products, or if the Company otherwise misjudgesthe market for its product lines, resulting in a decline in sell-through ratesat retail, the Company may be faced with conditions which could have a materialadverse effect on the Company’s financial condition and results of operations.Decisions with respect to product designs often need to be made several monthsin advance of the time when consumer acceptance of such products is known. Inaddition, any failure by the Company to identify and respond to changingdemands and trends could adversely affect consumer acceptance of the Mossimoand Modern Amusement brand names, which may have an adverse effect on theCompany’s business and prospects.

 

***NEW PRODUCT INTRODUCTIONS***

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The Company’s success is dependent uponits ability to create and develop new product designs and new product lines. Asis typical with new products, demand for and market acceptance of new designsand products introduced by the Company is subject to uncertainty. There can beno assurance that the Company’s efforts will be successful. In addition, thefailure of new product designs or new product lines to gain sufficient marketacceptance could adversely affect the image of the Mossimo brand name andconsumers’ demand for other Mossimo and Modern Amusement branded products.

 

***DEPENDENCE ON KEY PERSONNEL***

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The success of the Company is largelydependent on the efforts and abilities of its design staff, which includesMossimo Giannulli, the Company’s founder and Co-Chief Executive Officer. TheCompany has only twenty-six employees, and Mr. Giannulli’s leadership andexperience in the apparel licensing industry is critical to the successfulimplementation of the Company’s business and marketing strategy. The Companyhas key person life insurance covering Mr. Giannulli. The Target Agreementis subject to early termination under certain circumstances, including amaterial failure by Mr. Giannulli to perform certain services or thetermination of employment, death or permanent disability of Mr. Giannulli,or a material change in his ownership or control of the Company which is deemedto materially affect the Company’s ability to perform its obligations under theTarget Agreement. During 2005, the Company extended the employment agreementwith Mr. Giannulli thru January 2008. The loss of Mr. Giannulliservices could have a material adverse effect on our business, financialcondition, and results of operations.

 

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***COMPETITION***

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Competition in the contemporary appareland related fashion accessories industry is extensive. The Company’s productsare subject to competition from designer and non-designer lines sold in a widevariety of retail stores, including Target stores, many of which have increasedin recent years the amount of sportswear and activewear manufacturedspecifically for them and sold under their own private labels.

 

The Company’s Mossimo branded productscompete based on factors including brand name appeal, design, style and colorselection, quality of garment construction and price. Such competitors includeCherokee, Sideout, The GAP, Old Navy, V.F. Corp., Levi Strauss, Quicksilver,among others. Increased competition by existing and future competitors couldresult in reductions in retail sales and reductions in revenues to the Company,or reduction of prices of the Company’s products that could have a materialadverse effect on the Company’s revenues, financial condition, and results ofoperations. The Company’s success is dependant on its licensees’ ability tomanufacture and sell product bearing the Mossimo brand and to respond to everchanging consumer demands. The Company’s Modern Amusement branded productscompete based on factors including brand name appeal, design, style and colorselection, and quality of garment construction. Such competitors includeDiesel, Penguin, Lacoste, Fred Perry, Howe, Ben Sherman, 7 Diamond, Paper,Denim & Cloth, AG Jeans, among others. Increased competition byexisting and future competitors could result in reductions in retail sales andreductions in revenues to the Company, or reduction of prices of the Company’sproducts that could have a material adverse effect on the Company’s revenues,financial condition, and results of operations. The Company expects that itsproducts will continue to face significant competition in the future, inparticular as other companies with established trademarks enter into licensingarrangements with retailers.

 

***UNCERTAINTIES IN APPAREL RETAILING;GENERAL ECONOMIC CONDITIONS***

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The apparel industry historically has beensubject to substantial economic cyclical variations. Economic observers haverecently commented that the United States economy may be rebounding. As theeconomic conditions change the trends in discretionary consumer spending becomeunpredictable, and could be subject to reductions due to uncertainties aboutthe future. When discretionary spending is reduced, purchases of apparel andrelated products tend to decline. Additionally, the continued militaryresponses to current international military situations, and possible futureterrorist attacks on the United States may exacerbate current economicconditions and lead to a downturn in the economy. Adverse economic conditionsand any related decreases in discretionary spending by consumers could have amaterial adverse effect on the Company’s results of operations.

 

***PROTECTION OF TRADEMARKS***

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The Company believes that its trademarksand other proprietary rights are important to its success and its competitiveposition. Accordingly, the Company devotes substantial resources to theestablishment and protection of its trademarks on a worldwide basis. There canbe no assurance that the actions taken by the Company to establish and protectits trademarks and other proprietary rights will be adequate to preventimitation of its products by others or to prevent others from seeking to blocksales of the Company’s products as a violation of the trademarks andproprietary rights of others. No assurance can be given that others will notassert rights in, and ownership of, trademarks and other proprietary rights ofthe Company. In addition, the laws of certain foreign countries do not protectproprietary rights to the same extent as do the laws of the United States.Despite our efforts to protect our intellectual property rights, unauthorizedparties may attempt to copy aspects of our intellectual property, which wouldhave a material adverse effect on our business prospects, financial condition,results of operations and liquidity. In the future we may be required to assertinfringement claims against third parties, and there can be no assurance thatone or more parties will not assert infringement claims against us. While wecurrently have the resources to pursue or defend most infringement claims, anyresulting litigation could result in significant expense and divert the effortsof our management personnel whether or not such litigation is determined in ourfavor.

 

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***CONTROL BY PRINCIPAL STOCKHOLDERS***

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Mossimo Giannulli has majority control ofthe Company and the ability to control the election of directors and theresults of other matters submitted to a vote of stockholders. Suchconcentration of ownership, together with the anti-takeover effects of certainprovisions in the Delaware General Corporation Law and in the Company’sCertificate of Incorporation and Bylaws, may have the effect of delaying orpreventing a change in control of the Company that other stockholders may viewas beneficial.

 

***CHANGING CORPORATE GOVERNANCE AND PUBLICDISCLOSURE REGULATIONS***

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We are subject to rules andregulations by various governing bodies, including the Securities and ExchangeCommission, NASDAQ and Public Company Accounting Oversight Board, that are chargedwith the protection of investors and the oversight of companies whosesecurities are publicly traded. Our efforts to comply with these newregulations, most notably the Sarbanes-Oxley Act, or SOX, have resulted in, andare likely to continue to result in, increased general and administrativeexpenses and a diversion of management time and attention fromrevenue-generating activities to compliance activities.

 

In 2007, we will be required to comply onan on-going basis with the SOX requirements involving the assessment of ourinternal controls over financial reporting and our external auditors’ audit ofthat assessment. Our efforts to comply with the SOX requirements will requireus to commit significant financial and managerial resources.

 

Moreover, because these laws, regulationsand standards are subject to varying interpretations, their application inpractice may evolve over time as new guidance becomes available. This evolutionmay result in continuing uncertainty regarding compliance matters and additionalcosts necessitated by ongoing revisions to our disclosure and governancepractices. If we fail to address and comply with these regulations and anysubsequent changes, our business may be harmed.

 

***CERTAIN FEDERAL TAX CONSEQUENCES***

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In addition to the Company’s taxableincome being subject to federal, state and local income taxes, the Company maybe classified as a “personal holding company” from time to time. Personalholding company status results from more than 50% of the value of outstandingstock being owned directly or indirectly by five or fewer individuals, and morethan 60% of the Company’s income, as defined, being derived from royalties.Personal holding companies are subject to an additional federal tax at a 15%tax rate on undistributed after tax earnings.

 

Over 50% of the value of the Company’soutstanding stock is owned by one stockholder, and in 2002 and 2001, more than60% of the Company’s income, as defined, was derived from license royalties.Accordingly, the Company was classified as a personal holding company in 2002and 2001. However, no personal holding company tax was due in 2002 because theCompany recognized certain expenses for tax purposes in 2002 that had beenrecognized in previous years for financial reporting purposes, and which offsetthe taxable income subject to personal holding company tax in 2002. Inaddition, no personal holding company taxes were due in 2001 because theCompany was able to use its tax operating loss carry forward to offset thetaxable income subject to personal holding company tax in 2001. In 2003, 2004and 2005 less than 60 percent of the Company’s income, as defined, was derivedfrom license royalties, accordingly it was not classified as a personal holdingcompany and was not subject to the personal holding company tax. The Companyintends to continue to take appropriate measures to avoid being classified as apersonal holding company in future years. However, there can be no assurancethat the Company will be successful in its efforts to avoid classification as apersonal holding company in the future.

 

**ITEM 1B—UNRESOLVED STAFF COMMENTS**

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None.

 

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**ITEM 2—PROPERTIES**

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The Company’s current corporateheadquarters and design studios are located in Santa Monica, California andconsist of a leased facility totaling approximately 6,000 square feet of space.In January 2004, the Company expanded its leased facilities from 6,000 toapproximately 9,000 square feet of space to accommodate newly acquired Modern Amusementat a near-by but separate facility.

 

**ITEM 3—LEGAL PROCEEDINGS**

** **

On April 12, 2005, Mossimo Giannulli(“Giannulli”) offered to acquire all of the outstanding publicly held commonstock of the Company at a price of $4.00 per share. Following the announcement,six purported class action lawsuits were filed in the Court of Chancery of theState of Delaware. Each of the complaints asserted that the directors breachedtheir fiduciary duties to the Company’s shareholders, and sought an injunctionpreventing the acquisition. On April 19, 2005, the Board of Directorsappointed a Special Committee to consider and evaluate Mr. Giannulli’sproposal. The Special Committee retained Houlihan Lokey and GibsonDunn & Crutcher to serve as the Committee’s independent financialadvisor and legal counsel, respectively, with respect to the Committee’sevaluation of Mr. Giannulli’s proposal. On May 27, 2005, the abovereferenced cases were consolidated under the following caption: In reMossimo, Inc. Shareholder Litigation, Consolidated Civil Action No.1246-N(the “Action”).

 

On October 10, 2005, the Company andother defendants entered into a Memorandum of Understanding (“MOU”) to settlethe Action. Under the terms of the MOU, Giannulli agreed that his proposal toacquire all of the Company’s outstanding shares would be priced at $5.00 pershare and that the tender offer pursuant to which the acquisition was proposedto be consummated would be conditioned upon no less than 50 percent of allpublic stockholders of the Company unaffiliated with Giannulli accepting orapproving the tender offer. The MOU further provided that plaintiffs’ leadcounsel would be afforded the opportunity to comment on and suggest inclusionsto the disclosures made to the Company’s public stockholders in conjunctionwith the acquisition. In addition, the Company agreed to negotiate in goodfaith with the plaintiffs’ lead counsel concerning the amount of attorney feesand expenses to be paid, subject to Delaware Chancery Court approval. TheCompany also agreed to pay whatever fee and expense amount the DelawareChancery Court might have awarded to plaintiffs’ lead counsel. In considerationof these terms, the parties agreed that they would fully and finally releaseand discharge all claims against each other.

 

The settlement was conditioned on theconsummation of the acquisition by Giannulli, the negotiation of a definitivestipulation of settlement and the entry of a Final Order and Judgment approvingthe settlement by the Delaware Chancery Court. On November 14, 2005Giannulli announced that he had withdrawn the proposal to acquire theoutstanding shares of the Company that he did not already own. The provisionsof the MOU have thus become moot. The Action remains on file. The Company isworking with plaintiffs’ counsel to seek voluntary dismissal of the Action.

 

On April 12, 2006, apurported shareholder class action lawsuit was filed in the Superior Court ofthe State of California for the County of Los Angeles entitled Laborers’ Local#231 Pension Fund vs. Mossimo, Inc. et al. The lawsuit alleges that the Companyand its board of directors breached their fiduciary duties and engaged inself-dealing in approving the merger agreement with Iconix Brand Group, Inc.and seeks, among other relief, to enjoin the proposed merger of the Companywith Iconix, the rescission of any agreements entered into in connection withthe proposed merger, and costs, including attorney’s fees. The Company and itsdirectors believe the allegations in the complaint are without merit and intendto defend the claims vigorously.

 

**ITEM 4—SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

On December 15, 2005, the Companyheld its Annual Meeting of Shareholders. The following are the results of thevarious proposals submitted for stockholder approval:

 
| ** ** | ** ** | ** **                                         | ** ** | **For**    | ** ** | **Withheld** | ** ** | ** ** | ** **  | ** ** |
|------------|------------|----------------------------------------------------|------------|------------|------------|--------------|------------|------------|-------------|------------|
| a.         | ** ** | **Election of Directors**                | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** **  | ** ** |
|       |       | Mossimo G. Giannulli                               |       | 12,951,253 |       | 2,238,004    |       |       |        |       |
|       |       | Edwin H. Lewis                                     |       | 12,951,253 |       | 2,241,004    |       |       |        |       |
|       |       |                                               |       |       |       |         |       |       |        |       |
| ** ** | ** ** | ** **                                         | ** ** | **For**    | ** ** | **Against**  | ** ** | ** ** | **Abstain** | ** ** |
| b.         |       | Amended and Restated Mossimo Giannulli  Bonus Plan |       | 10,906,110 |       | 2,316,261    |       |       | 25,620      |       |
| c.         |       | Amended and Restated Edwin Lewis Bonus Plan        |       | 10,944,659 |       | 2,278,375    |       |       | 24,960      |       |
| d.         |       | Mossimo, Inc. 2005 Stock Option Plan          |       | 10,874,141 |       | 2,348,239    |       |       | 25,614      |       |

 

10

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** **

**PART II**

** **

**ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

** **

Our common stock trades on The NasdaqStock Market under the symbol MOSS. The table below sets forth for each of thefiscal quarters during our last two fiscal years the range of the high and lowclosing price for our common stock.

 
| **Fiscal Year ended December 31, 2005** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                                    |       | $        | 4.10       |    | $          | 3.13 |   |
| Second Quarter                                                   |       | $        | 4.53       |    | $          | 3.32 |   |
| Third Quarter                                                    |       | $        | 5.72       |    | $          | 4.25 |   |
| Fourth Quarter                                                   |       | $        | 5.91       |    | $          | 4.94 |   |
|                                                             |       |     |       |    |       |
| **Fiscal Year ended December 31, 2004** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter                                                    |       | $        | 4.95       |    | $          | 3.80 |   |
| Second Quarter                                                   |       | $        | 4.39       |    | $          | 3.79 |   |
| Third Quarter                                                    |       | $        | 4.16       |    | $          | 2.88 |   |
| Fourth Quarter                                                   |       | $        | 3.87       |    | $          | 2.99 |   |

 

The high and low sales prices on theCompany’s common stock reported on the Nasdaq Stock Market on February 28,2006 were $6.30 and $6.10 per share, respectively. On February 28, 2006,the closing sales price of the Company’s common stock reported on the NasdaqStock Market was $6.29 per share.

 

As of February 28, 2006, the Companyhad 205 stockholders of record. This does not include beneficial owners whoseshares may be held of record by brokerage firms and clearing agencies.

 

**DIVIDENDS**

** **

To date, the Company has never paid adividend on its common stock. Any future determination as to the payment ofdividends will be at the discretion of the Company’s Board of Directors andwill depend upon the Company’s results of operations, financial condition,contractual restrictions, and changes in the tax laws, and other factors deemedrelevant by the Board of Directors.

 

11

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**ITEM 6—SELECTED FINANCIAL DATA**

** **

The following table sets forth certainselected financial data regarding the Company which is qualified by referenceto, and should be read in conjunction with, the consolidated financialstatements and notes thereto (see “Index to Financial Statements”) and “Item 7- Management’s Discussion and Analysis of Financial Condition and Results ofOperations.” The statement of earnings and balance sheet data presented belowhas been derived from the Company’s audited financial statements.

 
| ** **                                                     | ** ** | **YEARS ENDED DECEMBER 31,**                                 | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                     | ** ** | **(IN THOUSANDS, EXCEPT FOR PER SHARE DATE)** | ** ** |
| STATEMENTS OF EARNINGS DATA:                                   |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Revenue from license royalties &  design service fees |       | $                                                                           | 24,298     |   | $ | 18,714 |   | $ | 19,895 |   | $ | 19,881 |   | $ | 16,666 |   |
| Product sales                                                  |       | 6,730                                                                       |       | 1,821 |   | — |   | — |   | — |   |
| Total revenues                                                 |       | 31,028                                                                      |       | 20,535 |   | 19,895 |   | 19,881 |   | 16,666 |   |
| Operating expenses:                                            |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cost of product sales                                          |       | 3,993                                                                       |       | 1,241 |   | — |   | — |   | — |   |
| Selling, general, and administrative  expenses                 |       | 20,294                                                                      |       | 14,843 |   | 12,834 |   | 11,925 |   | 10,455 |   |
| Goodwill impairment loss                                       |       | 212                                                                         |       | — |   | — |   | — |   | — |   |
| Settlement costs of disputed commissions                       |       | —                                                                      |       | 71 |   | 643 |   | 600 |   |   |   |
| Total operating expenses                                       |       | 24,499                                                                      |       | 16,155 |   | 13,477 |   | 12,525 |   | 10,455 |   |
| Operating earnings                                             |       | 6,529                                                                       |       | 4,380 |   | 6,418 |   | 7,356 |   | 6,211 |   |
| Other income (expense):                                        |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Other, net                                                     |       | —                                                                      |       | — |   | — |   | 181 |   | 536 |   |
| Interest Income                                                |       | 420                                                                         |       | 104 |   | 23 |   | 75 |   | 74 |   |
| Interest expense                                               |       | —                                                                      |       | — |   | — |   | (351 | ) | (938 | ) |
| Other income (expense), net                                    |       | 420                                                                         |       | 104 |   | 23 |   | (95 | ) | (328 | ) |
| Earnings before income taxes                                   |       | 6,949                                                                       |       | 4,484 |   | 6,441 |   | 7,261 |   | 5,883 |   |
| Income tax expense (benefit) (a)                               |       | 2,248                                                                       |       | 1,783 |   | 1,875 |   | (6,404 | ) | (3,153 | ) |
| Net earnings                                                   |       | $                                                                           | 4,701      |   | $ | 2,701 |   | $ | 4,566 |   | $ | 13,665 |   | $ | 9,036 |   |
| Net earnings per common share:                                 |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                          |       | $                                                                           | 0.30       |   | $ | 0.17 |   | $ | 0.29 |   | $ | 0.89 |   | $ | 0.59 |   |
| Diluted                                                        |       | $                                                                           | 0.30       |   | $ | 0.17 |   | $ | 0.29 |   | $ | 0.87 |   | $ | 0.59 |   |
| Weighted average common shares outstanding:                    |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                          |       | 15,751                                                                      |       | 15,738 |   | 15,613 |   | 15,409 |   | 15,080 |   |
| Diluted                                                        |       | 15,784                                                                      |       | 15,759 |   | 15,658 |   | 15,648 |   | 15,080 |   |

 

Note (a): Reflects the reductions of thevaluation allowance against certain components of deferred tax assets in 2002and 2001.

 
| ** **                          | ** ** | **DECEMBER 31,**   | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                          | ** ** | **(IN THOUSANDS)** | ** ** |
| BALANCE SHEET DATA:                 |       |                    |       |   |   |   |   |   |   |   |   |
| Working Capital                     |       | $                       | 24,016     |   | $ | 14,243 |   | $ | 11,918 |   | $ | 5,971 |   | $ | (1,342 | ) |
| Total Assets                        |       | 32,234                  |       | 23,473 |   | 26,413 |   | 20,536 |   | 9,294 |   |
| Long-term debt                      |       | —                  |       | — |   | — |   | — |   | — |   |
| Other long-term Liabilities         |       | —                  |       | — |   | — |   | 191 |   | 1,596 |   |
| Stockholders’ equity (deficit) |       | 26,873                  |       | 21,713 |   | 19,012 |   | 13,480 |   | (678 | ) |
|                                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

12

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**ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

** **

Management’s Discussion and Analysisshould be read in conjunction with the Company’s consolidated financialstatements and the notes thereto set forth in this Form 10-K commencing onpage F-1.

