**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

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FORM 10-K

**x**                              ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**FOR THE FISCAL YEAR ENDED DECEMBER 31,2004**

**OR**

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

**FOR THE TRANSITION PERIOD FROM                    TO                    **

**COMMISSION FILE NUMBER: 1-14208**

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MOSSIMO,INC.

(Exact name of registrant as specified in its charter)

| **DELAWARE**                                                    | **33-0684524**           |
|-----------------------------------------------------------------|--------------------------|
| (State or other jurisdiction of  incorporation or organization) | (I.R.S. Employer ID No.) |
| **2016 BROADWAY  SANTA MONICA, CALIFORNIA**                     | **90404**                |
| (Address of principal executive offices)                        | (Zip Code)               |

 

**(310) 460-0040**

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of theAct: **None**

Securities registered pursuant to Section 12(g) of theAct: **Common stock, par value $.001 per share**

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuantto Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference and Part III of this Form 10-Kor any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an acceleratedfiler (as determined by Exchange Act Rule 12b-2). Yes o No x

The aggregate market value of the voting stock held bynon-affiliates of the registrant on June 30, 2004, the last business dayof the registrant’s most recently completed second quarter was approximately$21,207,000 (based on the closing sales price of the registrant’s common stockon that date).

The registrant had 15,738,442 shares of common stock, par value$.001 per share outstanding at February 28, 2005.

**DOCUMENTS INCORPORATED BY REFERENCE**

Part III of this Form 10-Kincorporates by reference information from the Registrant’s Proxy Statement forthe 2005 Annual Meeting of Stockholders to be filed within 120 days of the endof the fiscal year ended December 31, 2004.

 

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**FORWARD LOOKING INFORMATION**

This report on Form 10-Kcontains certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward looking statementsrelate to matters such as the Company’s future operating results, the successand longevity of its licensing program with Target in the United States, Hudson’sBay Company in Canada, and other licensees, and the Company’s success in executingits business plan for Modern Amusement. Such forward-looking statements arebased on the beliefs of the Company’s management as well as assumptions made byand information currently available to the Company’s management. The words “anticipate”,“believe”, “may”, “estimate”, “plan”, “expect”, “future”, “intend”, “will”, “should”,“continue” and similar expressions, variations of such terms or the negative ofsuch terms as they relate to the Company or its management when used in thisdocument, are intended to identify such forward-looking statements. Inparticular, the forward looking statements in this Form 10-K include,among other things, statements regarding or expectations about our futurerevenues and earnings. Forward looking statements include known or unknownrisks and uncertainties that may cause our results, performance and stock priceto be materially different from the forward looking statements. Such statementsare based on management’s current expectations and are subject to certainrisks, 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 products bearingthe 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.

**ITEM 1—BUSINESS**

**GENERAL**

Mossimo, Inc.(the Company) is a Delaware corporation formed in November 1995, andpresently operates as a designer and licensor of apparel and related productsunder the “Mossimo” brand and other brands it owns or may acquire. The Companylicenses the Mossimo brand to third parties domestically and internationally,our primary domestic licensee is Target Corporation. Our design and licensingstrategy is operated with the understanding that almost all aspects ofmoderately priced apparel and accessories can be sourced more effectively bylarge retailers who interact daily with the end consumer and who operate withsignificant economies of scale. By direct sourcing, stocking and selling widelyrecognized brand names licensed from others, these retailers in general may beable to obtain higher gross margins and increase store traffic, than throughcarrying only private label goods or brands, from third-party vendors.

In addition to the Target Agreement, the Company also licenses itsMossimo trademarks and provides design services outside of the United States,and also licenses its Mossimo trademarks for use in collections of eyewear andwomen’s swimwear and body-wear sold in Target stores in the United States.

**NEW WHOLESALEBUSINESS**

In January 2004,the Company acquired Modern Amusement, which is focused on design anddistribution of premium branded west coast-lifestyle casual sportswear appareland related accessories for young men and young women under the ModernAmusement brand. The products are offered at moderate 

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to upper price points through traditional specialty stores andbetter department store distribution channels. The Modern Amusement businessincludes sourcing manufactured products, wholesale distribution, inventorymanagement, marketing, promoting, and advertising of apparel and related accessoriesunder the Modern Amusement brand. While the Modern Amusement business isrelatively small, as the Company expands into the wholesale products business,it will encounter increased exposure to excess and obsolete inventories,potential delays and cancellations from sourcing manufactured productsdomestically and internationally, and product returns and allowances fromretail customers, as well as marketing, promotion and advertising expendituresthat may not result in successful campaigns.

The Company’sstrategy in developing Modern Amusement is to diversify the Company’s currentdesign and licensing businesses through the development of mass wholesaledistribution channels.

Net sales for Modern Amusement for the year ended December 31,2004 were $1.821 million with a gross profit margin of 32%. SG&A expensefor Modern Amusement for the year ended December 31, 2004 was $2.8 million.For 2004, Modern Amusement had an operating loss of $2.221 million. ModernAmusement’s total assets as of December 31, 2004 were $2.570 million.

**DESIGN ANDMERCHANDISING**

The cornerstone of the Company’s business is its ability to designproducts embodying the image of a contemporary, active, and youthful lifestyle.The Company’s designs are inspired by subtle changes in culture and societyincluding such areas as music, television, cinema, architecture and other formsof artistic expression, and appeal to the contemporary consumer. The work ofthe Company’s design staff reflects the Company’s fashion conscious consumer asthey consistently monitor changes in fashion, style, culture and society, anddevelop designs that interpret such trends considering the targeted consumergroup. The Company’s product design and merchandising services provided tolicensees, along with the right to approve design, advertising, and promotionalmaterials are an important aspect for continuity of product quality,maintaining and enhancing the Company’s distinctive image and the value of itsMossimo trademark.

**LICENSING**

*DomesticLicensing.*

The Companyentered into a multi-year licensing and design services agreement with Targetin March 2000 which was subsequently amended in April 2002, and in February andJune 2003 (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 TargetAgreement the Company provides design services and has approval rights forproduct design, marketing and advertising materials. Target collaborates ondesign and is responsible for product development, sourcing, quality controland inventory management with respect to the Target licensed product line.Target is obligated to pay the Company design service fees and license royaltyfees. Total fees payable by Target are based upon a percentage of Target’s netsales of Mossimo brand products that varies according to the volume of sales ofmerchandise. Target has agreed to pay minimum guaranteed fees of approximately$9.6 million annually. Target’s fees are based on net sales achieved multipliedby a rate, as defined in the Target Agreement. The Company pays a 15%commission, based on fees received from Target, to a third party who assistedthe Company in connection with entering into the initial agreement with Target.The Target Agreement is subject to early termination under certaincircumstances. If Target is current with payments of its obligations under theTarget Agreement, Target has the right to renew the Target Agreement, on thesame terms and conditions, for additional terms of two years each. In 

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January 2003, Target exercised its first renewal optionextending the Target Agreement through January 31, 2006. In January 2005,Target exercised its second renewal option extending the Target Agreementthrough January 31, 2008. The next renewal option could be exercised byTarget on or before January 2007, this renewal option could extend theTarget Agreement thru January 2010, if it is exercised by Target.