 

**RESULTS OF OPERATIONS**

** **

**YEAR ENDED DECEMBER 31, 2005 COMPARED TOYEAR ENDED DECEMBER 31, 2004**

** **

Our financial results are significantlyimpacted by key executive compensation, the development of the Modern Amusementbusiness, and by the retail sales of our Mossimo branded products under thelicensing and design services agreement with Target, which is exclusive to theUnited States.

 

*Revenues*

* *

Under the Target Agreement, we earn feesbased on percentage of Target stores net sales of Mossimo branded products. Thepercentage we earn varies according to the volume of sales. The contract yearfor Target sales was from February 1st to January 31st. We earn 4% onthe first $100 million of sales, 21¤4% on$100 million to $500 million of sales, and 1% on sales above $500 million eachyear. As a result, our revenues from license royalties and design service feesare highest at the beginning of each contract year and decrease throughout eachyear as Target reaches the specific retail thresholds. Therefore, the amount ofthe royalty revenue received by us in any quarter is dependent not only onretail sales of branded products in such quarter, but also the cumulative levelof retail sales, and the resulting attainment of royalty rate reductions in anypreceding quarters in the same year.

 

Revenues from Target were 69% and 79% oftotal revenues in 2005 and 2004, respectively. The change in 2005 was primarilydue to the larger contribution to total revenues of Modern Amusement. ModernAmusement generated revenues of $6.73 million in 2005 compared to $1.82 millionin 2004. Total revenue in 2005 increased by $10.5 million, or 51.1% from 2004.The remaining increase was due to growth of the Target business which increasedroyalty income from Target 33% from 2004. The increase in Target revenue wasprimarily due to increased volume of consumer purchasesof Mossimo branded products in 2005 at Target stores. Net sales of Mossimo branded products at Target stores increasedby 50% to $1.3 billion in 2005 from $868 billion in 2004.

 

*Cost of product sales*

* *

Cost of sales in 2005 resulted entirelyfrom Modern Amusement product sales. Cost of sales approximated 59% of sales ascompared to 68% in 2004. We experienced a higher profit margin from 2004 due toa greater brand awareness which resulted in better buying and a proportionalitysmaller amount of off price sales compared to regular priced sales. Cost ofsales includes all costs and expenses incurred prior to the receipt of finishedgoods at the Company’s distribution facilities. These costs include, but arenot limited to, product cost, inbound freight charges, purchasing and receivingcosts, inspection costs, insurance, duty, and brokers’ fees.

 

*Selling, general and administrativeexpenses*

* *

Selling, general and administrative expenses(SG&A) for both the Mossimo segment and the Modern Amusement segmentincreased approximately $5.66 million or 38% from $14.8 million in 2004 to$20.3 million in 2005.

 

Operational expenses for the Mossimosegment, as a percent of revenues from royalties and design service fees,increased to 67% for 2005 compared to 64% for 2004. Selling, general andadministrative expenses (SG&A) for the Mossimo segment increased byapproximately $4.27 million or 26% from $12.0 million in 2004 compared to$16.3 million in 2005, principally due to: (i) increases of accruedexecutive officer bonuses of $2.73 million (Executive bonuses were increased to$3.34 million for 2005 from $607,000 for 2004 consistent with the

 

13

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Company’s comparative performance.) Thesebonuses which are determined at the discretion of the Compensation Committee,in accordance with a performance criteria outlined in respective bonus plans,and are subject to a maximum annual amount based on a percent of Target licenseroyalty fees in excess of the minimum annual fee, are estimated and accrued ona quarterly basis, with a final determination made by the CompensationCommittee at the end of each year. In the fourth quarter, management and thecompensation committee concluded that the Company achieved its performancetargets previously established in the bonus plan, and accordingly, approvedbonuses of approximately $3.34 million for 2005. The bonuses were accruedratably throughout the year as Target license royalties were projected.Exclusive of the bonus accruals operational expenses would have been 53% ofroyalty and design fees in 2005 compared to 61% in 2004, (ii) commissionsdue to a third party who assisted the Company in connection with entering intothe initial agreement with Target increased by $610,000 to $3.23 million in2005 compared to $2.62 million for 2004, the increase was due to the increasedrevenue generated from Target in 2005, and (iii) $2.18 million increase incosts incurred for legal and financial advisor expenses for the Company and itsspecial committee associated with the review and consideration of thetransaction proposed by Mossimo Giannulli for the acquisition of all of thecompanies remaining outstanding shares and pending litigation relating to theproposal. The increases in SG&A were offset primarily by decreases innon-executive officer salaries of $497,000 and travel expense of $486,000 aswell as some operational improvements.

 

Selling, general and administrative expensesfor the Modern Amusement segment for 2005 were $3.98 million compared to $2.80million for the period of January 16, 2004 to December 31, 2004. Theincrease was primarily due to: (i) commissions of $257,000,(ii) sample costs of $199,000, (iii) outsourcing of$190,000,(iv) advertising and promotion of $248,000, (v) bad debts of$88,000,  and (vi) depreciation andamortization of $141,000. These increases were associated with the growth ofthe Modern Amusement brand.

 

The Modern Amusement segment is tested forgoodwill impairment on an annual basis at the end of the fourth quarter. Due tothe expected continuing investment in the Modern Amusement brand, the cash flowfrom this reporting segment is expected to be negative until 2008. InDecember 2005, a goodwill impairment loss of $212,000 was recognized inthe Modern Amusement reporting segment. The fair value of that reportingsegment was estimated using the expected present value of future cash flows.

 

Provision for income taxes increased from2004 to 2005 by $465,000 due to an increase in income. The 2005 and 2004provision for income taxes is comprised of a deferred provision of $1.7 millionand $1.2 million, respectively, and a current provision of $509,000 and$612,000, respectively. The effective rate decreased to 32.3% in 2005 comparedto 39.8% in 2004, the decrease in the rate was due to the reduction of thevaluation allowance. As of December 31, 2005, the Company hasapproximately $10.2 million and $8.2 million of federal and state income tax netoperating loss carry-forwards, respectively, available to offset future taxableincome, which expires in various years through 2022.

 

**YEAR ENDED DECEMBER 31, 2004 COMPARED TOYEAR ENDED DECEMBER 31, 2003**

** **

Revenues from Target were 79% and 88% oftotal revenues in 2004 and 2003, respectively. The change in 2004 was primarilydue to the contribution to revenues of Modern Amusement, and the sale of ourMossimo branded products in Canada under a licensing and design servicesagreement with Hudson’s Bay Company for distribution through its Zellers storesexclusively in Canada. Total revenues for 2004 were $20.5 million compared to$19.9 million in 2003. The increase was primarily due to revenues of$1.82 million generated from Modern Amusement. Total revenue in 2004increased by $0.6 million, or 3% from 2003, and revenue from Target decreased7% from 2003. The decrease in Target revenue was primarily due to reducedconsumer purchases of Mossimo branded products in 2004 at Target stores.

 

Cost of sales in 2004 resulted entirelyfrom Modern Amusement product sales. Cost of sales approximated 68% of sales.We experienced a low profit margin due to markdowns as the Company attempted topenetrate the wholesale distribution channel. Cost of sales included all costsand expenses incurred prior to the receipt of finished goods at the Company’sdistribution facilities. These costs include, but are not limited to, productcost, inbound freight charges, purchasing and receiving costs, inspectioncosts, insurance, duty, and brokers’ fees.

 

14

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The major components of selling, generaland administrative (SG&A)****expenses werepayroll, executive bonuses, commissions payable to a third party in connectionwith the Target agreement, and expenses incurred in connection with designrelated and business development activities such as travel, samples and artworkpurchases, and free-lance artists, as well as facilities, legal, accounting,and insurance expenses. Our SG&A increased approximately $2.0 million or16% from 2003 to 2004, principally due to the acquisition of Modern Amusementin January of 2004 and an increase in travel expense of $519,000 from 2003primarily attributed to developing and marketing the Modern Amusement business.Selling, general and administrative expenses for the Modern Amusement segmentfor 2004 were $2.8 million. Although overall SG&A increased in 2004,executive bonuses decreased by $1.25 million in 2004 from 2003. Executivebonuses were reduced consistent with the Company’s comparative performance.These bonuses which are determined at the discretion of the CompensationCommittee, in accordance with a performance criteria outlined in respectivebonus plans, and are subject to a maximum annual amount based on a percent ofTarget license royalty fees in excess of the minimum annual fee, are estimatedand accrued on a quarterly basis, with a final determination made by the Boardof Directors at the end of each year. In the fourth quarter of 2004, managementand the Compensation Committee concluded that the Company was not going toachieve its performance targets previously established in the bonus plan, andaccordingly, accrued bonuses of approximately $1.13 million were reversed.

 

Provision for income taxes decreased from2003 to 2004 by $92,000 due to a decrease in income. The 2004 and 2003provision for income taxes are comprised of a deferred provision of $1.2million and $1.1 million and a current provision of $612,000 and $766,000,respectively. The effective rate increased to 39.8% in 2004 compared to 29.1%in 2003. The 2003 tax effective tax rate included the benefit of foreign taxcredits and alternative minimum tax credits that had previously been fullyreserved.

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

Our sources of liquidity and capitalresources as of December 31, 2005 consisted of $19.7 million of cash andcash equivalents, and $0.7 million of short-term restricted cash, as well aspotential future cash flows from operations primarily resulting from the Targetagreement. As of December 31, 2005 we had positive working capital ofapproximately $24.0 million compared to $14.3 million at December 31,2004. The increase in working capital is due to increased earnings andassociated collections and revenues from Target in the twelve months endedDecember 31, 2005. The increase in cash of $14.8 million was principallydue to the sale of $4.8 million in investment securities and cash flow fromoperating activities of approximately $10.0 million.

 

Cash provided by operating activitiesincludes primarily $4.7 million of net earnings, deferred income taxes of $1.5million, accrued commissions of $130,000, and accrued bonuses of $3.3 million,primarily offset by a change in accounts receivable of $1.5 million. The changewas primarily due to the increase in accrued revenue from Target, whichincreased accrued commissions payable to a third party and accrued bonuses.

 

Net cash provided by investing activitieswas primarily generated from the sale of securities of $4.8 million, classifiedas available-for-sale. Capital expenditures for the twelve months endedDecember 31, 2005 were $181,000.

 

Net cash used by financing activities wasprimarily generated from obtaining additional certificates of deposits in theamount of $313,000 used to secure letters of credit with foreign supplies forfinished goods for Modern Amusement. Net cash provided by financing activitieswas generated from the exercise of stock options in the amount of $418,000.

 

The Company established a revolving line ofcredit with a bank in the amount of $300,000 in February 2004. The line ofcredit was established to open letters of credit with foreign suppliers forfinished goods for Modern Amusement. The line of credit was increased to$400,000 in June of 2004, and subsequently increased to $500,000 inJanuary of 2005 and increased again to $900,000 in May of 2005. Theline of credit is secured by three certificates of deposit totalingapproximately $726,000, which is recorded as restricted cash in our consolidatedbalance sheet. There is no expiration date for this line, and there are nocovenants. There is a fee charged per letter of credit opened and closed. Openletters of credit at December 31, 2005 were approximately $875,000.

 

15

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We have a commission obligation under anagreement with a third party for 15% of fees received from Target for theduration of the Target Agreement through January 2008, and for subsequentextensions if they are exercised by Target. Fees incurred under this obligationwere $3.2 million in 2005 and $2.6 million in 2004.

 

In January 2004 we completed theacquisition of Modern Amusement and we amended our facility lease increasingour space from approximately 6,000 square feet to approximately 9,000 squarefeet, and extending the lease term thru July 2009. The expanded facilityis intended to also accommodate Modern Amusement. The future annual obligationunder the amended lease varies each year, starts at approximately $290,000 in2004, increasing to $334,000 in 2008. The purchase price of the ModernAmusement assets of $375,000 was funded with existing cash. The expected cashrequirements in 2006 for Modern Amusement are approximately $600,000, and iscomprised mainly of selling, general, and administrative expenses. Most of thisworking capital will be satisfied through operating cash flows, and we do notexpect to incur any significant capital expenditures.

 

The Company is approached from time totime by parties seeking to sell their businesses, brands and relatedtrademarks. Should an established viable business and marketable brand becomeavailable on favorable terms, the Company may be interested in pursuing such anacquisition and may elect to fund such acquisition, in whole or in part, withavailable cash as well as different financing alternatives, including theissuance of debt instruments and / or equity securities.

 

We believe that the Company’s sources ofliquidity and capital will be sufficient to meet our expected operational and capitalneeds for the next 12 months and likely will be sufficient to meet ouroperating needs for the foreseeable future and at least throughJanuary 2008, which is the most recently extended contract term withTarget.

 

The following table provides informationrelated to our contractual cash obligations under various financial andcommercial agreements (amounts in thousands):

 
| ** **                          | ** ** | **Payments Due by Period(s):** | ** ** | ** **                     | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|
| **Contractual Obligations**    | ** ** | **Less than 1 year**           | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** | **Total** | ** ** |
| Operating Leases(a)                 |       | $                                             | 315        |                           | $          | 657 |   | $ | 196 |   | $ | — |   | $ | 1,168 |   |
| Other Long-Term Obligations(b), (c) |       | 2,865                                         |       | 2,535                          |       | — |   | — |   | 5,400 |   |
| Total Contractual Cash Obligations  |       | $                                             | 3,180      |                           | $          | 3,192 |   | $ | 196 |   | $ | — |   | $ | 6,568 |   |

 

----

Notes:

 

(a)    These amounts represent future minimum non-cancelable leasepayments under an operating lease agreement through July 2009 for ouroffice and design studio facilities in Santa Monica, California including thefacilities for Modern Amusement.

 

(b)    These amounts include $900,000 per year under our employmentagreement with Mossimo Giannulli, our Chairman and Co-Chief Executive Officerthrough January 2008, that provides for a $900,000 annual salary, plus abonus which is determined at the discretion of the Board of Directors, inaccordance with a performance criteria outlined in the Amended and RestatedMossimo Giannulli Bonus Plan, and is subject to a maximum annual amount basedon a percent of Target license royalty fees in excess of the minimum annual feeunder the Target Agreement. The future bonus amounts, if any, have beenexcluded because they are at the discretion of the Board of Directors and cannot be determined.

 

16

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These amounts also include $900,000 per year, commencingAugust 1, 2005, under our employment agreement with Edwin Lewis, ourCo-Chief Executive Officer through August 1, 2006, that provides for a$900,000 annual salary, plus a bonus which is determined at the discretion ofthe Board of Directors, in accordance with a performance criteria outlined inthe Amended and Restated Edwin Lewis bonus plan, and is subject to a maximumannual amount based on a percent of Target license royalty fees in excess ofthe minimum annual fee under the Target Agreement. The future bonus amounts, ifany, have been excluded because they are at the discretion of the Board ofDirectors and can not be determined.

 

(c)    We have a commission obligation under an agreement with a thirdparty for 15% of fees received from Target for the duration of the Targetagreement through January 2008, and for subsequent extensions if they areexercised by Target. The future commissions are based on the minimum royaltyand design fee payment from target of approximately $9.6 million throughJanuary 2008.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

** **

**REVENUE RECOGNITION**

** **

Revenue from license royalties and designservice fees are recognized in accordance with the terms of the underlyingagreements, which is generally after the design services are performed, and asthe licensee achieves sales of the Company’s products. Revenue from licenseroyalties and design service fees are generally collected on a quarterly basis,and they range from one percent to five percent of sales as defined in therespective agreements. During the periods presented herein, a substantialamount of the Company’s revenue from license royalties and design fees weregenerated under the Target Agreement under a declining rate as the yearprogresses and Target achieves certain levels of retail sales. Accordingly, theCompany’s revenues from Target decrease as the year progresses. The decliningrate is reset each contract year beginning on February 1. Revenuerecognized in the first and second quarters of the Company’s calendar year inconnection with the Target Agreement is significantly higher than in the thirdand fourth quarters of the Company’s calendar year due to the declining ratesin the Target Agreement. If Target sales of Mossimo branded products increasein the future, as a result of opening new stores or otherwise, the minimum rateof fees may apply earlier in the Company’s future calendar years, shiftingadditional revenue recognition to the first half of the year, and potentiallyreducing the revenue recognition in the second half of the year.