The TargetAgreement is subject to early termination under certain circumstances,including a material failure by Mossimo Giannulli to perform certain servicesor the termination of employment, death or permanent disability of Mr. Giannullior 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.

The Company haslicensed the exclusive right to manufacture and distribute eyewear bearing itsMossimo trademarks through specialty retail stores such as opticians, opticalchains and specialty eyeglass and sunglass stores pursuant to a licenseagreement with the Marcolin Group. This agreement ended on December 31,2004. The Company in the process of negotiating a new agreement with LantisAcquisition Corp.

The Company has licensedthe exclusive right to manufacture and distribute women’s swimwear and bodywearbearing its Mossimo trademarks through Target stores in the United Statespursuant to a license agreement with The Lunada Bay Corporation. This agreementextends through September 30, 2005, and is renewable annually.

Under license agreements the Company grants retailers a license touse its trademarks on certain categories of merchandise. The Company providesdesign directions and to the extent licensees desire to modify the designs toaccommodate seasonal, regional or category needs, the Company retains approvalrights with respect to the design of products, advertising, and marketing. Inall cases, all products are subject to our pre-approved packaging, graphics andqualify control standards. The retailer is responsible for manufacturing themerchandise. All payments under the Target Agreement are due on a quarterlybasis and range from one to four percent of net sales depending on the volumeof sales achieved in each contract year. Under all other license agreements,royalty payments are due generally on a quarterly basis and range fromapproximately two to seven percent of the licensee’s net sales.

*InternationalLicensing*

The Company entersinto International licensing agreements of its Mossimo branded products forcertain geographical territories when the Company believes such arrangementsprovide effective manufacturing, distribution and marketing of such products.The Company generally maintains substantial control over the design, quality,advertising, and marketing of its licensed products, and maintains a policy ofevaluating its licensing arrangements to ensure consistent presentation of theMossimo brand image.

In May 2002, the Company entered into an exclusive agreementwith Hudson’s Bay Company. Under the agreement the Company provides productdesign services, and licenses the Mossimo trademark to Hudson’s Bay Company forexclusive use in Canada. The Company receives license royalties and designservice fees. Hudson’s Bay Company collaborates on product design, and isresponsible for manufacturing, importing, marketing, advertising, selling anddistributing merchandise bearing the Mossimo trademark. The initial term of theagreement is three years beginning in May 2002, with a five-year extensionat the option of Hudson’s Bay Company. Hudson’s Bay Company fully launched theMossimo branded product in mid-March 2003 for distribution through itsZellers stores in Canada.

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**PRODUCTS**

MEN’S, WOMEN’S ANDCHILDREN’S APPAREL AND ACCESSORIES.   Mossimo branded apparel encompass avariety of products, including: knit and woven tops (including polo shirts andcollared, button-down shirts); outerwear, including sweaters and jackets; denimand related products, including jeans, shirts and jackets; dresses; pants;screenprinted and embroidered sweatshirts and tee-shirts; and shorts. Theseproducts are designed exclusively for distribution under the Company’slicensing agreements (Target in the United States and Hudson’s Bay Company fordistribution through Zellers stores in Canada). The initial Target licensedproduct lines were launched in Target’s stores in the Fall of 2000 and throughZellers stores in Spring of 2003. The Company complements its apparel productlines with footwear and other fashion accessories such as jewelry, watches,handbags, belts, neckwear and gloves.

HOME PRODUCTS.   InCanada the Company has expanded its Mossimo branded product line to includehome products such as towels and sheets, as well as a complete line of kitchen,bedroom and bath soft good products and accessories. These products werelaunched thru Zellers stores in Spring of 2003.

OPTICS LINE.   TheCompany has 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, opticalchains and specialty eyeglass and sunglass stores. This agreement, however,permits Target to sell Mossimo branded eyewear in Target stores. The licenseagreement expired on December 31, 2004. The Company is negotiating alicensing agreement with Lantis Acquisition Corp. for the production anddistribution of the Mossimo branded product line of eyewear, includingsunglasses, sport glasses and optical frames. Lantis Acquisition Corp. wouldsell Mossimo branded eyewear through specialty retail stores such as opticians,optical chains and specialty eyeglass and sunglass stores. This agreement,however, will permit Target to sell Mossimo branded eyewear in Target stores.

WOMEN’S SWIMWEARAND BODYWEAR.   The Mossimo branded product line of women’s swimwear andbodywear is manufactured and distributed through Target stores in the UnitedStates under an exclusive license agreement with The Lunada Bay Corporation.The high quality swimwear products include one-piece and two-piece swimsuitswhich are fashion-oriented and targeted towards youthful-minded, body-consciouswomen. The line of women’s body wear is a collection of fashionable fitnessactive wear which is designed and manufactured using materials such as lycra,tactel and flexcel nylon that stretch and compensate for body movements duringstrenuous exercise. The license agreement extends through September 30,2005, and is renewable annually.

MODERN AMUSEMENT BRANDED PRODUCTS.   Modern Amusement isfocused on design and distribution of premium branded west coast-lifestylecasual sportswear apparel and related accessories for young men and young womenunder the Modern Amusement trademarked brand.

**SOURCING, MANUFACTURING, AND DISTRIBUTION**

*Design and Licensing*.   Under the Company’s retaillicensing agreement the retailer is responsible for product development,sourcing, manufacturing, quality control, distribution, and inventorymanagement.

*Modern Amusement*.   The Modern Amusement businessincludes sourcing manufactured products, distribution, and inventory managementof apparel and related accessories under the Modern Amusement trademarked brand.We currently purchase most of our product from international vendors. We supplythe manufacturers with the product design and fabric selection. We do notmaintain any long-term or exclusive commitments or arrangements to purchasemerchandise from any single supplier, and there are many vendors who couldsupply our merchandise. We warehouse and distribute our finished goods througha fulfillment company. Markdowns are taken as required to effect the sale ofslow-moving inventory. Markdown merchandise that remains unsold is sold to aclearance company.

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**MARKETING AND ADVERTISING**

*Design and Licensing*.   The Company has developed adistinctive image of a contemporary, active, and youthful lifestyle and strivesto maintain consistency through the coordination of product merchandising,advertising, and marketing promotions.

Under itsLicensing Agreements, the Company primarily relies on its licensees toadvertise the Mossimo branded product and intends to continue to promote apositive brand image through licensee-sponsored advertising and marketingpromotions. The Company has approval rights for marketing and advertisingmaterials.