 

Modern Amusement extends credit tocustomers in the normal course of business, subject to established creditlimits. Accounts receivable, net, in the consolidated balance sheets, consistsof amounts due from customers net of allowance for doubtful accounts. Theallowance for doubtful accounts is determined by reviewing accounts receivableaging and evaluating individual customer receivables, considering customers’financial condition, credit history and current economic conditions.

 

Modern Amusement recognizes wholesaleoperations revenue from the sale of merchandise when products are shipped, FOBModern Amusement’s distribution facilities, and the customer takes title andassumes risk of loss, collection is reasonably assured, pervasive evidence ofan arrangement exists, and the sales price is fixed or determinable.

 

**INVENTORY**

** **

We maintain inventories for the ModernAmusement segment of our business. Inventories are valued at the lower of cost(first-in, first-out) or market. The Company continually evaluates itsinventories by assessing slow moving current product as well as prior seasons’inventory. Market value of non-current inventory is estimated based on theimpact of market trends, an evaluation of economic conditions and the value ofcurrent orders relating to the future sales of this type of inventory.

 

To the extent that management’s estimatesof price reductions necessary to rapidly sell inventory differ from actualresults, additional price reductions may be required that could reduce ourgross margin, operating income and the carrying value of inventories. Oursuccess is largely dependent upon our ability to anticipate the changingfashion tastes of our customers and to respond to those changing tastes in atimely manner. If we fail to

 

17

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anticipate, identify or reactappropriately to changing styles, trends or brand preferences of our customers,we may experience lower sales, excess inventories and more frequent andextensive markdowns, which would adversely affect our operating results.

 

**IMPAIRMENT OF LONG-LIVED ASSETS**

** **

Goodwill represents the excess of costsover fair value of assets of businesses acquired. Goodwill and intangibleassets acquired in a purchase business combination and determined to have anindefinite useful life are not amortized, but instead tested for impairment atleast annually in accordance with the provisions of FASB StatementNo. 142, Goodwill and Other Intangible Assets. Intangible assets withestimable useful lives are amortized over their respective estimated usefullives to their estimated residual values, and reviewed for impairment inaccordance with FASB Statement No. 144, Accounting for Impairment orDisposal of Long-Lived Assets.

 

**DEFERRED TAXES**

** **

The Company accounts for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109).Deferred taxes primarily result from the recognition of the income tax benefitto be derived from the Company’s net operating loss carry forward for incometaxes purposes. As of December 31, 2005, the Company has approximately$10.2 million, and $8.2 million of federal and state income tax net operatingloss carry-forwards, respectively, available to offset future taxable income,which expires in various years through 2022. In accordance with the provisionsof SFAS No. 109 the Company records a valuation allowance to reducedeferred tax assets to the amount expected to “more likely than not” berealized in future tax returns. The Company monitors its profitability andconsiders the credit and collections risk of future fees under its agreements,particularly in connection with the Target Agreement. Should we determine thatwe would not be able to realize all or part of our net deferred tax assets inthe future, adjustments to the valuation allowance for deferred tax assets maybe required.

 

In addition to the Company’s taxableincome being subject to federal, state and local income taxes, the Company maybe classified as a “personal holding company” from time to time. Personalholding company status results from more than 50 percent of the value ofoutstanding stock being owned directly or indirectly by five or fewerindividuals, and more than 60 percent of the Company’s income, as defined,being derived from royalties. Personal holding companies are subject to anadditional federal tax at a 15 percent tax rate on undistributed after taxearnings.

 

Over 50 percent of the value of theCompany’s outstanding stock is owned by one stockholder. In 2005, 2004 and2003, less than 60 percent of the Company’s income as defined was derived fromlicense royalties, accordingly the Company is not classified as a personalholding company and is not subject to the personal holding company tax. TheCompany intends to continue to take appropriate measures to avoid beingclassified as a personal holding company in future years. However, there can beno assurance that the Company will be successful in its efforts to avoidclassification as a personal holding company in the future.

 

**CONTINGENCIES AND LITIGATION**

** **

Management evaluates contingentliabilities including pending or threatened litigation in accordance with SFASNo. 5, and records accruals when the outcome of these matters is deemedprobable and the amount of the liability is subject to reasonable estimation.Management makes these assessments based on the facts and circumstancesavailable at the time, and in some instances based in part on the advice ofoutside counsel.

 

**INFLATION**

** **

The Company does not believe that therelatively moderate rates of inflation experienced in the United States overthe last three years have had a significant effect on its operations. Since theCompany’s future revenues are based on a percentage of sales of licensedproducts by licensees, the Company does not anticipate that inflation will havea material impact on future operations.

 

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**EXCHANGE RATES**

** **

The Company receives United States dollarsfor all its revenue from license royalties and design service fees, other thanfrom its business in Canada, which began in 2003 and does not represent asubstantial amount of revenue at this time. During the last three fiscal years,exchange rate fluctuations have not had a material impact on the Company’soperating results. The Company does not engage in hedging activities withrespect to exchange rate risk.

 

**IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS**

** **

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections—a replacementof APB Opinion No. 20 and FASB Statement No. 3.” This statementapplies to all voluntary changes in accounting principle and changes requiredby an accounting pronouncement where no specific transition provisions areincluded. SFAS No. 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. Retrospective application is limited to the directeffects of the change; the indirect effects should be recognized in the periodof the change. This statement carries forward without change the guidancecontained in APB Opinion No. 20 for reporting the correction of an errorin previously issued financial statements and a change in accounting estimate.However, SFAS No. 154 redefines restatement as the revising ofpreviously issued financial statements to reflect the correction of an error.The provisions of SFAS No. 154 are effective for accounting changesand corrections of errors made in fiscal periods that begin afterDecember 15, 2005, although early adoption is permitted. The Company doesnot anticipate that the implementation of this standard will have a materialimpact on its financial condition and results of operations.

 

In December 2004, the FASB issuedSFAS No. 123R (revised 2004), “Share-Based Payment.”SFAS No. 123R addresses the accounting for share-based paymenttransactions in which a company receives employee services in exchange foreither equity instruments of the company or liabilities that are based on thefair value of the company’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123R eliminates theability to account for share-based compensation transactions using theintrinsic method that is currently used and requires that such transactions beaccounted for using a fair value-based method and recognized as expense in theconsolidated statement of earnings. SFAS No. 123R is effective for theCompany on January 1, 2006. Accordingly, the Company will adopt SFASNo. 123R in our first quarter of 2006. See Note 1 Summary of BusinessDescription and Significant Accounting Policies—Stock-Based Compensation forthe pro forma effects of how SFAS No. 123R would have affected results ofoperations in 2005, 2004 and 2003. We are currently assessing the impact thisprospective change in accounting guidance will have on our financial conditionand results of operations, but we believe that the impact will not be material.

 

In November 2004, the FASB issuedSFAS No. 151, “Inventory Costs, an amendment of Accounting ResearchBulletin No. 43, Chapter 4.” SFAS No. 151 requiresthat abnormal amounts of idle facility expense, freight, handling costs andwasted materials (spoilage) be recorded as current period charges and thatthe allocation of fixed production overhead to inventory be based on the normalcapacity of the production facilities. SFAS No. 151 is effective forthe Company on January 1, 2006. The Company does not believe that theadoption of SFAS No. 151 will have a material impact on itsconsolidated financial statements.

 

In November 2002, the FASB issuedFASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others”. This interpretation clarifies the requirements of aguarantor in accounting for and disclosing certain guarantees issued andoutstanding. The initial recognition and measurement provisions of this interpretationare applicable on a prospective basis to guarantees issued afterDecember 31, 2002. The Company licenses its trademarks, provides designservices and has approval rights for product design, marketing and advertisingmaterials under licensing and design service agreements which include certainprovisions for indemnifying the licensee. As an element of its standardcommercial terms, the Company includes an indemnification clause in itslicensing and design services agreements that indemnifies the licensee againstliability and damages arising from any claims, suits, damages, or costsrelating to the breach of any warranty, representation, term or condition madeor agreed to by

 

19

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its licensees involving the manufacture,packaging, distribution, promotion, sale, marketing, advertising or other useof the trademarks under license. We believe that our policies and practiceslimit our exposure related to the indemnification provisions of the license anddesign services agreements. For several reasons, including the lack of priorindemnification claims and the lack of monetary liability limit for certaininfringement cases under the license and design services agreements, we cannotdetermine the maximum amount of potential future payments, if any, related tosuch indemnification provisions.

 

**ITEM 7A—QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

** **

The Company makes temporary investments ofcash in liquid interest bearing accounts and marketable securities. The Companydoes not use interest rate swaps, futures contracts or options on futures, orother types of derivative financial instruments. The Company does not believethat future market risks arising from holdings of its financial instrumentswill have a material impact on its financial position or results of operations.

 

**ITEM 8—FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

** **

The financial statements required to befiled hereunder are set forth on pages F-1 through F-18 of this report.

 

**ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

** **

Not applicable.

 

**ITEM 9A—CONTROLS AND PROCEDURES**

** **

Based on their evaluation as ofDecember 31, 2005, our Co-Chief Executive Officers and Chief FinancialOfficer have concluded that our internal controls and disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Act of 1934, as amended) were effective to ensure that theinformation required to be disclosed by us in this annual report on Form 10-Kwas recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and instructions for Form 10-K.

 

Our management, including our Co-ChiefExecutive Officers and Chief Financial Officer, does not expect that ourinternal controls and disclosure controls and procedures will prevent allerrors and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute assurance that theobjectives of the control system are met. Further, the design of the controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

 

**CHANGES IN INTERNAL CONTROLS OVERFINANCIAL REPORTING**

** **

There are no changes in our internalcontrols over financial reporting during the quarter ended December 31,2005 that have materially affected, or are reasonably likely to materiallyaffect our internal controls over financial reporting.

 

**ITEM 9B—OTHER INFORMATION**

** **

None.

 

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**PART III**

**ITEM10—DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

**Board Of Directors**

*The following tables set forththe name and age of each director of the Company, the principal occupation ofeach during the past five years, and the year each began serving as a directorof the Company:*
| **Name**             | ** ** | **Principal Occupation During Last Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Age** |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|
| MOSSIMO G. GIANNULLI |       | Mr. Giannulli founded  the Company’s business in 1987 and has been Chairman of the Board since the  Company’s formation in 1988. Mr. Giannulli has served as the Company’s  Chief Executive Officer from March 28, 2000 to 2004 when he became  Co-Chief Executive Officer. Mr. Giannulli was the Company’s President  from March 28, 2000 to March 20, 2002, and from the Company’s  formation in 1988 to March 4, 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 42      |
| EDWIN H. LEWIS       |       | Mr. Lewis has served  as a director of the Company and as the Company’s President and Vice Chairman  since March 20, 2002. In 2004, Mr. Lewis was appointed Co-Chief  Executive Officer. Previously, Mr. Lewis served as the Company’s Chief  Executive Officer and a director from November 30, 1998 to  March 28, 2000. Mr. Lewis worked for Tommy Hilfiger, Inc. from  December 1991 through February 1996 where he held the positions of  Vice-Chairman and Chief Executive Officer. Before joining Tommy Hilfiger,  Mr. Lewis worked for Polo Ralph Lauren from 1973 through December 1991  where he held various positions including Executive Vice President and  President of Ralph Lauren Womenswear.                                                                                                                                                            |       | 55      |
| BRYANT R. RILEY      |       | Mr. Riley has served as  director of the Company since November 2005. Mr. Riley has been the chief  executive officer and chairman of the board of B. Riley and Co., Inc., an  investment banking firm since 1996, and the chief executive officer and  chairman of the board of Riley Investment Management, a registered investment  management company since 2000. Mr. Riley is also a director of Alliance  Semiconductor, Inc., Aldila, Inc. and Celeritek, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 39      |
| ROBERT MARTINI       |       | Mr. Martini has served as  a director of the Company since October, 1996. Mr. Martini served as the  Chairman of the Board of Directors of AmerisourceBergen Corporation (NYSE:ABC)  from August 2001 to March 2004. Prior to August 2001, Mr. Martini was a  40-year veteran of Bergen Brunswig Corporation, where he held several  management positions including Chairman of the Board of Directors and served  as interim Chief Executive Officer from 1999 to August 2001 and Chief  Executive Officer from 1990 to 1997.                                                                                                                                                                                                                                                                                                                                                                                         |       | 73      |
| WILLIAM R. HALFORD   |       | Mr. Halford has served as  a director of the Company since April 2000. Mr. Halford is the President and  Chief Executive Officer of Bixby Land Company. From January 2001 to January  2006, Mr. Halford served as President of Office Properties, a division of The  Irvine Company, which develops, leases and operates a 22 million square foot  office and flex tech real estate portfolio. From July 1996 to January 2001,  Mr. Halford served as President of the Irvine Office Company, a division of  The Irvine Company, which developed, leased and operated a seven million  square foot office real estate portfolio. From August 1995 to June 1996, Mr.  Halford served as Vice President General Manager of The Irvine Company.  Before joining The Irvine Company, Mr. Halford was Vice President of Leasing  and Marketing for PM Realty Group’s Western Division from January 1994 to  July 1995. |       | 45      |

 

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**Independenceof Directors**

** **

*Our Board of Directors hasdetermined that the majority of our Board is comprised of “independentdirectors” within the meaning of applicable Nasdaq listing standards. Ourindependent directors are the following: William R. Halford, RobertMartini and Bryant R. Riley. In connection with the proposed merger of theCompany with a subsidiary of Iconix Brand Group, Inc., or an alternative strategictransaction, the Company has agreed to pay B. Riley & Co., Inc. a fee of$600,000 for investment banking services. Mr. Riley is the chairman and chief executive officer of B. Riley &Co., Inc. and would not be considered an “independent director” under theapplicable NASDAQ standards upon payment of the transaction fee.*

* *

**Committeesand Meetings of the Board of Directors**

** **

*The Board of Directors heldseven meetings during 2005. The Board of Directors has a standing AuditCommittee, Compensation Committee, and Nominating and Corporate GovernanceCommittee. Each director attended at least 75% of the aggregate of the totalnumber of meetings of our Board of Directors held during 2005 and of the totalnumber of meetings held during 2005 by all committees of our Board of Directorson which that director served.*

 

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***Audit Committee.***   The Audit Committee is currently comprised of WilliamR. Halford (Chairman), Robert Martini and Bryant R. Riley. The Audit Committeeprovides oversight of our financial, accounting and reporting processes, oursystem of internal accounting and financial controls and our compliance withrelated legal and regulatory requirements, the appointment, engagement,termination and oversight of our independent auditors, including conducting areview of their independence, reviewing and approving the planned scope of ourannual audit, overseeing the independent auditor’s audit work, reviewing andpre-approving any audit and non-audit services that may be performed by them,reviewing with management and our independent auditors the adequacy of ourinternal financial controls, and reviewing our critical accounting policies andthe application of accounting principles. Each member of the Audit Committeemeets the independence criteria prescribed by applicable law and the rules ofthe Securities and Exchange Commission (the “SEC”) for audit committeemembership and is an “independent director” within the meaning of applicableNasdaq listing standards. Each Audit Committee member meets the Nasdaq’sfinancial knowledge requirements, and the Board of Directors has furtherdetermined that Bryant R. Riley (i) is an “audit committee financialexpert” as such term is defined in Item 401(h) of Regulation S-K promulgated bythe SEC and (ii) also meets the Nasdaq’s professional experience requirements.The Audit Committee operates pursuant to a written charter, which complies withthe applicable provisions of the Sarbanes-Oxley Act of 2002 and related rulesof the SEC and the Nasdaq. The Committee met five times in 2005.

*** ***

***Compensation Committee.***   The Compensation Committee is currently comprised ofRobert Martini (Chairman) and Bryant R. Riley. The Compensation Committee isresponsible for recommending to the Board of Directors the base salary andincentive compensation for all executive officers, taking final action withrespect to base salary and incentive compensation for certain other officersand key employees and reviewing the Company’s compensation policies. TheCompensation Committee also administers the Company’s 1995 Stock Plan, the 1995Non-Employee Stock Option Plan, 2005 Stock Option Plan, the Amended andRestated Edwin Lewis Bonus Plan, and the Amended and Restated Mossimo GiannulliBonus Plan. Each member of the Compensation Committee is independent within themeaning of applicable Nasdaq listing standards. The Compensation Committee met threetimes in 2005.

*** ***

***Nominating and Corporate Governance Committee.***   The Nominating and Corporate Governance Committee iscurrently comprised of Bryant R. Riley (Chairman) and Robert Martini. TheNominating and Corporate Governance Committee is responsible for the selectionof potential candidates for director and the recommendation of candidates tothe Board of Directors. It also makes recommendations to the Board of Directorsconcerning the structure and membership of the other committees and othercorporate governance matters. Each member of the Committee is an independentdirector within the meaning of the applicable Nasdaq listing standards. TheCommittee met once in 2005.

*** ***

**Directors’ Compensation**

** **

Ourindependent directors receive $20,000 annually and $1,500 for each BoardMeeting attended in person ($750 for attendance by telephone conference) ascompensation for serving on the Board of Directors. Independent directors whoserve on committees also receive $1,500 for each meeting attended in person($750 for attendance by telephone conference). The chairman of each committeereceives an additional $1,500 for each committee meeting chaired. All directorsare reimbursed for their reasonable expenses incurred in attending meetings.Our independent directors participate in the Company’s 1995 Non-EmployeeDirectors Stock Option Plan (the “Directors Plan”), which provides forautomatic grants of options to each independent employee director at the thencurrent market price for the Company’s common stock. Under the Directors Plan,each independent director is granted options for 30,000 shares upon initialappointment or election to the Board and receives an annual grant of optionsfor 3,000 shares upon the date of each annual meeting of the Company’sstockholders at which such director is re-elected or continues as a director.The initial options for 30,000 shares vest 50% per year, commencing on thefirst anniversary of the date of grant, and the options for 3,000 shares fullyvest on the first anniversary of the date of grant. In 2005 the Company adoptedand the shareholders approved the Company’s 2005 stock option plan (“2005 Plan”)to replace the Directors Plan and the Company’s 1995 Employee Stock OptionPlan. It is anticipated that directors will receive the same number of optionsper year under the 2005 Plan as they received under the Directors Plan. In2005, Robert Martini, William Halford and Bret White (a formerdirector) each received $25,000 in additional compensation for their service ona special committee formed to review Mossimo Giannulli’s offer to acquire theCompany’s common stock. See “Item 3 — Legal Proceedings”.

 

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**Compliancewith Reporting Requirements of Section 16 of the Exchange Act**

** **

UnderSection 16(a) of the Securities Exchange Act of 1934, the Company’s directors,executive officers and any persons holding ten percent or more of the Company’scommon stock are required to report their ownership of common stock and anychanges in that ownership to the SEC and to furnish the Company with copies ofsuch reports. Specific due dates for these reports have been established andthe Company is required to report in this proxy statement any failure to fileon a timely basis by such persons. Based solely upon a review of copies ofreports filed with the SEC during fiscal 2005, all persons subject to thereporting requirements of Section 16(a) filed all required reports on a timelybasis, except for one late filing by each of William R. Halford, RobertMartini and Bryan R. Riley for options granted to them under the DirectorsPlan.

 

**CompensationCommittee Interlocks and Insider Participation**

** **

Noneof the directors, other than those identified above, served as members of theCompensation Committee during the last completed fiscal year. No member of thatcommittee was an officer or employee of the Company or any of its subsidiariesduring the year. None of the executive officers of the Company have served onthe board of directors or on the compensation committee of any other entity,any of whose officers served either on the Board of Directors or on theCompensation Committee of the Company.

 

**Codeof Business Conduct**

** **

Wehave adopted a Code of Business Conduct applicable to all officers, directorsand employees as required by Nasdaq listing standards. Our Code of BusinessConduct also has specific provisions applicable to our Co-Chief ExecutiveOfficers, Chief Financial Officer, and certain other finance executives, whichis a “code of ethics” as defined by applicable rules of the SEC. This Code ofBusiness Conduct includes an enforcement mechanism, and any waivers for directorsor officers must be approved by the Board and disclosed in a Form 8-K.

 

**ExecutiveOfficers**

** **

Thefollowing table sets forth certain information concerning the executiveofficers of the Company:

 
| **NAME**              | ** ** | **AGE** | ** ** | **POSITION**                                                           |
|-----------------------|------------|---------|------------|------------------------------------------------------------------------|
| Mossimo G.  Giannulli |       | 42      |       | Chairman of  the Board and Co-Chief Executive Officer                  |
| Edwin H.  Lewis       |       | 55      |       | Vice-Chairman  of the Board, President, and Co-Chief Executive Officer |
| Vicken J.  Festekjian |       | 34      |       | Chief  Financial Officer                                               |

 

Backgroundinformation on Messrs. Giannulli and Lewis is set forth under “Board ofDirectors” above.

 

Mr.Festekjian joined the Company as its Chief Financial Officer inNovember 2004. Prior to joining the Company, Festekjian was with theaccounting firm of Moss Adams. Prior to joining Moss Adams in 1999Mr. Festekjian was employed with Aginian Accounting Corp., a CPA firm.Mr. Festekjian is a CPA and holds a Bachelor of Business (Accounting)degree from California State University Northridge.

 

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**ITEM 11—EXECUTIVE COMPENSATION**

** **

Thefollowing table sets forth certain information regarding the compensation foreach of the last three years of our: (i) Chief Executive Officer of theCompany, and (ii) the Company’s other executive officer. This group is referredto in this report as the Named Executive Officers.

 
| ** **                                     | ** ** | ** ** | ** ** | ** **                      | ** ** | ** **                     | ** ** | **Long Term Compensation** | ** ** |
|------------------------------------------------|------------|------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation(1)** | ** ** | **Securities Underlying** | ** ** |
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary($)**                   | ** ** | **Bonus($)**                   | ** ** | **Options(#)**                       | ** ** |
| Mossimo G. Giannulli                           |       | 2005       |       | 900,000                         |       | 1,670,000                      |       |                                 |       |
| Chairman of the Board                          |       | 2004       |       | 900,000                         |       | 455,309                        |       |                                 |       |
| and Co-Chief Executive Officer                 |       | 2003       |       | 900,000                         |       | 2,639,000                      |       | 100,000                              | (2)        |
|                                           |       |       |       |                            |       |                           |       |                                 |       |
| Edwin H. Lewis                                 |       | 2005       |       | 900,000                         |       | 1,670,000                      |       |                                 |       |
| Vice-Chairman of the Board,                    |       | 2004       |       | 900,000                         |       | 151,822                        |       |                                 |       |
| President and Co-Chief Executive Officer       |       | 2003       |       | 200,000                         |       | 662,000                        |       | 100,000                              | (2)        |
| Vicken J. Festekjian                           |       | 2005       |       | 150,000                         |       | 7,500                          |       |                                 |       |
| Chief Financial Officer                        |       | 2004       |       | 17,693                          | (3)        | 0                              |       | 20,000                               |       |

 

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(1)    Perquisites are excluded as theiraggregate value did not exceed the lesser of $50,000 or the 10% of total annualsalary and bonus for any Named Executive Officer.

 

(2)    These options were cancelled by theCompany in 2003.

 

(3)    Mr.Festekjian joined the Company in November 2004, and this represents salary paidfor the partial year.

 

**Aggregated OptionExercises In Last Fiscal Year And Year-End Option Value**

** **

Thefollowing table sets forth certain information with respect to exercisable andunexercisable options held by the Named Executive Officers as of December 31,2005.

 
| ** **           | ** ** | ** **           | ** ** | ** **   | ** ** | **Number Of Securities**           | ** ** | **Value Of Unexercised In-The**       | ** ** |
|----------------------|------------|----------------------|------------|--------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **Shares**           | ** ** | ** **   | ** ** | **Underlying Unexercised Options** | ** ** | **Money Options At Fiscal Year** | ** ** |
| ** **           | ** ** | **Acquired**         | ** ** | **Value**    | ** ** | **At Fiscal Year End**        | ** ** | **End(1)**                                           | ** ** |
| **Name**             | ** ** | **On Exercise** | ** ** | **Realized** | ** ** | **Exercisable**                              | ** ** | **Unexercisable**                                    | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Mossimo G. Giannulli |       | —               |       | —       |       | —                                       |       | —                                               |       | — |   | — |   |
| Edwin H. Lewis       |       | —               |       | —       |       | —                                       |       | —                                               |       | — |   | — |   |
| Vicken J. Festekjian |       | —               |       | —       |       | —                                       |       | 20,000                                               |       | — |   | $ | 40,600 |   |
|                      |            |                      |            |              |            |                                              |            |                                                      |            |  |  |  |  |  |

 

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(1) Based on the closing priceof the Company’s common stock as reported on the NASDAQ Stock Market on December31, 2005.

 

**GiannulliEmployment Agreement and Bonus Plan**

** **

In2001, the Company entered into an Employment Agreement with Mossimo G.Giannulli, the Company’s Chief Executive Officer and then President (the “EmploymentAgreement”), which was effective as of February 1, 2001. During the periodthe Company’s license agreement with Target Corporation (as amended to date,the “Target Agreement”) remained in effect, Mr. Giannulli’s annual base salarywas set at $900,000 and he was eligible to receive a bonus equal to 50% of theannual net royalty revenue above the minimum required net royalty payment underthe Target Agreement.

 

OnApril 25, 2002, the Company and Mr. Giannulli amended Mr. Giannulli’semployment agreement, effective February 1, 2002. Pursuant to this amendment,Mr. Giannulli continued to receive a base salary of $900,000 but was no longerentitled to the any bonus under the prior bonus provision contained in hisemployment agreement for any period beginning on or after February 1, 2002and Mr. Giannulli was instead entitled to participate in the Mossimo GiannulliBonus Plan (the “Bonus Plan”). The Bonus Plan was approved

 

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bythe Company’s Board of Directors and, on June 3, 2002, by the Company’s stockholdersat the Company’s 2002 Annual Meeting. The Bonus Plan, as adopted, was designedto provide Mr. Giannulli with bonus compensation for the accomplishment ofspecific pre-established financial performance objectives by the Company, asdetermined by the Compensation Committee of the Board of Directors (the “Committee”).The Bonus Plan was amended and restated (the “Amended and Restated Plan”). TheAmended and Restated Plan and was approved by the Board and the stockholders in2005. The Amended and Restated Plan is administered by the CompensationCommittee. Mr. Giannulli is eligible to earn an annual bonus (“AnnualBonus”) based on the achievement of certain performance objectives determinedby the Compensation Committee. The Annual Bonus may not exceed nineteen andthirty-three hundreds percent (19.33%) of the excess (if any) of: (i) theroyalties paid to the Company under Section 5.1 of the Target Agreement,which is attached as Exhibit 10.13 to this Amendment No. 1 to Mossimo’s AnnualReport on Form 10-K and incorporated herein by reference, for such contractyear, less (ii) $5,293,750.

 

IfMr. Giannulli’s employment with the Company is terminated for any reason otherthan death or disability prior to the end of a contract year, Mr. Giannulli’srights to an Annual Bonus under the Plan with respect to such contract year andsubsequent contract years will terminate. The Compensation Committee willdetermine whether all or a portion of Mr. Giannulli’s Annual Bonus under thePlan for the contract year in which his death or disability occurs will be paidif Mr. Giannulli’s employment has been terminated by reason of death ordisability. If the proposed merger of the Company with a subsidiary of IconixBrand Group, Inc. becomes effective, Mr. Giannulli’s employment agreement willbe terminated.

 

**LewisEmployment Agreement**

** **

OnAugust 1, 2004, Edwin H. Lewis and the Company entered into an employmentagreement. Under the terms of the agreement Mr. Lewis was appointed Co-ChiefExecutive Officer and will be paid an annual salary of $900,000. The agreementextends for twelve month periods unless either the Company or Mr. Lewis gives60 days written notice prior to the end of a contract year to the other thatthe contract will not be renewed. If the agreement is terminated without causeby the Company, the Company is required to pay Mr. Lewis an amount equal to hissalary in effect on the date of termination for the remaining contract year asif Mr. Lewis had remained in the employ of the Company.

 

**LewisBonus Plan**

** **

EdwinLewis is entitled to participate in the Edwin Lewis Bonus Plan (“Lewis Plan”). TheLewis Plan was approved by the Board of Directors and became effective as ofFebruary 1, 2002 and extends to January 31, 2007. The Lewis Plan, asadopted, was developed to provide Mr. Lewis with bonus compensation for theaccomplishment of specific pre-established financial performance objectives bythe Company as determined by the Compensation Committee. The Lewis Plan wasamended and restated (“Amended and Restated Plan”), and approved by the Boardand stockholders in 2005. The Amended and Restated Plan is administered by theCompensation Committee. Mr. Lewis is eligible to earn an annual bonusbased on the achievement of certain performance objectives determined by theCompensation Committee. The Amended and Restated Annual Bonus may not exceednineteen and thirty-three, which is attached as Exhibit 10.13 to this AmendmentNo. 1 to Mossimo’s Annual Reporton Form 10-K and incorporated herein by reference, hundrethspercent (19.33%) of the excess (if any) of: (i) royalties paid to the Company under Section 5.1 of the TargetAgreement, which is attached as Exhibit 10.13 to this Amendment No. 1 toMossimo’s AnnualReport on Form 10-K and incorporated herein by reference, for such contractyear, less (ii) $5,293,750.

 

26

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IfMr. Lewis’ employment with the Company is terminated for any reason other thandeath or disability prior to the end of a contract year, Mr. Lewis’ rights toan Annual Bonus under the Plan with respect to such contract year andsubsequent contract years will terminate. The Compensation Committee willdetermine whether all or a portion of Mr. Lewis’ Annual Bonus under the Planfor the contract year in which his death or disability occurs will be paid ifMr. Lewis’s employment has been terminated by reason of death or disability.

 

**ITEM 12—SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

** **

**EquityCompensation Plan Information**

** **

Thefollowing table sets forth information about the Company’s equity compensationplans as of December 31, 2005.

 
| **Plan Category**                                      | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average Exercise  Price of Outstanding  Options, Warrant and Rights** | ** ** | **Number Of Securities  Remaining Available for  Future Issuance Under  EquityCompensation Plans** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by  Security Holders     |       | 549,331                                                                                                                                              | (1)(2)     | $                                                                                                              | 6.41       |                                                                                                                                  | 1,500,000  | (2)(3) |
| Equity Compensation Plans Not Approved by  Security Holders |       | None                                                                                                                                                 |       | None                                                                                                           |       | None                                                                                                                                  |       |
| Total                                                       |       | 549,331                                                                                                                                              |       | $                                                                                                              | 6.41       |                                                                                                                                  | 1,500,000  |   |

 

 

----

(1)    Includes the following:

 

•       349,331 shares of the Company’s CommonStock to be issued upon exercise of outstanding stock options granted under the1995 Employee Stock Option Plan; and

 

•       200,000 shares of the Company’s CommonStock to be issued upon exercise of outstanding stock options granted under the1995 Non-Employee Stock Option Plan.

 

(2)    The 1995 Employee Stock Option Plan and1995 Non-Employee Stock Option Plan expired on December 31, 2005.

 

(3)    Includes 1,500,000 shares available forissuance under the Company’s 2005 Stock Option Plan which was approved by theCompany’s shareholders in December, 2005.

 

27

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**BeneficialOwnership**

** **

Thefollowing table sets forth information as of February 15, 2006, withrespect to our common stock owned by (i) each person known by us to be thebeneficial owner of more than 5% of the outstanding common stock, (ii) eachdirector and director nominee of the Company, (iii) each Named ExecutiveOfficer and (iv) all current directors and executive officers of the Company asa group. The number and percentage of shares beneficially owned is based on15,899,249 shares outstanding as of February 15, 2006.

 
| **Name**                                                             | ** ** | **Number of Shares  Beneficially Owned****(1)** | ** ** | **Percentage  Ownership****(1)** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------|------------|
| Mossimo G. Giannulli                                                 |       | 10,272,822                                                     |       | 64.61                            | %          |
| Edwin H. Lewis                                                       |       | -0-                                                            |       |                             | *          |
| Vicken J. Festekjian                                                 |       | 6,667                                                          | (4)        |                             | *          |
| William R. Halford                                                   |       | 42,000                                                         | (2)        |                             | *          |
| Robert Martini                                                       |       | 121,000                                                        | (3)        |                             | *          |
| Bryant Riley                                                         |       | -0-                                                            |       |                             | *          |
| Roger Feldman(5)                                                     |       | 850,531                                                        |       | 5.33                             |       |
| Harvey Hanerfeld(5)                                                  |       | 876,373                                                        |       | 5.50                             |       |
| All current directors and executive  officers as a group (6 persons) |       | 10,442,489                                                     | (6)        | 65.05                            | %          |

 

----

*       Less than one percent.

 

(1)    Beneficial ownership is determined inaccordance with the rules of the Securities and Exchange Commission andgenerally includes voting or investment power with respect to securities. Sharesof common stock subject to options and warrants which are currently exercisable,or will become exercisable within 60 days of February 15, 2006, are deemedoutstanding for computing the percentage of the person or entity holding suchsecurities but are not outstanding for computing the percentage of any otherperson or entity. Except as indicated by footnote, and subject to the communityproperty laws where applicable, to our knowledge the persons named in the tableabove have sole voting and investment power with respect to all shares ofcommon stock shown as beneficially owned by them. Unless otherwise indicated,the address for each person is care of our address at 2016 Broadway, SantaMonica, California 90401.

 

(2)    Includes 42,000 shares of common stockunderlying options exercisable within sixty days of the date of this table.

 

(3)    Includes 106,000 shares of common stockunderlying options exercisable within sixty days of the date of this table.

 

(4)    Includes 6,667****sharesof common stock underlying options exercisable within sixty days of the date ofthis table.

 

(5)    According to a Amendment No. 1 toSchedule 13G dated December 31, 2005, Roger Feldman is the beneficialowner of 850,931 shares of Common Stock, constituting 5.4% of the issued andoutstanding shares of common stock, and Harvey Hanerfeld is the beneficial ownerof 876,373 shares of Common Stock, constituting 5.6% of the issued andoutstanding shares of Common Stock. Roger Feldman has the sole power to vote orto direct the voting of and to dispose and to direct the disposition of the24,558 shares of common stock beneficially owned by him as an individual. Assole stockholders of West Creek Capital, Inc., a Delaware corporation that isthe general partner of West Creek Capital, L.P., a Delaware limited partnershipthat is the investment adviser to (i) West Creek Partners Fund L.P., a Delawarelimited partnership (the “Fund”) and (ii) certain private accounts (the “Accounts”),Mr. Feldman and Mr. Hanerfeld may be deemed to have the shared powerto direct the voting and disposition of the 443,113 shares of common stockowned by the Fund and the 60,000 shares of common stock held in the Accounts.As voting members of Cumberland Investment Partners, L.L.C., a Delaware limitedliability company (“Cumberland”), Mr. Feldman and Mr. Hanerfeld may bedeemed to have the shared power to direct the voting and disposition of the322,660 shares of common stock owned by Cumberland. Mr. Hanerfeld also maybe deemed to have shared power to direct the voting and disposition of 50,000shares of Common

 

28

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Stock owned by Mr.Hanerfeld’s wife. The address for Mr. Feldman and Mr. Hanerfeld is1919 Pennsylvania Avenue, NW, Suite 725, Washington, DC, 20006.