*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**

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

In connection withthe Modern Amusement business, the Company acquired worldwide trademark rightsfor Modern Amusement and the Crow Design marks, except for the Asia territory.The current Modern Amusement trademark portfolio includes 14 registrations and8 pending applications in eleven nations.

The Company regards its trademarks and other proprietary rights asvaluable assets and believes they have significant value in the sales andmarketing of its products. The Company vigorously protects its trademarksagainst infringement by using, among other things, cease-and-desist letters,administrative proceedings, and applicable legal action.

**PERSONNEL**

The Company currently employs twenty-eight full time employees, ofwhich nine are employed by Modern Amusement, and also employs temporarypersonnel on an as needed basis. A substantial number of the Company’spersonnel and resources are dedicated to providing design services. The Companybelieves that it is able to recruit and retain the high level of creativepersonnel to continue to provide the necessary design services to maintain thecontinuity of product quality, the Company’s distinctive image, and the valueof its trademarks. None of the Company’s employees are covered by collectivebargaining agreements. The Company considers its relations with its employeesto be satisfactory.

**CODE OF ETHICS**

The Company hasadopted a Code of Ethics in accordance with the rules of the Securitiesand Exchange Commission and NASDAQ. A copy of such a code can be obtained bywritten request from:

Chief Financial Officer

Mossimo, Inc.

2016 Broadway

Santa Monica, CA 90404

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**RISK FACTORS**

In addition to the other information contained herein orincorporated by reference, the risks and uncertainties and other factorsdescribed below could have a material adverse effect on our business, financialcondition, results of operations, cash flows and share price and could alsocause our future business, financial condition and results of operations andcash flows to differ materially from the results contemplated by anyforward-looking statement we may make herein, in any other document we filewith the Securities Exchange Commission, or in any press release or otherwritten or oral statement we may make.

***DEPENDENCE ON THETARGET STORES LICENSE WHICH ACCOUNTED FOR 79% OF OUR CONSOLIDATED REVENUES IN2004.***

The Company’srevenues under the Target Agreement commenced in November 2000, andrepresented 79% in 2004, 88% in 2003, and 92% in 2002, of total revenue. TheCompany expects that its revenues under the Target Agreement will continue torepresent a significant portion of the Company’s total revenues during theremaining term of the Target Agreement, which has been extended through January 2008,and is subject to future extension. Because the amount of the Company’srevenues under the Target Agreement are dependent on the sales of Mossimo brandproducts in Target stores, the Company’s revenue potential is impacted by thenumber of Target stores and the patronage at these stores, and Target’s abilityand/or commitment to manufacture and market Mossimo branded products.Termination or non-extension of the Target Agreement, or a material adversechange in the business of Target stores, could have a material adverse effecton the Company’s business, financial condition, and results of operations. Theterm of the Amended Target Agreement currently extends until January 31,2008 and, unless Target Stores gives us one year’s advance notice of itsintention to terminate the agreement, the Agreement will continue toautomatically renew provided that Target Stores has paid a minimum guaranteedroyalty equal to or greater than $9.6 million for the preceding fiscal year. IfTarget Stores elects to terminate the agreement, effective after January 31,2008 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.

***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.***

Modern Amusement has onlya limited operating history and its business and future prospects are difficultto evaluate. The risks and difficulties we encounter include acceptance of theModern Amusement brand, manufacturing arrangements, management of inventory anddistribution and overall execution of a successful business model. In 2004,Modern Amusement had an operating loss of $2.221 million. There is no assurancethat the Modern Amusement business will become profitable on an operating basisin the near term.

***CHANGES IN FASHIONTRENDS***

The apparel industry is subject to rapidly changing consumerdemands and preferences, which may adversely affect companies which misjudgesuch demands and preferences. The Company believes that its success depends onits ability to anticipate, gauge and respond in a timely manner to changingconsumer 

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demands and fashion trends. There can beno assurance that the Company will be successful in this regard. If fashiontrends shift away from the Company’s products, or if the Company otherwisemisjudges the market for its product lines, resulting in a decline insell-through rates at retail, the Company may be faced with conditions whichcould have a material adverse effect on the Company’s financial condition andresults of operations. Decisions with respect to product designs often need tobe made several months in advance of the time when consumer acceptance of suchproducts is known. In addition, any failure by the Company to identify andrespond to changing demands and trends could adversely affect consumeracceptance of the Mossimo and Modern Amusement brand names, which may have anadverse effect on the Company’s business and prospects.

***NEW PRODUCTINTRODUCTIONS***

The Company’s success is dependent upon its ability to create anddevelop new product designs and new product lines. As is typical with new products,demand for and market acceptance of new designs and products introduced by theCompany is subject to uncertainty. There can be no assurance that the Company’sefforts will be successful. In addition, the failure of new product designs ornew product lines to gain sufficient market acceptance could adversely affectthe image of the Mossimo brand name and consumers’ demand for other Mossimo andModern Amusement branded products.

***DEPENDENCE ON KEYPERSONNEL***

The success of the Company is largely dependent on the efforts andabilities of its design staff, which includes Mossimo Giannulli, the Company’sfounder and Co-Chief Executive Officer. The Company has only eighteenemployees, and Mr. Giannulli’s leadership and experience in the apparellicensing industry is critical to the successful implementation of the Company’sbusiness and marketing strategy. The Company has key person life insurancecovering Mr. Giannulli. The Target Agreement is subject to earlytermination under certain circumstances, including a material failure by Mr. Giannullito perform certain services or the termination of employment, death orpermanent 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. During2005, the Company extended the employment agreement with Mr. Giannullithru January 2006. The loss of Mr. Giannulli’s services could have amaterial adverse effect on our business, financial condition, and results ofoperations.

***COMPETITION***

Competition in thecontemporary apparel and related fashion accessories industry is extensive. TheCompany’s products are subject to competition from designer and non-designerlines sold in a wide variety of retail stores, including Target stores, many ofwhich have increased in recent years the amount of sportswear and activewearmanufactured specifically for them and sold under their own private labels.

The Company’s Mossimo branded products compete based on factorsincluding brand name appeal, design, style and color selection, quality ofgarment construction and price. Such competitors include Cherokee, Sideout, TheGAP, Old Navy, V.F. Corp., Levi Strauss, Quicksilver, among others. Increased competitionby existing 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’s success isdependant on its licensees’ ability to manufacture and sell product bearing theMossimo brand and to respond to ever changing consumer demands. The Company’sModern Amusement branded products compete based on factors including brand nameappeal, design, style and color selection, and quality of garment construction.Such competitors include Diesel, Penguin, Lacoste, Fred Perry, Howe, BenSherman, 7 Diamond, Paper, Denim & Cloth, AG Jeans, among others. Increasedcompetition by existing and future competitors could result in reductions inretail sales and reductions in revenues to the 

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Company, or reduction of prices of theCompany’s products that could have a material adverse effect on the Company’srevenues, financial condition, and results of operations. The Company expectsthat its products will continue to face significant competition in the future,in particular as other companies with established trademarks enter intolicensing arrangements with retailers.

***UNCERTAINTIES INAPPAREL RETAILING; GENERAL ECONOMIC CONDITIONS***

The apparelindustry historically has been subject to substantial economic cyclicalvariations. Economic observers have recently commented that the United Stateseconomy may be rebounding. As the economic conditions change the trends indiscretionary consumer spending become unpredictable, and could be subject toreductions due to uncertainties about the future. When discretionary spendingis reduced, purchases of apparel and related products tend to decline. Additionally,the continued military responses to current International military situations,and possible future terrorist attacks on the United States may exacerbatecurrent economic conditions and lead to a downturn in the economy. Adverseeconomic conditions and any related decreases in discretionary spending byconsumers could have a material adverse effect on the Company’s results ofoperations.

***FUTURE CHANGES INFINANCIAL ACCOUNTING STANDARDS MAY CAUSE ADVERSE UNEXPECTED OPERATINGRESULTS AND AFFECT THE COMPANY’S REPORTED RESULTS OF OPERATIONS.***

A change in accounting standards can have a significant effect onthe Company’s reported results and may affect the Company’s reporting oftransactions completed before the change is effective. Changes to existing rules orthe questioning of current practices could adversely affect our reportedfinancial results.

***PROTECTION OFTRADEMARKS***

The Company believes that its trademarks and other proprietaryrights are important to its success and its competitive position. Accordingly,the Company devotes substantial resources to the establishment and protectionof its trademarks on a worldwide basis. There can be no assurance that theactions taken by the Company to establish and protect its trademarks and otherproprietary rights will be adequate to prevent imitation of its products byothers or to prevent others from seeking to block sales of the Company’sproducts as violative of the trademarks and proprietary rights of others. Noassurance can be given that others will not assert rights in, and ownership of,trademarks and other proprietary rights of the Company. In addition, the lawsof certain foreign countries do not protect proprietary rights to the sameextent as do the laws of the United States. Despite our efforts to protect ourintellectual property rights, unauthorized parties may attempt to copy aspectsof our intellectual property, which would have a material adverse effect on ourbusiness prospects, financial condition, results of operations and liquidity. Inthe future we may be required to assert infringement claims against thirdparties, and there can be no assurance that one or more parties will not assertinfringement claims against us. While we currently have the resources to pursueor defend most infringement claims, any resulting litigation could result insignificant expense and divert the efforts of our management personnel whetheror not such litigation is determined in our favor.

***CONTROL BYPRINCIPAL STOCKHOLDERS***

Mossimo Giannulli has majority control of the Company and theability to control the election of directors and the results of other matterssubmitted to a vote of stockholders. Such concentration of ownership, togetherwith the anti-takeover effects of certain provisions in the Delaware GeneralCorporation Law and in the Company’s Certificate of Incorporation and Bylaws,may have the effect of delaying or preventing a change in control of theCompany.

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***CERTAIN FEDERALTAX CONSEQUENCES***

In addition to theCompany’s taxable income being subject to federal, state and local incometaxes, the Company may be classified as a “personal holding company” from timeto time. Personal holding company status results from more than 50% of thevalue of outstanding stock being owned directly or indirectly by five or fewerindividuals, and more than 60% of the Company’s income, as defined, beingderived from royalties. Personal holding companies are subject to an additionalfederal tax at a 15% tax rate on undistributed after tax earnings.

Over 50% of the value of the Company’s outstanding stock is ownedby one stockholder, and in 2002 and 2001, more than 60% of the Company’sincome, as defined, was derived from license royalties. Accordingly, theCompany was classified as a personal holding company in 2002 and 2001. However,no personal holding company tax was due in 2002 because the Company recognizedcertain expenses for tax purposes in 2002 that had been recognized in previousyears for financial reporting purposes, and which offset the taxable incomesubject to personal holding company tax in 2002. In addition, no personalholding company taxes were due in 2001 because the Company was able to use itstax operating loss carry forward to offset the taxable income subject to personalholding company tax in 2001. In 2003 and 2004 less than 60 percent of theCompany’s income, as defined, was derived from license royalties, accordinglyit was not classified as a personal holding company and was not subject to thepersonal holding company tax. The Company intends to continue to takeappropriate measures to avoid being classified as a personal holding company infuture years. However, there can be no assurance that the Company will besuccessful in its efforts to avoid classification as a personal holding companyin the future.

**ITEM 2—PROPERTIES**

The Company’s current corporate headquarters and design studiosare located in Santa Monica, California and consist of a leased facilitytotaling approximately 6,000 square feet of space. In January 2004, theCompany expanded its leased facilities from 6,000 to approximately 9,000 squarefeet of space to accommodate newly acquired Modern Amusement at a near-by butseparate facility.

**ITEM 3—LEGALPROCEEDINGS**

In May 2002,the Company made a demand for arbitration in connection with a claim foroverpayment of commissions paid to a third party who assisted the Company inconnection with entering into the initial agreement with Target. Thearbitration hearing was completed in October 2002. In November 2002,the arbitration hearing panel issued a preliminary award in favor of the thirdparty, which became final in January 2003 and awarded the third party thecommissions owed, interest on the amounts due which had been withheld by theCompany, and the recovery of the third party’s legal fees.

In January 2003,the Company filed a petition to vacate the award, including commissions, thirdparty legal fees, and interest, on the basis that the evidence received duringthe arbitration hearing demonstrated that the finder’s agreement between theCompany and the third party was illegal under certain applicable Californialaw. In January 2003, the third party filed a petition to confirm theaward, including commissions, the third party’s legal fees, and interest.

In June 2003,the award was confirmed and a judgment entered in favor of the third party, andthe third party was awarded additional interest. In June 2003, the Companyfiled an appeal to the judgment and in connection therewith deposited with thecourt approximately $4,585,000. The $4,585,000 deposited with the courts wasclassified as restricted cash on the Company’s balance sheet as of December 31,2003. The deposit secured 150% of the judgment amount. In January 2004,the appeal decision was rendered in favor of the third party, and the Companyproceeded with an appeal to the Supreme Court of the State of California.

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In March 2004,the California Supreme Court denied the Company’s appeal. The CaliforniaSupreme Court’s decision not to review the trial court judgment reaffirmed thevalidity of the original finder’s agreement between the third party and Mossimoand the third party’s right to be paid all amounts currently due, includinginterest at the legal rate and all post-judgment amounts as well as attorney’sfees.