 

(6)    Includes 154,667****sharesof common stock underlying options exercisable within sixty days of the date ofthis table.

 

**ITEM 13—CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

** **

During2005, C&E Holdings, LLC, a limited liability company owned by Edwin Lewismade a private jet available to the Company’s executive officers for businessuse. The Company reimbursed C&E Holdings for the direct costs (withoutmarkup) incurred in operating the private jet for each use. During 2005 therewere approximately 135 flight hours at an average cost of approximately $3,400per hour.

 

TheCompany entered into an agreement and plan of merger (which we refer to as themerger agreement) dated as of March 31, 2006 by and among Iconix Brand Group,Inc., a Delaware corporation, Moss Acquisition Corp., a Delaware corporationand wholly-owned subsidiary of Iconix, the Company, and Mr. Giannulli, owner ofapproximately 64.5% of the issued and outstanding common stock of theCompany.   Subject to the terms andconditions of the merger agreement, Iconix will acquire all of the outstandingshares of the Company for cash and common stock of Iconix worth $7.50 per shareof the Company’s common stock (which the merger agreement refers to as the  initial merger consideration), plus, if theIconix common stock does not trade above $18.71 for at least twenty tradingdays in the year following the merger, former shareholders of the Company willreceive additional shares of Iconix common stock (the “additional mergerconsideration”).  

 

At the effective time of the merger, each outstanding share of theCompany will be entitled to receive the initial merger consideration,consisting of: (a) 0.2271139 shares of Iconix common stock, and (b) $4.25 incash, subject to adjustment if the Company has a cash balance of less than$17,000,000 (as defined and adjusted pursuant to the merger agreement) at theclosing.  

 

29

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The additional merger consideration will become payable if the Iconixcommon stock does not close at or above $18.71 during each day of any twentyconsecutive trading day period during the twelve-month period following theeffective date (which the merger agreement refers to as the measurementperiod). If the additional merger consideration becomes payable, Iconix willissue to each former holder of the Company’s common stock a number ofadditional shares of Iconix common stock determined according to a formula setforth in the merger agreement.  Thenumber of shares of Iconix common stock issuable as initial mergerconsideration is subject to limitations as set forth in the merger agreement. 

 

Subject to the merger occurring, each unexpired and unexercised option,whether vested or unvested, to purchase shares of the Company’s common stock,without regard to whether such option is then exercisable, will be cancelled.Each former holder of any cancelled option shall be entitled to receive, inconsideration of the cancellation of such option and in settlement therefor, apayment in cash (subject to any applicable tax withholding) of the excess, ifany, of $7.50 (subject to the per-share amount of any reduction in cashconsideration) over the exercise price per share of the Company’s common stockpreviously subject to such option. If the additional merger considerationbecomes payable pursuant to the merger agreement, each holder of an optioncancelled pursuant to the merger agreement who was entitled to a paymenttherefor will receive a cash payment equal to the per-share cash value of theadditional merger consideration he or she would have received if such holderhad exercised the options prior to the effective time, less any applicable taxwithholding.  If the merger with IconixBrand Group is consummated, the Company expects that Mr. Martini will receive$59,355, Mr. Halford will receive $219,855, Mr. Riley will receive $62,100 andMr. Festekjian will receive $81,000 pursuant to the cancellation and payment ofstock options.  The amount, if any, thatmay become payable to Mr. Martini, Mr. Halford and Mr. Riley if additionalmerger consideration becomes payable cannot be ascertained as of the date ofthis filing.  

 

Mr. Giannulli, the Chairman and Co-Chief Executive Officer of theCompany, owns approximately 65% of the Company’s outstanding common stockand will receive the same consideration per-share of the Company’s common stockas all other holders of common stock who do not exercise appraisal rights.  Edwin Lewis, Co-Chief Executive Officer ofthe Company, may be entitled to up to one-half of the proceeds Mr. Giannullireceives in the merger pursuant to a previous understanding with Mr.Giannulli.  

 

In connection with the merger, Mr. Giannulli has also entered into anAgreement for Creative Director Services with Iconix pursuant to which Mr.Giannulli will provide certain creative services to Iconix after the effectivedate of the merger.  It is also acondition to the closing of the merger that the Company will have sold all ofthe capital stock of the Company’s subsidiary, Modern Amusement, Inc., to Mr.Giannulli and Mr. Lewis for aggregate consideration of $2,000,000 prior to themerger.  

 

In connection with the investment banking services provided inconnection with the merger or other strategic alternative, the Company hasagreed to pay $600,000 in fees to B. Riley & Co., Inc.  Bryant R. Riley, a director of the Company,is the Chairman of B. Riley & Co., Inc. and may be deemed to have anindirect material interest in the fee. It is not practicable to ascertain the amount of Mr. Riley’s interest inthe fee.

 

30

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As of March 31, 2006 theCompany entered into a Restated License Agreement with Target Brands, Inc.  As described under Item 11 – “EXECUTIVECOMPENSATION – Giannulli Employment Agreement and Bonus Plan and – Lewis BonusPlan,” Mr. Giannulli and Mr. Lewis are each eligible to earn an annual bonus,which in each case may not exceed nineteen and thirty-three hundreds percent(19.33%) of the excess (if any) of:  (i)the royalties paid to the Company under Section 5.1 of the Target Agreement foreach contract year, less (ii) $5,293,750. Each of Mr. Giannulli and Mr. Lewis may therefore be deemed to have anindirect material interest in the Target Agreement.  It is not practicable at the time of this reportto determine the amount of Mr. Giannulli’s or Mr. Lewis’s interest in theTarget Agreement.  The Target Agreementis attached as Exhibit 10.13 to this Amendment No. 1 to the Annual Report onForm 10-K and is incorporated herein by reference.

 

**ITEM 14—PRINCIPAL ACCOUNTING FEES ANDSERVICES**

** **

*Audit Fees*.   Theaggregate fees billed by KPMG LLP for professional services rendered for theaudit of the Company’s annual financial statements for the years ended December31, 2005 and December 31, 2004, and the reviews of the financial statementsincluded in our Forms 10-Q or services that are normally provided by theaccountant in connection with statutory and regulatory filings or engagementsfor those fiscal years were $191,800 and $115,000, respectively.

 

*Audit-Related Fees*.   Theaggregate fees billed in each of the years ending December 31, 2005 andDecember 31, 2004 for assurance and related services by KPMG LLP that arereasonably related to the performance of the audit or review of our financialstatements and are not included in the above paragraph were $0 and $0,respectively.

 

*Tax Fees*.   Theaggregate fees billed in each of the years ending December 31, 2005 andDecember 31, 2004 for professional services rendered by KPMG for taxcompliance, tax advice, and tax planning were $0 and $0, respectively.

 

*All Other Fees*.   Theaggregate fees billed for services rendered by our principal accountants, otherthan described above, for the fiscal years ending December 31, 2005 andDecember 31, 2004, were $0 and $0, respectively.

 

Allaudit related services, tax services and other services were pre-approved byour audit committee, which concluded that the provision of such services byKPMG LLP was compatible with the maintenance of that firm’s independence in theconduct of its auditing functions. The audit committee’s pre-approval policyprovides for the pre-approval of audit, audit-related and tax servicesspecifically described by the committee on an annual basis, and unless a typeof service is pre-approved under the policy, it will require separatepre-approval by the committee if it is to be provided by the independentauditor. The policy authorizes the committee to delegate to one or more of itsmembers pre-approval authority with respect to permitted services.

 

**ITEM 15—EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

** **

(a)(1) List of Financial Statements—see Index to FinancialStatements on page 26.

 

(2) List of Financial StatementSchedules—None

 

(b) List of Exhibits

 

The exhibits listed in the accompanyingIndex of Exhibits are filed as part of this Form 10-K.

 

31

----

 

**EXHIBIT INDEX**

** **
| **EXHIBIT NO.** | ** ** | **DESCRIPTION** |
|----------------------|------------|-----------------|
| 3                    | .1         |            | Certificate of Incorporation of  Registrant(1) |
| 3                    | .2         |            | Bylaws of the Registrant(1) |
| 4                    | .1         |            | Specimen certificate of shares of Common  Stock of the Registrant(1) |
| 10                   | .1*        |            | Registrant’s 1995 Stock Plan(1) |
| 10                   | .2*        |            | Registrant’s 1995 Directors Stock Option  Plan(1) |
| 10                   | .3         |            | Mossimo License Agreement, dated as of  March 28, 2000, between Mossimo, Inc. and Target Stores, a division  of Target Corporation(2) |
| 10                   | .3.1       |            | Amendment to License and Design Services  Agreement, dated February 1, 2002(7) |
| 10                   | .3.2       |            | Consent of Assignment and Amendment to  License and Design Services Agreement dated February 2, 2003(8) |
| 10                   | .3.3       |            | Amendment to License and Design Services  Agreement dated June 20, 2003(9) |
| 10                   | .5         |            | Cherokee-Mossimo Finders Agreement dated  March 27, 2000 between Mossimo, Inc. and Cherokee Inc.(2) |
| 10                   | .6         |            | Lease, dated June 29, 2000, between  the Registrant and Lexington-Broadway Place, LLC(3) |
| 10                   | .6.1       |            | First Amendment to Office Lease dated  June 26, 2002(7) |
| 10                   | .6.2       |            | Second Amendment to Office Lease dated  January 1, 2004(10) |
| 10                   | .7         |            | Sunglasses Agreement, dated as of  December 1, 2000, between Mossimo, Inc., Marcolin S.P.A. and Target  Stores(4) |
| 10                   | .8*        |            | Amended and Restated Employment  Agreement between the Registrant and Mossimo Giannulli dated February 1,  2002(7) |
| 10                   | .8.1*      |            | Amendment Number One to the Mossimo  Giannulli Employment Agreement, dated July 30, 2002(6) |
| 10                   | .8.2       |            | Amendment Number Two to the Mossimo  Giannulli Employment Agreement, dated February 18, 2003(8) |
| 10                   | .9         |            | Amended and Restated Mossimo Giannulli  Bonus Plan(11) |
| 10                   | .10        |            | Amended and Restated Edwin Lewis Bonus  Plan(11) |
| 10                   | .11        |            | 2005 Stock Option Plan(11) |
| 10                   | .12        |            | Form of Stock Option Agreement for  2005 Stock Option Plan(11) |
| 10                   | .13        |            | Restated License Agreement by and between  Mossimo, Inc. and Target Brands, Inc., dated as of March 31, 2006 |
| 14                   | .1         |            | Code of Ethics |
| 21                   |       |            | Subsidiaries of Registrant |
| 23                   |       |            | Consent of Independent Registered Public  Accounting Firm - KPMG LLP |
| 31                   | .1         |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
| 31                   | .2         |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
| 31                   | .3         |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
| 32                   | .1         |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
| 32                   | .2         |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(b) of the Securities Act of  1934 |
| 32                   | .3         |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(b) of the Securities Act of  1934 |

 

----

NOTES:

 

(1)    Incorporated by reference from theRegistrant’s Registration Statement on Form S-1 (No. 33-80597), asamended, which became effective February 22, 1996.

 

(2)    Incorporated by reference from theRegistrant’s Current Report on Form 8-K, dated March 28, 2000.

 

32

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(3)    Incorporated by reference from theRegistrant’s Quarterly Report on Form 10-Q for the Quarter endedSeptember 30, 2000.

 

(4)    Incorporated by reference from theRegistrant’s Annual Report on Form 10-K for the year endedDecember 31, 2000.

 

(5)    Incorporated by reference from theRegistrant’s Quarterly Report on Form 10-Q for the Quarter endedJune 30, 2002.

 

(6)    Incorporated by reference from theRegistrant’s Quarterly Report on Form 10-Q for the Quarter endedSeptember 30, 2002.

 

(7)    Incorporated by reference from theRegistrant’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

(8)    Incorporated by reference from theRegistrant’s Quarterly Report on Form 10-Q for the Quarter endedMarch 31, 2003.

 

(9)    Incorporated by reference from theRegistrant’s Quarterly Report on Form 10-Q for the Quarter endedJune 30, 2003.

 

(10)  Incorporated by reference from theRegistrant’s Annual Report on Form 10-K for the year endedDecember 31, 2004.

 

(11)  Incorporated by reference from theRegistrant’s Form 8-K dated December 15, 2005.

 

*       Indicates a management contract or compensatory plan orarrangement

 

33

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**SIGNATURES**

** **

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized on the **28**thday of April 2006.

 
|   |   |   |   | MOSSIMO, INC.                                 |
|--------|--------|--------|--------|-----------------------------------------------|
|   |   |   |   |                                          |
|   |   |   |   |                                          |
|   |   |   | By:    | /s/ MOSSIMO GIANNULLI                         |
|   |   |   |   | Mossimo Giannulli*CO-CHIEF EXECUTIVE OFFICER* |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities indicatedon the 28th day of April 2006.

 
| /s/ MOSSIMO GIANNULLI |   | Chairman of  the Board and Co-Chief Executive Officer     |
|-----------------------|--------|-----------------------------------------------------------|
| Mossimo Giannulli     |   |                                                      |
|                  |   |                                                      |
| /s/ EDWIN LEWIS       |   | Vice  Chairman, President, and Co-Chief Executive Officer |
| Edwin Lewis           |   |                                                      |
|                  |   |                                                      |
| /s/ VICKEN FESTEKJIAN |   | Chief  Financial Officer (Principal Accounting Officer)   |
| Vicken Festekjian     |   |                                                      |
|                  |   |                                                      |
| /s/ ROBERT MARTINI    |   | Director                                                  |
| Robert Martini        |   |                                                      |
|                  |   |                                                      |
| /s/ WILLIAM HALFORD   |   | Director                                                  |
| William Halford       |   |                                                      |
|                  |   |                                                      |
| /s/ BRYANT R. RILEY   |   | Director                                                  |
| Bryant R. Riley       |   |                                                      |

 

34

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**MOSSIMO, INC.**

** **

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| REPORT OF  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                      |   |   |
|-----------------------------------------------------------------------------------------------|--------|--------|
|                                                                                          |   |   |
| CONSOLIDATED  FINANCIAL STATEMENTS:                                                           |   |   |
| Balance sheets as of December 31, 2005 and  2004                                              |   |   |
| Statements of earnings for the years ended  December 31, 2005, 2004 and 2003                  |   |   |
| Statements of stockholders’ equity for the  years ended December 31, 2005, 2004 and 2003 |   |   |
| Statements of cash flows for the years  ended December 31, 2005, 2004 and 2003                |   |   |
| Notes to consolidated financial statements                                                    |   |   |

 

33

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

The Board of Directors and StockholdersMossimo, Inc.:

 

We have audited the accompanyingconsolidated balance sheets of Mossimo, Inc. and subsidiary as ofDecember 31, 2005 and 2004, and the related consolidated statements ofearnings, stockholders’ equity, and cash flows for each of the years in thethree-year period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Mossimo, Inc. and subsidiary as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles.

 
| /s/ KPMG LLP            |   |
|-------------------------|--------|
|                    |
| Los Angeles, California |
| March 24, 2006     |

 

F-1

----

 

**MOSSIMO, INC.**

** **

**CONSOLIDATEDBALANCE SHEETS**

** **

**(IN THOUSANDS, EXCEPTSHARE DATA)**

** **
| ** **                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ASSETS                                                                                                                                                              |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| CURRENT ASSETS:                                                                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                           |       | $                     | 19,658     |   | $ | 4,903 |   |
| Restricted cash                                                                                                                                                     |       | 726                   |       | 413 |   |
| Investments                                                                                                                                                         |       | —                |       | 4,800 |   |
| Accounts receivable, net                                                                                                                                            |       | 4,372                 |       | 2,908 |   |
| Merchandise inventory                                                                                                                                               |       | 101                   |       | 539 |   |
| Deferred income taxes                                                                                                                                               |       | 4,004                 |       | 1,869 |   |
| Prepaid expenses and other current assets                                                                                                                           |       | 388                   |       | 436 |   |
| Total current assets                                                                                                                                                |       | 29,249                |       | 15,868 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| PROPERTY AND EQUIPMENT, at cost, net of  accumulated depreciation and amortization                                                                                  |       | 893                   |       | 1,117 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| DEFERRED INCOME TAXES                                                                                                                                               |       | 1,923                 |       | 6,068 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| GOODWILL                                                                                                                                                            |       | —                |       | 212 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| TRADENAME                                                                                                                                                           |       | 90                    |       | 112 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| OTHER ASSETS                                                                                                                                                        |       | 79                    |       | 96 |   |
|                                                                                                                                                                |       | $                     | 32,234     |   | $ | 23,473 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                          |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| CURRENT LIABILITIES:                                                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                                                    |       | $                     | 884        |   | $ | 352 |   |
| Accrued liabilities                                                                                                                                                 |       | 503                   |       | 809 |   |
| Accrued commissions                                                                                                                                                 |       | 388                   |       | 258 |   |
| Accrued bonuses                                                                                                                                                     |       | 3,458                 |       | 206 |   |
| Total current liabilities                                                                                                                                           |       | 5,233                 |       | 1,625 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| DEFERRED RENT                                                                                                                                                       |       | 128                   |       | 135 |   |
| Total liabilities                                                                                                                                                   |       | 5,361                 |       | 1,760 |   |
|                                                                                                                                                                |       |                  |       |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                       |       |                  |       |   |   |
|                                                                                                                                                                |       |                  |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                          |       |                  |       |   |   |
| Preferred stock, par value $.001;  authorized shares 3,000,000; no shares issued or outstanding                                                                     |       | —                |       | — |   |
| Common stock, par value $.001; authorized  shares 30,000,000; issued and outstanding 15,828,754 at December 31,  2005 and 15,738,442 at December 31, 2004 |       | 15                    |       | 15 |   |
| Additional paid-in capital                                                                                                                                          |       | 40,222                |       | 39,763 |   |
| Accumulated deficit                                                                                                                                                 |       | (13,364               | )          | (18,065 | ) |
| Net stockholders’ equity                                                                                                                                       |       | 26,873                |       | 21,713 |   |
|                                                                                                                                                                |       | $                     | 32,234     |   | $ | 23,473 |   |

 

See accompanying notes to consolidated financial statements

 

F-2

----

** **

**MOSSIMO, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

** **

**(IN THOUSANDS, EXCEPTPER SHARE DATA)**

 
| ** **                                              | ** ** | **YEARS ENDED DECEMBER 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue from license royalties and design  service fees |       | $                                           | 24,298     |   | $ | 18,714 |   | $ | 19,895 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Product sales                                           |       | 6,730                                       |       | 1,821 |   | — |   |
|                                                    |       |                                        |       |   |   |   |   |
| Total revenues                                          |       | 31,028                                      |       | 20,535 |   | 19,895 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Operating expenses:                                     |       |                                        |       |   |   |   |   |
| Cost of product sales                                   |       | 3,993                                       |       | 1,241 |   | — |   |
| Selling, general and administrative                     |       | 20,294                                      |       | 14,843 |   | 12,834 |   |
| Goodwill impairment loss                                |       | 212                                         |       | — |   | — |   |
| Settlement costs of disputed commissions                |       | —                                      |       | 71 |   | 643 |   |
| Total operating expenses                                |       | 24,499                                      |       | 16,155 |   | 13,477 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Operating earnings                                      |       | 6,529                                       |       | 4,380 |   | 6,418 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Interest income                                         |       | 420                                         |       | 104 |   | 23 |   |
| Earnings before income taxes                            |       | 6,949                                       |       | 4,484 |   | 6,441 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Income taxes                                            |       | 2,248                                       |       | 1,783 |   | 1,875 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Net earnings                                            |       | $                                           | 4,701      |   | $ | 2,701 |   | $ | 4,566 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Net earnings per common share:                          |       |                                        |       |   |   |   |   |
| Basic                                                   |       | $                                           | 0.30       |   | $ | 0.17 |   | $ | 0.29 |   |
| Diluted                                                 |       | $                                           | 0.30       |   | $ | 0.17 |   | $ | 0.29 |   |
|                                                    |       |                                        |       |   |   |   |   |
| Weighted average common shares outstanding:             |       |                                        |       |   |   |   |   |
| Basic                                                   |       | 15,751                                      |       | 15,738 |   | 15,613 |   |
| Diluted                                                 |       | 15,784                                      |       | 15,759 |   | 15,658 |   |

 

See accompanying notes to consolidated financial statements

 

F-3

----

 

**MOSSIMO, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

** **

**(IN THOUSANDS)**

** **
| ** **                                         | ** ** | ** **            | ** ** | ** **  | ** ** | **ADDITIONAL**  | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                         | ** ** | **COMMON STOCK** | ** ** | **PAID-IN** | ** ** | **ACCUMULATED** | ** ** | ** **  | ** ** |
| ** **                                         | ** ** | **SHARES**            | ** ** | **AMOUNT**  | ** ** | **CAPITAL**     | ** ** | **DEFICIT** | ** ** | **TOTAL**  | ** ** |
| BALANCE, December 31, 2002                    |       | 15,488                |       | $           | 15         |            | $          | 38,797      |       | $          | (25,332    | ) | $ | 13,480 |   |
| Exercise of stock options                          |       | 250                   |       | —      |       | 749             |       | —      |       | 749        |       |
| Income tax benefit from exercise of stock  options |       | —                |       | —      |       | 217             |       | —      |       | 217        |       |
| Net earnings                                       |       | —                |       | —      |       | —          |       | 4,566       |       | 4,566      |       |
| BALANCE, December 31, 2003                    |       | 15,738                |       | 15          |       | 39,763          |       | (20,766     | )          | 19,012     |       |
| Net earnings                                       |       | —                |       | —      |       | —          |       | 2,701       |       | 2,701      |       |
| BALANCE, December 31, 2004                    |       | 15,738                |       | 15          |       | 39,763          |       | (18,065     | )          | 21,713     |       |
| Exercise of stock options                          |       | 90                    |       |        |       | 418             |       |        |       | 418        |       |
| Income tax benefit from exercise of stock  options |       |                  |       |        |       | 41              |       |        |       | 41         |       |
| Net earnings                                       |       | —                |       | —      |       | —          |       | 4,701       |       | 4,701      |       |
| BALANCE, December 31, 2005                    |       | 15,828                |       | $           | 15         |            | $          | 40,222      |       | $          | (13,364    | ) | $ | 26,873 |   |

 

See accompanying notes to consolidated financial statements

 

F-4

----

** **

**MOSSIMO, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

** **

**(IN THOUSANDS)**

 
| ** **                                                                           | ** ** | **YEARS ENDED DECEMBER 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                |       |                                        |       |   |   |   |   |
| Net income                                                                           |       | $                                           | 4,701      |   | $ | 2,701 |   | $ | 4,566 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 427                                         |       | 329 |   | 257 |   |
| Inventory write-down                                                                 |       | 328                                         |       | — |   | — |   |
| Deferred rent                                                                        |       | (7                                          | )          | — |   | — |   |
| Provision for bad debt                                                               |       | 88                                          |       |   |   |   |   |
| Deferred income taxes                                                                |       | 1,458                                       |       | 1,171 |   | 1,109 |   |
| Goodwill impairment                                                                  |       | 212                                         |       |   |   |   |   |
| Changes in:                                                                          |       |                                        |       |   |   |   |   |
| Restricted cash                                                                      |       | —                                      |       | 4,585 |   | (4,585 | ) |
| Accounts receivable                                                                  |       | (1,552                                      | )          | (876 | ) | (81 | ) |
| Merchandise inventory                                                                |       | 110                                         |       | (539 | ) | — |   |
| Prepaid expenses and other current assets                                            |       | 48                                          |       | (154 | ) | (158 | ) |
| Other assets                                                                         |       | 17                                          |       | 154 |   | (152 | ) |
| Accounts payable                                                                     |       | 532                                         |       | (173 | ) | (407 | ) |
| Accrued liabilities                                                                  |       | 287                                         |       | (569 | ) | 181 |   |
| Accrued commissions                                                                  |       | 130                                         |       | (4,993 | ) | 2,590 |   |
| Accrued bonuses                                                                      |       | 3,252                                       |       | 94 |   | (953 | ) |
| Net cash provided by operating activities                                            |       | 10,031                                      |       | 1,730 |   | 2,367 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                |       |                                        |       |   |   |   |   |
| Proceeds from sale of available-for-sale  securities                                 |       | 4,800                                       |       | 3,950 |   | — |   |
| Purchases of available-for-sale securities                                           |       | —                                      |       | (3,750 | ) | (5,000 | ) |
| Payments for acquisition of property and  equipment                                  |       | (181                                        | )          | (946 | ) | (129 | ) |
| Acquisition of Modern Amusement                                                      |       | —                                      |       | (375 | ) | — |   |
| Net cash provided by (used in) investing  activities                                 |       | 4,619                                       |       | (1,121 | ) | (5,129 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                |       |                                        |       |   |   |   |   |
| Restricted cash—certificates of deposit                                         |       | (313                                        | )          | (413 | ) | — |   |
| Proceeds from issuance of common stock                                               |       | 418                                         |       | — |   | 749 |   |
| Payments of loan payable                                                             |       | —                                      |       | — |   | (1,066 | ) |
| Net cash provided by (used in) financing  activities                                 |       | 105                                         |       | (413 | ) | (317 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                |       | 14,755                                      |       | 196 |   | (3,079 | ) |
| CASH AND CASH EQUIVALENTS, beginning of  year                                        |       | 4,903                                       |       | 4,707 |   | 7,786 |   |
| CASH AND CASH EQUIVALENTS, end of year                                               |       | $                                           | 19,658     |   | $ | 4,903 |   | $ | 4,707 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                   |       |                                        |       |   |   |   |   |
| Cash paid during the year for interest                                               |       | $                                           | —     |   | $ | — |   | $ | 10 |   |
| Cash paid during the year for state income  taxes                                    |       | $                                           | 415        |   | $ | 60 |   | $ | 640 |   |

 

See accompanying notes to consolidated financial statements

 

F-5

----

 

**MOSSIMO, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.**      SUMMARY BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

** **

Mossimo, Inc. (the Company) is aDelaware corporation formed in November 1995, and presently operates as adesigner and licensor of apparel and related products. A substantial amount ofthe Company’s revenue is derived under an agreement with Target Corporation asfurther described below.

 

In January 2004 the Company acquiredsubstantially all the assets of Modern Amusement LLC through a wholly ownedsubsidiary, Modern Amusement, Inc. (“Modern Amusement”). Modern Amusementdesigns, merchandises, sources, markets, sells and distributes wholesaleapparel and related accessories for young men. The products are offered atmoderate to upper price points thru traditional specialty store and betterdepartment store distribution channels.

 

**LICENSING AGREEMENTS**

** **

The Company entered into a multi-yearlicensing and design services agreement with Target Corporation (“Target”) inMarch 2000, subsequently amended in February 2002, and inFebruary and June 2003, hereinafter referred to as the “TargetAgreement”. Under the terms of the Target Agreement, Target has the exclusivelicense, for production and distribution through Target stores, ofsubstantially all Mossimo products sold in the United States.

 

Under the Target Agreement the Companyprovides design services and has approval rights for product design, marketingand advertising materials. Target collaborates on design and is responsible forproduct development, sourcing, quality control and inventory management withrespect to the Target licensed product line. Target is obligated to pay theCompany design service fees and license royalty fees. Total fees payable byTarget are based upon a percentage of Target’s net sales of Mossimo brandedproducts, with minimum total guaranteed fees of approximately $9.6 millionannually. Target fees are based on net sales achieved multiplied by a rate, asdefined in the Target Agreement. The Company pays a 15 percent commission,based on fees received from Target, to a third party who assisted the Companyin connection with entering into the initial agreement with Target. The TargetAgreement is subject to early termination under certain circumstances. IfTarget is current with payments of its obligations under the Target Agreement,Target has the right to renew the Target Agreement, on the same terms andconditions, for additional terms of two years each. In January 2003,Target exercised its first renewal option extending the Target Agreementthrough January 31, 2006. In January 2005, Target exercised itssecond renewal option extending the Target Agreement through January 31,2008. The next renewal option could be exercised by Target on or beforeJanuary 2007, this renewal option could extend the Target Agreement thruJanuary 2010, if it is exercised by Target.

 

In addition to the Target Agreement, theCompany also licenses its trademarks and provides design services outside ofthe United States, and also licenses its trademarks for use in collections ofeyewear and women’s swimwear and body-wear sold in Target stores in the UnitedStates.

 

In May 2002, the Company entered intoan agreement with Hudson’s Bay Company. Under the agreement, the Companyprovided product design services, and granted a license for the Mossimotrademark to Hudson’s Bay Company exclusively in Canada, in return for licenseroyalties and design service fees. Hudson’s Bay Company collaborated on productdesign, and was responsible for manufacturing, importing, marketing,advertising, selling and distributing merchandise bearing the Mossimotrademark. The initial term of the agreement was three years beginning inMay 2002. The agreement expired in May of 2005, we expect to receiveroyalty payments through the third quarter of 2006. There are no plans to renewthe agreement.

 

F-6

----

 

**BASIS OF PRESENTATION**

 

The consolidated financial statementsinclude the accounts of Mossimo, Inc. and its wholly-owned subsidiary, ModernAmusement, Inc. All significant intercompany balances and transactionshave been eliminated in consolidation.

 

**USE OF ESTIMATES**

** **

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

**REVENUE RECOGNITION**

** **

Revenue from license royalties and designservice fees are recognized in accordance with the terms of the underlyingagreements, which is generally after the design services are performed, and asthe licensee achieves sales of the Company’s products. During the periodspresented herein, a substantial amount of the Company’s revenue from licenseroyalties and design fees were generated under the Target Agreement under arate that declines as the contract year progresses and Target achieves certainlevels of retail sales. Accordingly, the Company’s revenues from Targetdecrease as the year progresses. The declining rate is reset each contract yearbeginning on February 1. Revenue recognized in the first and secondquarters of the Company’s calendar year in connection with the Target Agreementis significantly higher than in the third and fourth quarters of the Company’scalendar year due to the declining rates in the Target Agreement. Revenue fromlicense royalties and design service fees are generally collected on aquarterly basis, and they range from one percent to five percent of sales, asdefined in the respective agreements.

 

Modern Amusement recognizes wholesaleoperations revenue from the sale of merchandise when products are shipped, FOBModern Amusement’s distribution facilities, and the customer takes title andassumes risk of loss, collection is reasonably assured, pervasive evidence ofan arrangement exists, and the sales price is fixed or determinable.

 

**CASH AND CASH EQUIVALENTS**

** **

Cash and cash equivalents includetemporary investment of cash in liquid interest bearing accounts with originalmaturities of 30 days or less.

 

**INVESTMENTS**

** **

Short-term investments, which consist ofmarket auction rate preferred securities are classified as “available for sale”under the provisions of SFAS No. 115, “Accounting for Certain Investmentsin Debt and Equity Securities.” Accordingly, the short-term investments arereported at fair value, with any unrealized gains and losses included as aseparate component of stockholders’ equity, net of applicable taxes. Realizedgains and losses, interest and dividends are included in interest income. Thefair value of the short-term investments approximated cost at December 31,2004. There were no investments on hand at December 31, 2005.

 

**INVENTORIES**

** **

We maintain inventories for the ModernAmusement segment of our business. Inventories are valued at the lower of cost(first-in, first-out) or market. The Company continually evaluates itsinventories by assessing slow moving current product as well as prior seasons’inventory. Market value of non-current inventory is estimated based on theimpact of market trends, an evaluation of economic conditions and the value ofcurrent orders relating to the future sales of this type of inventory. During2005, the company wrote-down certain inventories by $328,000 to their netrealizable value.

 

F-7

----

 

**PROPERTY AND EQUIPMENT**

** **

Property and equipment are stated at cost,net of accumulated depreciation and amortization. Depreciation is calculatedusing the straight-line method over the estimated useful life of the asset,which is generally three to seven years for furniture, fixtures, and equipment.Amortization of leasehold improvements is calculated using the straight linemethod over the shorter of its useful life or the remaining term of the lease.The Company evaluates the impairment of long-lived assets when certaintriggering events occur. If such assets are determined to be impaired, awrite-down to fair market value is recorded.

 

**GOODWILL AND TRADENAME**

** **

Goodwill represents the excess of costsover fair value of assets of businesses acquired. Goodwill and intangibleassets acquired in a purchase business combination and determined to have anindefinite useful life are not amortized, but instead tested for impairment atleast annually in accordance with the provisions of FASB Statement No. 142,Goodwill and Other Intangible Assets. Intangible assets with estimable usefullives are amortized over their respective estimated useful lives to theirestimated residual values, and reviewed for impairment in accordance with FASBStatement No. 144, Accounting for Impairment or Disposal of Long-LivedAssets.

 

**SEGMENTS**

** **

The Company operates in two businesssegments: Mossimo and Modern Amusement (Modern).In accordance with SFAS No. 131, “*Disclosure About Segments of an Enterprise and Related Information”,*theCompany’s principal segments are divided between the generation of revenuesfrom products and royalties. The Mossimo segment derives its revenues fromroyalties associated from the use of its brand names primarily with Target. TheModern segment derives its revenues from the design, and distribution ofapparel to department stores and other retail outlets, principally throughoutthe United States.

 

**INCOME TAXES**

** **

The Company accounts for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes”. Deferredincome taxes are provided for temporary differences between the amounts ofassets and liabilities for financial and tax reporting purposes. Deferred taxassets are reduced by a valuation allowance when it is estimated to be morelikely than not that some portion of the deferred tax assets will not berealized. Accounting for income taxes are further explained in Note 5.

 

**STOCK-BASED COMPENSATION**

** **

TheCompany accounts for stock-based compensation in accordance with AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related interpretations. The Company follows the pro formadisclosure requirements of SFAS No. 123, “Accounting for Stock-BasedCompensation”, which require presentation of the pro forma effect of the fairvalue based method on net income and net income per share in the financialstatement footnotes.

 

F-8

----

 

Ifcompensation expense was determined based on the fair value method, the Company’snet earnings and net earnings per share would have resulted in the approximatepro forma amounts indicated below for the years ended December 31, 2005,2004 and 2003 (*in thousands, except per share data*):

 

| ** **                                                                                      | ** ** | **2005**                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                      | ** ** | **(in thousands,  except for per share data)** | ** ** |
| Net earnings as reported                                                                        |       | $                                                                       | 4,701      |     | $          | 2,701    |       | $ | 4,566 |   |
| Add: Stock-based employee compensation  expense included in reported net earnings               |       | —                                                                  |       | —   |       | —   |       |
| Deduct: Total stock-based employee  compensation expense determined under the fair value method |       | (63                                                                     | )          | (305     | )          | (298     | )          |
| Pro forma net earnings                                                                          |       | $                                                                       | 4,638      |     | $          | 2,396    |       | $ | 4,268 |   |
|                                                                                            |       |                                                                    |       |     |       |     |       |
| Earnings per share:                                                                             |       |                                                                    |       |     |       |     |       |
| Basic—as reported                                                                          |       | $                                                                       | 0.30       |     | $          | 0.17     |       | $ | 0.29 |   |
| Basic—pro forma                                                                            |       | $                                                                       | 0.29       |     | $          | 0.15     |       | $ | 0.27 |   |
| Diluted—as reported                                                                        |       | $                                                                       | 0.30       |     | $          | 0.17     |       | $ | 0.29 |   |
| Diluted—pro forma                                                                          |       | $                                                                       | 0.29       |     | $          | 0.15     |       | $ | 0.27 |   |

 

Thefair value of each option grant was estimated as of the grant date using theBlack-Scholes option-pricing model for the years ended December 31, 2005,2004 and 2003, assuming risk-free interest rates of approximately 4.43 percent,3.7 percent, and 1.9 percent, respectively; volatility of approximately 80percent, 45 percent, and 50 percent, respectively; zero dividend yield; andexpected lives of five years for all periods.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

The Company’s balance sheets include thefollowing financial instruments: cash and cash equivalents, restricted cash,securities available-for-sale, accounts receivable, accounts payable, accruedliabilities, accrued commissions, and accrued bonuses. The Company considersthe carrying value of these instruments to approximate fair value for theseinstruments because of the relatively short period of time between originationand their expected realization or settlement.