In 2004, the Company paid all unpaid commissions, legal fees andinterest payable to the third party in connection with this litigation. TheCompany had accrued for the full amount each quarter under the originalagreement with the third party, including estimated penalties and interest.

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

No matters were submitted to a vote of security holders during thefourth quarter of 2004.

**ITEM 5—MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER 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, 2004** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  ended                                             |       | $          | 4.95       |     | $          | 3.80    |       |
| Second Quarter  ended                                            |       | $          | 4.39       |     | $          | 3.79    |       |
| Third Quarter  ended                                             |       | $          | 4.16       |     | $          | 2.88    |       |
| Fourth Quarter  ended                                            |       | $          | 3.87       |     | $          | 2.99    |       |

 
| **Fiscal Year ended December 31, 2003** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                                                    |       | $          | 6.65       |     | $          | 4.41    |       |
| Second Quarter                                                   |       | $          | 4.89       |     | $          | 3.50    |       |
| Third Quarter                                                    |       | $          | 4.00       |     | $          | 6.70    |       |
| Fourth Quarter                                                   |       | $          | 4.16       |     | $          | 6.25    |       |

 

The high and lowsales prices on the Company’s common stock reported on the NASDAQ NationalMarket System on February 28, 2005 were $4.10 and $4.00 per share,respectively. On February 28, 2005, the closing sales price of the Company’scommon stock reported on NASDAQ was $4.06 per share.

As of February 28, 2005, the Company had 211 stockholders ofrecord. This does not include beneficial owners whose shares may be held ofrecord by brokerage firms and clearing agencies.

**DIVIDENDS**

To date, the Company has never paid a dividend on its common stock.Any future determination as to the payment of dividends will be at thediscretion of the Company’s Board of Directors and will depend upon the Company’sresults of operations, financial condition, contractual restrictions, andchanges in the tax laws, and other factors deemed relevant by the Board ofDirectors.

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**ITEM 6—SELECTEDFINANCIAL 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’sDiscussion and Analysis of Financial Condition and Results of Operations.” Thestatement of operations and balance sheet data presented below has been derivedfrom the Company’s financial statements.
| ** **                                                           | ** ** | **YEARS ENDED DECEMBER 31,**                                 | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                                                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                           | ** ** | **(IN THOUSANDS, EXCEPT FOR PER SHARE DATE)** | ** ** |
| STATEMENTS OF OPERATIONS  DATA:                                      |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Revenue from  license royalties & design service fees  |       | $                                                                           | 18,714     |   | $ | 19,895 |   | $ | 19,881 |   | $ | 16,666 |   | $ | 24,150 |   |
| Product sales                                                        |       | 1,821                                                                       |       | — |   | — |   | — |   | 3,475 |   |
| Total revenues                                                       |       | 20,535                                                                      |       | 19,895 |   | 19,881 |   | 16,666 |   | 27,625 |   |
| Operating expenses:                                                  |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Cost of product sales                                                |       | 1,241                                                                       |       | — |   | — |   | — |   | 20,730 |   |
| Selling, general, and administrative expenses                        |       | 14,843                                                                      |       | 12,834 |   | 11,925 |   | 10,455 |   | 19,017 |   |
| Settlement costs of disputed commissions                             |       | 71                                                                          |       | 643 |   | 600 |   | — |   | — |   |
| Total operating expenses                                             |       | 16,155                                                                      |       | 13,477 |   | 12,525 |   | 10,455 |   | 39,747 |   |
| Operating income (loss)                                              |       | 4,380                                                                       |       | 6,418 |   | 7,356 |   | 6,211 |   | (12,122 | ) |
| Other (income)  expense:                                             |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Other, net                                                           |       | —                                                                      |       | — |   | (181 | ) | (536 | ) | (760 | ) |
| Interest Income                                                      |       | (104                                                                        | )          | (23 | ) | (75 | ) | (74 | ) |   |   |
| Interest expense                                                     |       | —                                                                      |       | — |   | 351 |   | 938 |   | 923 |   |
| Other (income) expense, net                                          |       | (104                                                                        | )          | (23 | ) | 95 |   | 328 |   | 163 |   |
| Income before  income taxes                                          |       | 4,484                                                                       |       | 6,441 |   | 7,261 |   | 5,883 |   | (12,285 | ) |
| Income tax expense (benefit)                                         |       | 1,783                                                                       |       | 1,875 |   | (6,404 | ) | (3,153 | ) | 3 |   |
| Net income (loss)                                                    |       | $                                                                           | 2,701      |   | $ | 4,566 |   | $ | 13,665 |   | $ | 9,036 |   | $ | (12,288 | ) |
| Net income (loss) per  common share:                                 |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                |       | $                                                                           | 0.17       |   | $ | 0.29 |   | $ | 0.89 |   | $ | 0.59 |   | $ | (0.81 | ) |
| Diluted                                                              |       | $                                                                           | 0.17       |   | $ | 0.29 |   | $ | 0.87 |   | $ | 0.59 |   | $ | (0.81 | ) |
| Weighted average common  shares outstanding:                         |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                |       | 15,738                                                                      |       | 15,613 |   | 15,409 |   | 15,080 |   | 15,050 |   |
| Diluted                                                              |       | 15,759                                                                      |       | 15,658 |   | 15,648 |   | 15,080 |   | 15,050 |   |

 

Note (a): Reflects the reductions of thevaluation allowance against certain components of deferred tax assets in 2002and 2001.
| ** **                           | ** ** | **DECEMBER 31,**   | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                           | ** ** | **(IN THOUSANDS)** | ** ** |
| BALANCE SHEET DATA:                  |       |                    |       |   |   |   |   |   |   |   |   |
| Working Capital                      |       | $                       | 14,665     |   | $ | 11,918 |   | $ | 5,971 |   | $ | (1,342 | ) | $ | (5,423 | ) |
| Total Assets                         |       | 22,921                  |       | 26,413 |   | 20,536 |   | 9,294 |   | 1,964 |   |
| Long-term debt                       |       | —                  |       | — |   | — |   | — |   | — |   |
| Other long-term  Liabilities         |       | —                  |       | — |   | 191 |   | 1,596 |   | 5,676 |   |
| Stockholders’ equity  (deficit) |       | 21,713                  |       | 19,012 |   | 13,480 |   | (678 | ) | (10,458 | ) |
|                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 7—MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Management’s discussion and analysis should be read in conjunctionwith the Company’s consolidated financial statements and the notes thereto setforth in this Form 10-K commencing on page F-1.

**RESULTS OFOPERATIONS**

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

Our financialresults are significantly impacted by our staffing levels and key executivecompensation, the development of the Modern Amusement business, and by theretail sales of our Mossimo branded products under the licensing and designservices agreement with Target, which is exclusive to the United States.