 

**COMPUTATION OF PER SHARE AMOUNTS**

** **

Basicand diluted earnings per share are computed using the methods prescribed bySFAS 128, “Earnings per Share.” Basic income per share is computed as netincome divided by the weighted average number of common shares outstandingduring the period. Diluted earnings per share gives effect to all potentialdilutive common share equivalents outstanding during the period. Thecomputation of diluted earnings per share does not assume the exercise ofsecurities that would have an anti-dilutive effect.

 

F-9

----

 

Thecomputation of basic and diluted earnings per common share for income fromcontinuing operations is as follows (*in thousands, except pershare data*):

 

| ** **                                                                                                                    | ** ** | **2005**                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                    | ** ** | **(in thousands,  except for per share data)** | ** ** |
| Income available to common  shareholders—basic and diluted                                                               |       | $                                                                       | 4,701      |     | $          | 2,701    |       | $ | 4,566 |   |
| Basic weighted average common shares                                                                                          |       | 15,751                                                                  |       | 15,738   |       | 15,613   |       |
| Incremental shares related to stock options                                                                                   |       | 33                                                                      |       | 21       |       | 45       |       |
| Diluted weighted average common shares                                                                                        |       | 15,784                                                                  |       | 15,759   |       | 15,658   |       |
|                                                                                                                          |       |                                                                    |       |     |       |     |       |
| Net earnings per share:                                                                                                       |       |                                                                    |       |     |       |     |       |
| Basic earnings per common share                                                                                               |       | $                                                                       | 0.30       |     | $          | 0.17     |       | $ | 0.29 |   |
| Diluted earnings per common share                                                                                             |       | $                                                                       | 0.30       |     | $          | 0.17     |       | $ | 0.29 |   |
| Potential common shares excluded from diluted  earnings per share since their effect would be antidilutive—stock options |       | 342                                                                     |       | 468      |       | 554      |       |

 

**IMPACT OF RECENTLY ADOPTED ACCOUNTINGPRONOUNCEMENTS**

** **

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections—a replacementof APB Opinion No. 20 and FASB Statement No. 3.” This statementapplies to all voluntary changes in accounting principle and changes requiredby an accounting pronouncement where no specific transition provisions areincluded. SFAS No. 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. Retrospective application is limited to the directeffects of the change; the indirect effects should be recognized in the periodof the change. This statement carries forward without change the guidancecontained in APB Opinion No. 20 for reporting the correction of an errorin previously issued financial statements and a change in accounting estimate.However, SFAS No. 154 redefines restatement as the revising ofpreviously issued financial statements to reflect the correction of an error.The provisions of SFAS No. 154 are effective for accounting changesand corrections of errors made in fiscal periods that begin afterDecember 15, 2005, although early adoption is permitted. The Company doesnot anticipate that the implementation of this standard will have a materialimpact on its financial condition and results of operations.

 

In December 2004, the FASB issuedSFAS No. 123R (revised 2004), “Share-Based Payment.”SFAS No. 123R addresses the accounting for share-based paymenttransactions in which a company receives employee services in exchange for eitherequity instruments of the company or liabilities that are based on the fairvalue of the company’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123R eliminates theability to account for share-based compensation transactions using theintrinsic method that is currently used and requires that such transactions beaccounted for using a fair value-based method and recognized as expense in theconsolidated statement of operations. SFAS No. 123R is effective for theCompany on January 1, 2006. Accordingly, the Company will adopt SFASNo. 123R in our first quarter of 2006. See Note 1 Summary of BusinessDescription and Significant Accounting Policies—Stock-Based Compensation forthe pro forma effects of how SFAS No. 123R would have affected results ofoperations in 2005, 2004 and 2003. We are currently assessing the impact thisprospective change in accounting guidance will have on our financial conditionand results of operations, but we believe that the impact will not be material.

 

In November 2004, the FASB issuedSFAS No. 151, “Inventory Costs, an amendment of Accounting ResearchBulletin No. 43, Chapter 4.” SFAS No. 151 requiresthat abnormal amounts of idle facility expense, freight, handling costs and wastedmaterials (spoilage) be recorded as current period charges and that theallocation of fixed production overhead to inventory be based on the normalcapacity of the production facilities. SFAS No. 151 is effective forthe Company on January 1, 2006. The Company does not believe that theadoption of SFAS No. 151 will have a material impact on itsconsolidated financial statements.

 

F-10

----

 

In November 2002, the FASB issuedFASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others”. This interpretation clarifies the requirements of aguarantor in accounting for and disclosing certain guarantees issued and outstanding.The initial recognition and measurement provisions of this interpretation areapplicable on a prospective basis to guarantees issued after December 31,2002. The Company licenses its trademarks, provides design services and hasapproval rights for product design, marketing and advertising materials underlicensing and design service agreements which include certain provisions forindemnifying the licensee. As an element of its standard commercial terms, theCompany includes an indemnification clause in its licensing and design servicesagreements that indemnifies the licensee against liability and damages arisingfrom any claims, suits, damages, or costs relating to the breach of anywarranty, representation, term or condition made or agreed to by its licenseesinvolving the manufacture, packaging, distribution, promotion, sale, marketing,advertising or other use of the trademarks under license. We believe that ourpolicies and practices limit our exposure related to the indemnificationprovisions of the license and design services agreements. For several reasons,including the lack of prior indemnification claims and the lack of monetaryliability limit for certain infringement cases under the license and designservices agreements, we cannot determine the maximum amount of potential futurepayments, if any, related to such indemnification provisions.

 

**RECLASSIFICATIONS**

** **

Certain reclassifications have been madeto conform to current year presentation. These reclassifications have no impacton reported net earnings.

 

**2.**      BUSINESS ACQUISITION

** **

On January 16, 2004,Mossimo, Inc. acquired substantially all the assets of Modern AmusementLLC through a wholly owned subsidiary, Modern Amusement for cash. ModernAmusement designs, merchandises, sources, markets, sells and distributeswholesale apparel and related accessories for young men and young women. The “ModernAmusement” registered brand is principally focused on premium westcoast-lifestyle apparel and related accessories. The products are offered at moderateto upper price points through traditional specialty store and higher-enddepartment store distribution channels. The purpose of the acquisition was todiversify the Company’s current design and licensing business of its Mossimobrand product through mass retail distribution channels. The acquisition wasaccounted for as a purchase whereby the purchase price was allocated to theassets acquired based on fair values. The excess purchase price over the amountallocated to the assets acquired has been allocated to goodwill, in theaccompanying consolidated balance sheet at December 31, 2005. In thefourth quarter of 2004, the Company completed the appraisal of ModernAmusement, and allocated $112,000 of the purchase price to tradename, anamortizable intangible asset with a 10-year life. The amortization will berecorded ratably over the 10-year period. The following table summarizes thefair values of the assets acquired at the date of acquisition. Pro formainformation is not presented as the impact of this acquisition on theconsolidated financial statements is not material.

 

| Net current assets     |   | $   | 25     |   |
|------------------------|--------|-----|--------|--------|
| Property and equipment |   | 20  |   |
| Goodwill               |   | 212 |   |
| Trade Name             |   | 112 |   |
| Other assets           |   | 6   |   |
| Assets acquired        |   | $   | 375    |   |

 

The Modern Amusement segment is tested forgoodwill impairment on an annual basis at the end of the fourth quarter. Due tothe expected continuing investment in the Modern Amusement brand, the cash flowfrom this reporting segment is expected to be negative until 2008. InDecember 2005, a goodwill impairment loss of $212,000 was recognized inthe Modern Amusement reporting segment. The fair value of that reportingsegment was estimated using the expected present value of future cash flows.

 

F-11

----

 

The Company also tested the ModernAmusement tradename for impairment. Based on our testing in accordance withFASB Statement No. 144, the tradename was not deemed impaired. Thetradename will continue to be amortized over its remaining useful life.

 

**3.**      MAJOR CUSTOMER AND ACCOUNTS RECEIVABLE

** **

A substantial amount of the Company’srevenue and accounts receivable are derived under the Target Agreement. Theaccounts receivable are held without collateral, and are subject to normalcredit risk assumed by the Company. Revenue from license royalties and designservice fees from Target were approximately 69% in 2005, 79% in 2004, and 88%in 2003, of total revenue. Accounts receivable from target for 2005 and 2004were 58% and 59%, respectively, of total accounts receivable.

 

Modern Amusement extends credit tocustomers in the normal course of business, subject to established creditlimits. Accounts receivable, net, in the consolidated balance sheets, consistsof amounts due from customers net of allowance for doubtful accounts. Theallowance for doubtful accounts is determined by reviewing accounts receivableaging and evaluating individual customer receivables, considering customers’financial condition, credit history and current economic conditions. Thewrite-off for bad debts in 2005 was approximately $88,000.

 

**4.**      CREDIT FACILITY WITH BANK

** **

The Company established a revolving lineof credit with a bank in the amount of $300,000 in February 2004. The lineof credit was established to open letters of credit with foreign suppliers forfinished goods for Modern Amusement. The line of credit was increased to$400,000 in June of 2004, and subsequently increased to $500,000 inJanuary of 2005 and increased again to $900,000 in May of 2005. Theline of credit is secured by three certificates of deposit totalingapproximately $726,000. There is no expiration date for this line, and thereare no covenants. There is a fee charged per letter of credit opened andclosed. Open letters of credit at December 31, 2005 were approximately$875,000.

 

**5.**      INCOME TAXES

** **

The provision for income taxes consists ofthe following for the years ended December 31:

 

| ** **                       | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(IN THOUSANDS)** | ** ** |
| Current:                         |       |                    |       |     |       |     |       |
| Federal                          |       | $                       | 209        |     | $          | 40       |       | $ | 162 |   |
| State                            |       | 581                     |       | 572      |       | 604      |       |
|                             |       | 790                     |       | 612      |       | 766      |       |
| Deferred:                        |       |                    |       |     |       |     |       |
| Federal                          |       | 1,502                   |       | 1,481    |       | 1,032    |       |
| State                            |       | (44                     | )          | (310     | )          | 77       |       |
|                             |       | 1,458                   |       | 1,171    |       | 1,109    |       |
| Total provision for income taxes |       | $                       | 2,248      |     | $          | 1,783    |       | $ | 1,875 |   |

 

F-12

----

 

The provision for income taxes may differfrom the amount of tax determined by applying the federal statutory rate of 34%to pretax earnings. The components of this difference consist of the followingfor the years ended December 31:

 

| ** **                                           | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(IN THOUSANDS)** | ** ** |
| Provision on earnings at federal statutory  tax rate |       | $                       | 2,380      |     | $          | 1,518    |       | $ | 2,198 |   |
| State tax provision, net of federal tax  effect      |       | 705                     |       | 260      |       | 375      |       |
| Decrease in valuation allowance                      |       | (862                    | )          | —   |       | —   |       |
| Other, including alternative minimum tax             |       | 25                      |       | 5        |       | (698     | )          |
| Total provision for income taxes                     |       | $                       | 2,248      |     | $          | 1,783    |       | $ | 1,875 |   |

 

F-13

----

 

Significant components of the Company’sdeferred income taxes are as follows as of December 31, 2005 and 2004:

 

| ** **                        | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(IN THOUSANDS)** | ** ** |
| Deferred income tax assets:       |       |                    |       |     |       |
| Net operating loss carry-forwards |       | $                       | 3,947      |     | $          | 7,631 |   |
| Related party accrued salary      |       | 665                     |       | —   |       |
| Foreign tax credits               |       | 371                     |       | 314      |       |
| Alternative minimum tax credit    |       | 718                     |       | 521      |       |
| State minimum tax credit          |       | 66                      |       | 20       |       |
| Other                             |       | 405                     |       | 6        |       |
| Total                             |       | 6,172                   |       | 8,492    |       |
| Less valuation allowance          |       | (245                    | )          | (555     | )          |
| Total net deferred tax asset      |       | $                       | 5,927      |     | $          | 7,937 |   |
| Current portion                   |       | $                       | 4,004      |     | $          | 1,869 |   |
| Long-term portion                 |       | 1,923                   |       | 6,068    |       |
| Total net deferred tax asset      |       | $                       | 5,927      |     | $          | 7,937 |   |

 

The Company considers projected taxableincome from the Target Agreement and other agreements in deriving its estimateof deferred tax asset recoverability. As a result of the extension of theTarget Agreement through January 31, 2008, the reevaluation of itsforecasted operating results and resultant taxable income during the extendedterm of the Target Agreement, management believes realization of its netdeferred tax assets is more likely than not.

 

As of December 31, 2005, the Companyhas approximately $10.2 million, and $8.2 million of federal and state incometax net operating loss carry forwards, respectively, available to offset futuretaxable income, which expire in various years through 2022.

 

In accordance with the Tax Reform Act of1986, the benefits from net operating losses carried forward may be impaired orlimited in certain circumstances. Events which may cause limitations in theamount of net operating losses that the Company may utilize in any one yearinclude, but are not limited to, a cumulative ownership change of more than 50percent over a three-year period. The impact of limitations, if any that may beimposed upon future issuances of equity securities cannot be determined at thistime.

 

In addition to the Company’s taxable incomebeing subject to federal, state and local income taxes, the Company may beclassified as a “personal holding company” from time to time. Personal holdingcompany status results from more than 50 percent of the value of outstandingstock being owned directly or indirectly by five or fewer individuals, and morethan 60 percent of the Company’s income, as defined, being derived fromroyalties. Personal holding companies are subject to an additional federal taxat a 15 percent tax rate on undistributed after tax earnings.

 

Over 50 percent of the value of theCompany’s outstanding stock is owned by one stockholder. In 2005, 2004 and2003, less than 60 percent of the Company’s income as defined was derived fromlicense royalties, accordingly the Company is not classified as a personalholding company and is not subject to the personal holding company tax. TheCompany intends to continue to take appropriate measures to avoid beingclassified as a personal holding company in future years. However, there can beno assurance that the Company will be successful in its efforts to avoidclassification as a personal holding company in the future.

 

F-14

----

 

**6.**      PROPERTY AND EQUIPMENT

** **

Property and equipment consists of thefollowing at December 31:

 

| ** **                                | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                | ** ** | **(IN THOUSANDS)** | ** ** |
| Furniture and fixtures                    |       | $                       | 486        |     | $          | 420 |   |
| Leasehold improvements                    |       | 1,365                   |       | 1,282    |       |
| Equipment                                 |       | 454                     |       | 422      |       |
|                                      |       | 2,305                   |       | 2,124    |       |
| Accumulated depreciation and amortization |       | 1,412                   |       | 1,007    |       |
|                                      |       | $                       | 893        |     | $          | 1,117 |   |

 

**7.**      EMPLOYEE BENEFIT PLANS

** **

The Company has a defined contributionplan under Section 401(k) of the Internal Revenue Code covering allfull-time employees, and providing for matching contributions by the Company,as defined in the plan. Contributions made to the plan were $13,600 in 2005,$13,300 in 2004 and $14,000 in 2003.

 

**8.**      COMMITMENTS AND CONTINGENCIES

** **

The Company leases its office and designstudio under an operating lease agreement effective through July 2009,providing for annual lease payments of approximately $315,000 in 2006, $324,000in 2007, $334,000 in 2008, and $196,000 in 2009. Rent expense was approximately$380,000 in 2005, $384,000 in 2004 and $260,000 in 2003.

 

The Company has a bonus program with itstwo top executives. Under this program bonuses payable to the Co-ChiefExecutive Officers’ are determined at the discretion of the CompensationCommittee of the Board of Directors, are subject to approval by the Board ofDirectors, and can not exceed a formula based on a percentage of fees paid byTarget to the Company, as defined in the respective bonus plans of these twoofficers. Bonus expense in connection with the bonus plans of these twoofficers was $3,340,000 in 2005, $607,000 in 2004 and $1,854,000 in 2003.

 

Wehad a dispute over the commissions payable to a third party whichrelate to our agreement with Target. In June 2003, we had deposited withthe court approximately $4,585,000 which was classified as restricted cash. Thedispute was resolved in the second quarter of 2004, and the funds weredistributed to the third party. As part of the settlement the Company isrequired to pay a fee to the third party of fifteen percent of applicablerevenues from the Target agreement. Fees incurred under this arrangement were$3.2 million in 2005, $2.6 million in 2004 and $2.6 million in 2003. Under thisagreement, we have a commission obligation for 15% of fees received from Targetfor the duration of the Target agreement thru January 2008, and forsubsequent extensions if they are exercised by Target. The future commissionsare based on the minimum royalty and design fee payment from target ofapproximately $9.6 million through January 2008.

 

**9.**      STOCKHOLDERS’ EQUITY

** **

TheCompany adopted the Mossimo, Inc. 1995 Stock Option Plan (the “1995 Plan”),which provides for the grant of stock options, stock appreciation rights andother stock awards to certain officers and key employees of the Company and tocertain advisors or consultants to the Company. A total of 1,500,000 shareshave been reserved for issuance under the 1995 Plan. Options granted thereunderhave an exercise price equal to the fair market value of the common stock onthe date of grant. In April 2000, the Company amended the 1995 Plan sothat an optionee’s vesting in such options automatically terminates when theoptionee’s employment with the Company is terminated for reasons other thanretirement, disability or death. As of December 31, 2005 there were noshares of common stock under the 1995 Plan that were available for future grant.