Under the Targetagreement, we earn fees based on percentage of Target stores net sales ofMossimo branded product. The percentage varies according to the volume ofsales. We earn 4% on the first $100 million of sales, 2-1¤4% on $100 million to $500 millionof sales, and 1% on sales above $500 million each year. As a result, our revenuesfrom license royalties and design secure fees are highest at the beginning ofeach year and decrease throughout each year as Target reaches the specificretail thresholds. Therefore, the amount of the royalty revenue received by usin any quarter is dependent not only on retail sales of branded products insuch quarter, but also the cumulative level of retail sales, and the resultingattainment of royalty rate reductions in any preceding quarters in the sameyear.

Revenues fromTarget were 79% and 88% of total revenues in 2004 and 2003, respectively. Thechange in 2004 was primarily due to the contribution to revenues of ModernAmusement, and the sale of our Mossimo branded products in Canada under alicensing and design services agreement with Hudson’s Bay Company fordistribution thru its Zellers stores exclusively in Canada. The Canadianbusiness has diversified our customer base and expanded our territory coverageof the Mossimo brand. Total revenues for 2004 were $20.5 million compared to$19.9 million in 2003. The increase was primarily due to revenues of $1.821million generated from Modern Amusement. Total revenue in 2004 increased by$0.6 million, or 3% from 2003, and revenue from Target decreased 7% from 2003. Thedecrease in Target revenue was primarily due to reduced consumerpurchases of Mossimo branded products in 2004 at Target stores.

Cost of sales in2004 resulted entirely from Modern Amusement product sales. Cost of salesapproximated 68% of sales. We experienced a low profit margin due to markdowns.We expect margins to improve as regular price sales become a larger percentageof total sales. Cost of sales includes all costs and expenses incurred prior tothe receipt of finished goods at the Company’s distribution facilities. Thesecosts include, but are not limited to, product cost, inbound freight charges,purchasing and receiving costs, inspection costs, insurance, duty, and brokers’fees.

The majorcomponents of selling, general and administrative (S, G & A)****expenses are payroll, executive bonuses, commissionspayable to a third party in connection with the Target agreement, and expensesincurred in connection with design related and business development activitiessuch as travel, samples and artwork purchases, and free-lance artists, as wellas facilities, legal, accounting, and insurance expenses. Our S, G & Aincreased approximately $2.0 million or 16% from 2003 to 2004, principally dueto the acquisition of Modern Amusement in January of 2004 and an increasein travel expense of $519,000 from 2003 primarily attributed to developing andmarketing the Modern Amusement business. Selling, general and administrativeexpenses for the Modern Amusement segment for 2004 were $2.8 million. Althoughoverall S, G & A increased in 2004, executive bonuses decreased by$1.25 million in 2004 from 2003. Executive bonuses were reduced consistent withthe Company’s comparative performance. These bonuses which are determined atthe discretion of the Board of Directors, in accordance with a performancecriteria outlined in respective bonus plans, and are subject to a maximumannual amount 

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based on a percent of Target license royalty fees in excess of theminimum annual fee, are estimated and accrued on a quarterly basis, with afinal determination made by the Board of Directors at the end of each year. Inthe fourth quarter, management and the compensation committee concluded thatthe Company was not going to achieve its performance targets previouslyestablished in the bonus plan, and accordingly, accrued bonuses ofapproximately $1.13 million were reversed. We do not expect that furtherincreases in staff or design related activities will be necessary in order toservice the Target and Zellers business in the future.

As furtherdiscussed in Item—3 Legal Proceedings of this report, we had a dispute over thecommissions payable to a third party which relate to our agreement with Target.In connection with pursuing our claim, we incurred legal fees and interest of$600,000 in 2003 and $643,000 in 2002. These costs decreased by 89% in 2004when compared to 2003. Substantially all of the costs were accrued for andexpensed in years 2003 and 2002. In 2004 the company incurred an additional$71,000 in legal fees and interest. The litigation was resolved.

Provision for income taxes decreased from 2003 to 2004 by $92,000due to a decrease in income. The 2004 and 2003 provision for income taxes arecomprised of a deferred provision of $1.7 million and $1.1 million and acurrent provision of $60,000 and $0.8 million, respectively. As of December 31,2004, the Company has approximately $20 million and $16 million of federal andstate income tax net operating loss carry-forwards, respectively, available tooffset future taxable income, which expires in various years through 2022.

**YEAR ENDED DECEMBER 31, 2003 COMPARED TOYEAR ENDED DECEMBER 31, 2002**

Revenues fromTarget were 88% and 92% of total revenues in 2003 and 2002, respectively. Thedecrease in 2003 primarily due to the introduction of our Mossimo brandedproducts into Canada during March of 2003, under the agreement with Hudson’sBay Company. Total revenues were approximately the same in 2003 and 2002 at$19.9 million. However, in 2002 we recognized $1.5 million in revenues whichhad been deferred during the initial Target contract year pending the resultsof an audit that was completed in second quarter of 2002. Excluding the $1.5million of non-recurring revenue in 2002, total revenue in 2003 increased by$1.5 million, or 8%, and revenue from Target increased 4% from 2002. Theincrease in revenue from sources other than Target were primarily due to thenew Canadian business.

The majorcomponents of selling, general and administrative (S, G & A) expenseswere payroll, executive bonuses, commissions payable to a third party inconnection with the Target agreement, and expenses incurred in connection withdesign related and business development activities such as travel, samples andartwork purchases, and free-lance artists, as well as facilities, legal,accounting, and insurance expenses. Our S, G & A increasedapproximately $900,000, or 8% in 2003 from 2002, principally due to increasesin personnel and related payroll expenses of approximately $850,000 andincreases in design related and business development activities expenses ofapproximately $650,000, which was partially offset by reductions in executivebonuses of $450,000 and commissions of $150,000. The increases in personnel anddesign related activities were necessary to better serve the Target business inthe United States, and to launch the new Canadian business with Zellers.Executive bonuses were reduced consistent with the Company’s comparativeperformance. Commissions were less in 2003 compared to 2002 because of thenon-recurring Target revenue recognized in 2002.

At the end of 2002we completed our assessment of the benefit to be derived from our tax netoperating loss carry forward and recorded a benefit for income taxes of $6.4million, which increased our diluted net income per share by $0.41. We reducedthe valuation allowance previously provided against our deferred tax assets, asa result of the extension of the Target Agreement through January 31,2006, and the reevaluation of our forecasted operating results and resultanttaxable income during the extended term of the Target Agreement, and theconsequent expected utilization of available net operating losses during the 

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extended term of the Target Agreement. In 2003 we recorded aprovision for income taxes of approximately $1.9 million, which decreaseddiluted net income per share by $0.12. This provision is based on theapplicable statutory rates for federal and California state taxes, at rate of40% and an effective rate of 29% due to credit utilization, net of anadditional deferred tax assets of approximately $700,000 recognized in 2003. Asubstantial amount of the 2003 provision for income taxes is a deferred expenseand represents a reduction of the corresponding deferred tax asset to reflectthe utilization of our net tax operating loss carry forwards.