 

F-15

----

 

TheCompany’s Non-Employee Directors Stock Option Plan (the “Directors Plan”)provides for the automatic grant to each of the Company’s non-employeedirectors of (i) an option to purchase 30,000 shares of common stock onthe date of such director’s initial election or appointment to the Board ofDirectors and (ii) an option to purchase 3,000 shares of common stock oneach anniversary thereof on which the director remains on the Board ofDirectors. A total of 250,000 shares have been reserved under the DirectorsPlan. Options granted thereunder have an exercise price equal to the fairmarket value of the common stock on the date of grant. As of December 31,2005 there were no shares of common stock under the Directors Plan that wereavailable for future grant.

 

Changesin shares under option for the 1995 Plan and the Directors Plan (the “Plans”)are summarized as follows for the years ended December 31,

 
| ** **                                                      | ** ** | **2005**   | ** ** | **2004**                     | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **Shares** | ** ** | **Weighted  Average  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Price** | ** ** |
| Outstanding, beginning of year                                  |       | 685,310    |       | $                            | 5.90       |       | 625,310    |   | $ | 7.23 |   | 992,075 |   | $ | 7.34 |   |
| Granted                                                         |       | 36,000     |       | 5.43                         |       | 210,000    |       | 3.77 |   | 549,000 |   | 4.13 |   |
| Exercised                                                       |       | (90,312    | )          | 4.60                         |       | —     |       | — |   | (250,400 | ) | 3.40 |   |
| Canceled/forfeited                                              |       | (81,667    | )          | 4.15                         |       | (150,000   | )          | 8.43 |   | (665,365 | ) | 6.06 |   |
| Outstanding, end of year                                        |       | 549,331    |       | 6.41                         |       | 685,310    |       | 5.90 |   | 625,310 |   | 7.23 |   |
| Options exercisable, end of year                                |       | 423,331    |       |                         |       | 475,310    |       |   |   | 281,000 |   |   |   |
| Weighted average fair value of options  granted during the year |       |       |       | $                            | 3.88       |       |       |   | $ | 1.80 |   |   |   | $ | 2.18 |   |

 

Outstandingstock options for the Plans at December 31, 2005 consist of the following:

 

| ** **                                  | ** ** | **Options Outstanding** | ** ** | ** **      | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **Weighted**    | ** ** | ** **   | ** ** | **Options Exercisable** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Average**     | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | **Number**                   | ** ** | **Remaining**   | ** ** | **Average**  | ** ** | **Number** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Outstanding**              | ** ** | **Contractual** | ** ** | **Exercise** | ** ** | **Exercisable** | ** ** | **Exercise** | ** ** |
| **Range of Exercise Prices** | ** ** | **at 12/31/2005**       | ** ** | **Life**        | ** ** | **Price**    | ** ** | **at 12/31/2005** | ** ** | **Price** | ** ** |
| $0.88 - $1.88                               |       | 36,000                       |       | 4.32            |       | $            | 1.71       |   | 36,000 |   | $ | 1.71 |   |
| $2.50 - $3.50                               |       | 60,000                       |       | 7.69            |       | 3.24         |       | 36,667 |   | 3.14 |   |
| $3.80 - $5.43                               |       | 313,021                      |       | 6.84            |       | 4.63         |       | 210,354 |   | 4.75 |   |
| $6.42 - $9.61                               |       | 100,000                      |       | 5.55            |       | 8.35         |       | 100,000 |   | 8.35 |   |
| $10.63 - $25.38                             |       | 40,310                       |       | 0.64            |       | 23.43        |       | 40,310 |   | 23.43 |   |
|                                        |       | 549,331                      |       | 6.08            |       | 6.34         |       | 423,331 |   | 6.98 |   |
|                                             |            |                              |            |                 |            |              |            |  |  |  |  |  |  |

 

TheCompany adopted the Mossimo, Inc 2005 stock Option Plan (the “2005 Plan) toreplace the 1995 Plan and the Directors Plan both of which terminated as ofDecember 31, 2005. The 2005 Plan provides for the grant of stock optionsto certain officers, key employees and non-employee directors. A total of1,500,000 shares have been reserved for issuance under the 2005 Plan. Optionsgranted under the 2005 Plan will have an exercise price equal to the fairmarket value of the common stock on the date of grant. Options will beexercisable in accordance with vesting schedules to be established by theCompensation Committee. As of December 31, 2005, no options have beengranted under the 2005 Plan.

 

F-16

----

 

**10.**   SEGMENT INFORMATION

** **

The Company operates in two businesssegments: Mossimo (design and licensing service) and Modern Amusement (Modern)(wholesale men’s apparel). The following tables summarize various financialamounts for each of our business segments (in thousands):

 

| **Year ended December 31, 2005** | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                             |       | $           | 24,298     |       | $          | 6,730     |       | $ | 31,028 |   |
| Gross Profit                                         |       | —      |       | 2,737      |       | 2,737     |       |
| Depreciation and Amortization                        |       | 186         |       | 241        |       | 427       |       |
| Selling, general and administrative expenses         |       | 16,315      |       | 3,979      |       | 20,294    |       |
| Goodwill impairment loss                             |       | —      |       | 212        |       | 212       |       |
| Operating Income (loss)                              |       | 7,983       |       | (1,454     | )          | 6,529     |       |
| Interest Income                                      |       | 420         |       | —     |       | 420       |       |
| Total Assets                                         |       | 29,280      |       | 2,954      |       | 32,234    |       |
|                                                 |       |        |       |       |       |      |       |
| **Year ended December 31, 2004** | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
| Revenues                                             |       | $           | 18,714     |       | $          | 1,821     |       | $ | 20,535 |   |
| Gross Profit                                         |       | —      |       | 580        |       | 580       |       |
| Depreciation and Amortization                        |       | 229         |       | 100        |       | 329       |       |
| Selling, general and administrative  expenses        |       | 12,041      |       | 2,802      |       | 14,843    |       |
| Operating Income (loss)                              |       | 6,601       |       | (2,221     | )          | 4,380     |       |
| Interest Income                                      |       | 104         |       | —     |       | 104       |       |
| Total Assets                                         |       | 20,753      |       | 2,720      |       | 23,473    |       |

 

The following information should beconsidered when reading the above table (in thousands):

 

•  The Company has no inter-segment revenue or expense.

 

•  Corporate overhead has been allocated to the Mossimo segment.

 

•  The provision for income tax is not allocated to businesssegments.

 

•  All long-lived assets were geographically located in the UnitedStates.

 

•  Revenue from countries other than the United States did not accountfor 10% or more of total revenue.

 

•  During 2003, the Company operated only the Mossimo segment.

 

•  Gross profit is derived by reducing sales of the Modern segment of$6,730 by $3,993 of cost of sales to arrive at a gross profit of approximately$2,737 for 2005. For 2004, sales of the Modern segment were $1,821 reduced bycost of sales of $1,241 to arrive at a gross profit of approximately $580.

 

•  Operating expenses that have a direct correlation to each segmenthave been recorded in each respective segment.

 

F-17

----

 

**11.**   VALUATION AND QUALIFYING ACCOUNTS

** **

As of December 31, 2005 and 2004there is no allowance for doubtful accounts or sales returns recorded for theMossimo segment. Changes in the allowances for doubtful accounts, and for salesreturns and markdowns for 2002 were as follows:

 
| ** **                                       | ** ** | ** **              | ** ** | **ADDITIONS**       | ** ** | ** **     | ** ** | ** **              | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **BALANCE AT**     | ** ** | **CHARGED TO** | ** ** | ** **     | ** ** | **BALANCE**             | ** ** |
| ** **                                       | ** ** | **BEGINNING**           | ** ** | **COSTS AND**  | ** ** | ** **     | ** ** | **AT END OF** | ** ** |
| ** **                                       | ** ** | **PERIOD**              | ** ** | **EXPENSES**        | ** ** | **DEDUCTIONS** | ** ** | **PERIOD**              | ** ** |
| ** **                                       | ** ** | **(IN THOUSANDS)** | ** ** |
| Year ended December 31, 2002—Note (a): |       |                    |       |                |       |           |       |                    |       |
| Allowance for doubtful accounts                  |       | $                       | 207        |                | $          | —         |       | $                       | (207       | ) | $ | — |   |
| Allowance for sales returns and markdowns        |       | 6,229                   |       | —              |       | (6,229         | )          | —                  |       |
|                                                  |            |                         |            |                     |            |                |            |                         |            |  |  |  |  |

 

----

Note (a): Deductions reflect the write-off of accounts previouslyreserved.

 

As of December 31, 2005 and 2004there was an allowances for doubtful accounts for the Modern segment. Changesin the allowances for doubtful accounts for 2005 for the Modern segment were asfollows:

 
| ** **                         | ** ** | **BALANCE AT**     | ** ** | **ADDITIONS**       | ** ** | ** **     | ** ** | **BALANCE**             | ** ** |
|------------------------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|-------------------------|------------|
| ** **                         | ** ** | **BEGINNING**           | ** ** | **CHARGED TO** | ** ** | ** **     | ** ** | **AT END OF** | ** ** |
| ** **                         | ** ** | **PERIOD**              | ** ** | **EXPENSE**         | ** ** | **DEDUCTIONS** | ** ** | **PERIOD**              | ** ** |
| ** **                         | ** ** | **(IN THOUSANDS)** | ** ** |
| Year ended December 31, 2004: |       |                    |       |                |       |           |       |                    |       |
| Allowance for doubtful accounts    |       | $                       | —     |                | $          | 22             |       | $                       | —     |   | $ | 22 |   |
| Year ended December 31, 2005: |       |                    |       |                |       |           |       |                    |       |
| Allowance for doubtful accounts    |       | $                       | 22         |                | $          | 88             |       | $                       | —     |   | $ | 110 |   |

 

**12.**   UNAUDITED INTERIM FINANCIAL INFORMATION

** **

The following tables set forth certainselected interim financial data for the Company by quarter for the years endedDecember 31, 2005 and 2004.

 
| ** **                      | ** ** | **YEAR ENDED DECEMBER 31, 2005**               | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                      | ** ** | **FIRST**                                                          | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **QUARTER**                                                        | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **YEAR** | ** ** |
| ** **                      | ** ** | **(IN THOUSANDS, EXCEPT PER SHARE DATA)** | ** ** |
| INCOME STATEMENT DATA:          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total revenues                  |       | $                                                                  | 8,664      |   | $ | 9,045 |   | $ | 6,771 |   | $ | 6,548 |   | $ | 31,028 |   |
| Earnings before income taxes(b) |       | 3,081                                                              |       | 3,076 |   | 755 |   | 37 |   | 6,949 |   |
| Provision for income taxes      |       | 1,260                                                              |       | 848 |   | 118 |   | 22 |   | 2,248 |   |
| Net earnings                    |       | 1,821                                                              |       | 2,228 |   | 637 |   | 15 |   | 4,701 |   |
| Net earnings per share:         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                           |       | $                                                                  | 0.12       |   | $ | 0.14 |   | $ | 0.04 |   | $ | 0.00 |   | $ | 0.30 |   |
| Diluted                         |       | 0.12                                                               |       | 0.14 |   | 0.04 |   | 0.00 |   | 0.30 |   |

 

F-18

----

 
| ** **                             | ** ** | **YEAR ENDED DECEMBER 31, 2004**               | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                             | ** ** | **FIRST**                                                          | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **QUARTER**                                                        | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **YEAR** | ** ** |
| ** **                             | ** ** | **(IN THOUSANDS, EXCEPT PER SHARE DATA)** | ** ** |
| INCOME STATEMENT DATA:                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total revenues                         |       | $                                                                  | 6,236      |   | $ | 6,208 |   | $ | 4,934 |   | $ | 3,157 |   | $ | 20,535 |   |
| Earnings (loss) before income taxes(b) |       | 2,037                                                              |       | 1,687 |   | (175 | ) | 935 |   | 4,484 |   |
| Provision (benefit) for income taxes   |       | 847                                                                |       | 680 |   | (50 | ) | 306 |   | 1,783 |   |
| Net earnings (loss)                    |       | 1,190                                                              |       | 1,007 |   | (125 | ) | 629 |   | 2,701 |   |
| Net earnings (loss) per share:         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                  |       | $                                                                  | 0.08       |   | $ | 0.06 |   | $ | (0.01 | ) | $ | 0.04 |   | $ | 0.17 |   |
| Diluted                                |       | 0.08                                                               |       | 0.06 |   | (0.01 | ) | 0.04 |   | 0.17 |   |

 

----

Note (a): Included in the fourth quarter of 2005 is an impairmentloss of goodwill in the amount of $212,000.

 

Note (b): Earnings (loss) before income taxes in the fourthquarter of 2004 reflects a reversal of accrued bonuses of $1.13 million.

 

F-19

----

 

**EXHIBIT INDEX**

 
| **EXHIBIT NO.** | ** ** | **DESCRIPTION** |
|----------------------|------------|-----------------|
| 3                    | .1         |            | Certificate of Incorporation of  Registrant(1) |
|                 |       |            |   |
| 3                    | .2         |            | Bylaws of the Registrant(1) |
|                 |       |            |   |
| 4                    | .1         |            | Specimen certificate of shares of Common  Stock of the Registrant(1) |
|                 |       |            |   |
| 10                   | .1*        |            | Registrant’s 1995 Stock Plan(1) |
|                 |       |            |   |
| 10                   | .2*        |            | Registrant’s 1995 Directors Stock Option  Plan(1) |
|                 |       |            |   |
| 10                   | .3         |            | Mossimo License Agreement, dated as of  March 28, 2000, between Mossimo, Inc. and Target Stores, a division  of Target Corporation(2) |
|                 |       |            |   |
| 10                   | .3.1       |            | Amendment to License and Design Services  Agreement, dated February 1, 2002(7) |
|                 |       |            |   |
| 10                   | .3.2       |            | Consent of Assignment and Amendment to  License and Design Services Agreement dated February 2, 2003(8) |
|                 |       |            |   |
| 10                   | .3.3       |            | Amendment to License and Design Services  Agreement dated June 20, 2003(9) |
|                 |       |            |   |
| 10                   | .5         |            | Cherokee-Mossimo Finders Agreement dated  March 27, 2000 between Mossimo, Inc. and Cherokee Inc.(2) |
|                 |       |            |   |
| 10                   | .6         |            | Lease, dated June 29, 2000, between  the Registrant and Lexington-Broadway Place, LLC(3) |
|                 |       |            |   |
| 10                   | .6.1       |            | First Amendment to Office Lease dated  June 26, 2002(7) |
|                 |       |            |   |
| 10                   | .6.2       |            | Second Amendment to Office Lease dated  January 1, 2004(10) |
|                 |       |            |   |
| 10                   | .7         |            | Sunglasses Agreement, dated as of  December 1, 2000, between Mossimo, Inc., Marcolin S.P.A. and Target  Stores(4) |
|                 |       |            |   |
| 10                   | .8*        |            | Amended and Restated Employment  Agreement between the Registrant and Mossimo Giannulli dated February 1,  2002(7) |
|                 |       |            |   |
| 10                   | .8.1*      |            | Amendment Number One to the Mossimo  Giannulli Employment Agreement, dated July 30, 2002(6) |
|                 |       |            |   |
| 10                   | .8.2       |            | Amendment Number Two to the Mossimo  Giannulli Employment Agreement, dated February 18, 2003(8) |
|                 |       |            |   |
| 10                   | .9         |            | Amended and Restated Mossimo Giannulli  Bonus Plan(11) |
|                 |       |            |   |
| 10                   | .10        |            | Amended and Restated Edwin Lewis Bonus  Plan(11) |
|                 |       |            |   |
| 10                   | .11        |            | 2005 Stock Option Plan(11) |
|                 |       |            |   |
| 10                   | .12        |            | Form of Stock Option Agreement for  2005 Stock Option Plan(11) |
|                 |       |            |   |
| 10                   | .13        |            | Restated License Agreement by and  between Mossimo, Inc. and Target Brands, Inc., dated as of March 31, 2006 |
|                 |       |            |   |
| 14                   | .1         |            | Code of Ethics |
|                 |       |            |   |
| 21                   |       |            | Subsidiaries of Registrant |
|                 |       |            |   |
| 23                   |       |            | Consent of Independent Registered Public  Accounting Firm - KPMG LLP |
|                 |       |            |   |
| 31                   | .1         |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
|                 |       |            |   |
| 31                   | .2         |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
|                 |       |            |   |
| 31                   | .3         |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |
|                 |       |            |   |
| 32                   | .1         |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(a) of the Securities Act of  1934 |

 

----

 
| **EXHIBIT NO.** | ** ** | **DESCRIPTION** |
|----------------------|------------|-----------------|
| 32                   | .2         |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(b) of the Securities Act of  1934 |
|                 |       |            |   |
| 32                   | .3         |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(b) of the Securities Act of  1934 |

 

----

NOTES:

 

(1)    Incorporated by reference from the Registrant’s RegistrationStatement on Form S-1 (No. 33-80597), as amended, which became effectiveFebruary 22, 1996.

 

(2)    Incorporated by reference from the Registrant’s Current Report onForm 8-K, dated March 28, 2000.

 

(3)    Incorporated by reference from the Registrant’s Quarterly Reporton Form 10-Q for the Quarter ended September 30, 2000.

 

(4)    Incorporated by reference from the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000.

 

(5)    Incorporated by reference from the Registrant’s Quarterly Reporton Form 10-Q for the Quarter ended June 30, 2002.

 

(6)    Incorporated by reference from the Registrant’s Quarterly Reporton Form 10-Q for the Quarter ended September 30, 2002.

 

(7)    Incorporated by reference from the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2002.

 

(8)    Incorporated by reference from the Registrant’s Quarterly Reporton Form 10-Q for the Quarter ended March 31, 2003.

 

(9)    Incorporated by reference from the Registrant’s Quarterly Reporton Form 10-Q for the Quarter ended June 30, 2003.

 

(10)  Incorporated by reference from the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2004.

 

(11)  Incorporated by reference from the Registrant’s Form 8-Kdated December 15, 2005.

 

*       Indicates a management contract or compensatory plan orarrangement.

 

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