Diluted net income per share was $0.29 in 2003 and $0.87 in 2002. However,we believe that it is important to compare pretax diluted income per share of$0.41 in 2003 and $0.46 in 2002, because of the significant impact that thebenefit for income taxes had on the 2002 net income.

**LIQUIDITY ANDCAPITAL RESOURCES**

Our sources ofliquidity and capital resources as of December 31, 2004 consisted of $9.7million of cash, cash equivalents and investments, and $0.4 million ofshort-term restricted cash, as well as potential future cash flows fromoperations primarily resulting from the Target agreement. As of December 31,2004 we had positive working capital of approximately $14.9 million.

The Companyestablished a revolving line of credit with a bank in the amount of $300,000 inFebruary 2004. The line of credit was established to open letters ofcredit with foreign suppliers for finished goods. The line of credit wasincreased to $400,000 in June of 2004, and subsequently increased to$500,000 in January of 2005. The line of credit is secured by twocertificates of deposit totaling approximately $413,000. There is no expirationdate for this line, and there are no covenants. There is a fee charged perletter of credit opened. Open letters of credit at December 31, 2004 wereapproximately $469,000.

We believe thatthe Company’s sources of liquidity and capital will be sufficient to meet ourexpected operational and capital needs for the next 12 months and likely willbe sufficient to meet our operating needs for the foreseeable future and atleast through January 2008, which is the most recently extended contractterm with Target.

As of December 31,2004 and 2003, cash and cash equivalents were $4.9 and $4.7 million,respectively. During 2004, the Company had $1.7 million cash provided byoperations offset by $1.1 million and $0.4 million of cash used in investingactivities and financing activities, respectively. The operating cash flowswere primarily driven by net earnings offset by incremental cash used for thetransition of Modern Amusement operations. Cash flows from net income plusdepreciation and amortization aggregated $4.4 million and was offset by cashflows used for the start-up of Modern Amusement and the reduction in accruedliabilities. Cash flows used in investing activities resulted form theacquisition of Modern Amusement, the related acquisitions of leaseholdimprovements and equipment for the newly leased facility for the ModernAmusement wholesale business, which are offset by net proceeds of $0.2 millionfrom sales of short term investments.

We have acommission obligation under an agreement with a third party for 15% of feesreceived from Target for the duration of the Target agreement through January 2008,and for subsequent extensions if they are exercised by Target. Fees incurredunder this obligation were $2.6 million in 2004, $2.6 million in 2003 and $2.7million in 2002.

In January 2004we completed the acquisition of the Modern Amusement and we amended ourfacility lease increasing our space from approximately 6,000 square feet toapproximately 9,000 square feet, and extending the lease term thru July 2009.The expanded facility is intended to also accommodate Modern Amusement. Thefuture annual obligation under the amended lease varies each year, starts atapproximately $290,000 in 2004, increasing to $334,000 in 2008. The purchaseprice of the Modern 

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Amusement assets of $375,000 was funded with existing cash. Theexpected cash requirements in 2005 for Modern Amusement are approximately $1.4million, and is comprised mainly of selling, general, and administrativeexpenses. Most of this working capital will be satisfied through operating cashflows, and we do not expect to incur any significant capital expenditures.

The Company is approachedfrom time to time by parties seeking to sell their businesses, brands andrelated trademarks. Should an established viable business and marketable brandbecome available on favorable terms, the Company may be interested in pursuingsuch an acquisition and may elect to fund such acquisition, in whole or inpart, with available cash as well as different financing alternatives,including the issuance of debt instruments and / or equity securities.

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)                |       |                                          | $          | 306                                 |       |   |   | $ | 639 |   |   |   | $ | 530 |   |   |   | $ | — |   |   | $ | 1,475 |   |
| Other Long-Term  Obligations(b),(c) |       |                                          | 2,865      |                                |       |   | 2,955 |   |   |   | 120 |   |   |   | — |   |   | 5,940 |   |
| Total Contractual Cash  Obligations |       |                                          | $          | 3,171                               |       |   |   | $ | 3,594 |   |   |   | $ | 650 |   |   |   | $ | — |   |   | $ | 7,415 |   |
|                                     |            |                                               |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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Notes:

(a)    These amounts represent future minimumnon-cancelable lease payments under an operating lease agreement through July 2009for our office and design studio facilities in Santa Monica, Californiaincluding the facilities for Modern Amusement.

(b)   These amounts include $900,000 per year underour employment agreement with Mossimo Giannulli, our Chairman and Co-ChiefExecutive Officer through January 2006, that provides for a $900,000annual salary, plus a bonus which is determined at the discretion of the Boardof Directors, in accordance with a performance criteria outlined in the bonusplan, and is subject to a maximum annual amount based on a percent of Targetlicense royalty fees in excess of the minimum annual fee under the TargetAgreement. The future bonus amounts, if any, have been excluded because theyare at the discretion of the Board of Directors and can not be determined.

These amounts alsoinclude $900,000 per year, commencing August 1, 2004, under our employmentagreement with Edwin Lewis, our Co-Chief Executive Officer through August 1,2005, that provides for a $900,000 annual salary, plus a bonus which isdetermined at the discretion of the Board of Directors, in accordance with aperformance criteria outlined in the 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 commissionobligation under an agreement with a third party for 15% of fees received fromTarget for 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.

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

**REVENUERECOGNITION**

Revenue fromlicense royalties and design service fees are recognized in accordance with theterms of the underlying contractual agreements, which is generally after thedesign services are performed, and as the licensee achieves sales of theCompany’s products. Revenue from license royalties and design service fees aregenerally collected on a quarterly basis, and they range from one percent toseven percent of sales, as defined in the respective agreements. A substantialamount of the Company’s revenue is generated under the Target Agreement, undera declining rate as the year progresses and Target achieves certain levels ofretail sales. Accordingly, the Company’s revenues from Target decrease as theyear progresses. The declining rate is reset each contract year on February 1.In 2004, Target reached the minimum rate during the third quarter of theCompany’s calendar year. 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 recognizes wholesale operations revenue from thesale of merchandise when products are shipped, generally FOB Modern Amusement’sdistribution facilities, and the customer takes title and assumes risk of loss,collection of relevant receivable is reasonably assured, pervasive evidence ofan arrangement exists, and the sales price is fixed or determinable.

**INVENTORY**

We maintaininventories for the Modern Amusement segment of our business Inventories arevalued at the lower of cost (first-in, first-out) or market. The Companycontinually evaluates its inventories by assessing slow moving current productas well as prior seasons’ inventory. Market value of non-current inventory isestimated based on the impact of market trends, an evaluation of economicconditions and the value of current orders relating to the future sales of thistype of inventory.

To the extent that management’s estimates of markdowns necessaryto rapidly sell inventory differ from actual results, additional markdowns maybe required that could reduce our gross margin, operating income and thecarrying value of inventories. Our success is largely dependent upon ourability to anticipate the changing fashion tastes of our customers and torespond to those changing tastes in a timely manner. If we fail to anticipate,identify or react appropriately to changing styles, trends or brand preferencesof our customers, we may experience lower sales, excess inventories and morefrequent and extensive markdowns, which would adversely affect our operatingresults.

**DEFERRED TAX ASSETVALUATION**

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes” (SFAS 109). Deferred taxes primarily result from the recognitionof the income tax benefit to be derived from the Company’s net operating losscarry forward for income taxes purposes. As of December 31, 2004, theCompany has approximately $20 million, and $16 million of federal and stateincome tax net operating loss carry-forwards, respectively, available to offsetfuture taxable income, which expires in various years through 2022. Inaccordance with the provisions of SFAS No. 109 the Company records avaluation allowance to reduce deferred tax assets to the amount expected to “morelikely than not” be realized in future tax returns. The Company monitors itsprofitability and considers the credit and collections risk of future feesunder its agreements, particularly in connection with the Target Agreement. Shouldwe determine that we would not be able to realize all or part of our netdeferred tax assets in the future, adjustments to the valuation allowance fordeferred tax assets may be required.

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In addition to the Company’s taxable income being subject tofederal, state and local income taxes, the Company may be classified as a “personalholding company” from time to time. Personal holding company status resultsfrom more than 50 percent of the value of outstanding stock being owneddirectly or indirectly by five or fewer individuals, and more than 60 percentof the Company’s income, as defined, being derived from royalties. Personalholding companies are subject to an additional federal tax at a 15 percent taxrate on undistributed after tax earnings.

Over 50 percent of the value of the Company’s outstanding stock isowned by one stockholder, and in 2002 and 2001, more than 60 percent of theCompany’s income, as defined, was derived from license royalties. Accordingly,the Company was classified as a personal holding company in 2002. However, nopersonal holding company tax was due in 2002 because the Company recognizedcertain expenses for tax purposes in 2002 that had been recognized in previousyears for financial reporting purposes, and which offset the taxable incomesubject to personal holding company tax in 2002. In 2004 and 2003 less than 60percent of the Company’s income as defined was derived from license royalties,accordingly the Company is not classified as a personal holding company and isnot subject to the personal holding company tax. The Company intends tocontinue to take appropriate measures to avoid being classified as a personalholding company in future years. However, there can be no assurance that theCompany will be successful in its efforts to avoid classification as a personalholding company in the future.

**CONTINGENCIES AND LITIGATION**

Management evaluates contingent liabilities including pending orthreatened litigation in accordance with SFAS No. 5, and records accrualswhen the outcome of these matters is deemed probable and the amount of theliability is subject to reasonable estimation. Management makes these assessmentsbased on the facts and circumstances available at the time, and in someinstances based in part on the advice of outside counsel.

**INFLATION**

The Company does not believe that the relatively moderate rates ofinflation experienced in the United States over the last three years have had asignificant effect on its operations. Since the Company’s future revenues arebased on a percentage of sales of licensed products by licensees, the Companydoes not anticipate that inflation will have a material impact on futureoperations.

**EXCHANGE RATES**

The Company receives United States dollars for all its revenuefrom license royalties and design service fees, other than from its business inCanada, which began in 2003 and does not represent a substantial amount of revenueat this time. During the last three fiscal years, exchange rate fluctuationshave not had a material impact on the Company’s operating results. The Companydoes not engage in hedging activities with respect to exchange rate risk.

**IMPAIRMENT OF LONG-LIVED ASSETS**

We evaluate the recoverability of our identifiable intangibleassets and other long-lived assets in accordance with SFAS No. 144 thatgenerally requires management to assess these assets for recoverability whenevents or circumstances indicate a potential impairment by estimating theundiscounted cash flows to be generated from the use and ultimate dispositionof these assets.

**IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS**

SFAS No. 153—In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets.” SFAS No. 153 amends APB Opinion No. 29,“Accounting for Nonmonetary Transactions,” by replacing the exception forexchanges of similar productive assets with an exception for exchanges that do 

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not have commercial substance. Atransaction has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. SFAS No. 153is effective for fiscal periods beginning after June 15, 2005. We do notexpect the adoption of SFAS No. 153 to have any effect on our financialposition, results of operations or cash flow.

SFAS No. 123R—In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment: anamendment of FASB Statements No. 123 and 95,” which requires companies torecognize in their income statement the grant-date fair value of stock optionsand other equity-based compensation issued to employees. SFAS No. 123R iseffective for interim or annual periods beginning after June 15, 2005. Accordingly,we will adopt SFAS No. 123R in our third quarter of 2005. See Note 1Summary of Business Description and Significant Accounting Policies—Stock-BasedCompensation for the pro forma effects of how SFAS No. 123R would haveaffected results of operations in 2004, 2003 and 2002. We are currentlyassessing the impact this prospective change in accounting will have butbelieve that it could have a material and adverse impact on our reportedresults of operations.

SFAS No. 151—In November 2004,the FASB issued SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43,Chapter 4,” to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material. SFAS No. 151is effective for inventory costs incurred during fiscal years beginning after June 15,2005. We do not believe the provisions of SFAS No. 151, when applied, willhave any impact on our financial position, results of operations or cash flows.

SAB 104—In December 2003, the SECissued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB No. 104),which codifies, revises and rescinds certain sections of SAB No. 101,Revenue Recognition, in order to make this interpretive guidance consistentwith current authoritative accounting and auditing guidance and SEC rules andregulations. The changes noted in SAB No. 104 did not have a materialeffect on the Company’s results of operations, financial position or cashflows.

In November 2002, the FASB issued FASB Interpretation No. 45(“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others”. This interpretationclarifies the requirements of a guarantor in accounting for and disclosingcertain guarantees issued and outstanding. The initial recognition andmeasurement provisions of this interpretation are applicable on a prospectivebasis to guarantees issued after December 31, 2002. The Company licensesits trademarks, provides design services and has approval rights for productdesign, marketing and advertising materials under licensing and design serviceagreements which include certain provisions for indemnifying the licensee. Asan element of its standard commercial terms, the Company includes anindemnification clause in its licensing and design services agreements thatindemnifies the licensee against liability and damages arising from any claims,suits, damages, or costs relating to the breach of any warranty,representation, term or condition made or agreed to by its licensees involvingthe 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.

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

The Company makes temporary investments of cash in liquid interestbearing accounts and marketable securities. The Company does not use interestrate swaps, futures contracts or options on futures, or other types ofderivative financial instruments. The Company does not believe that futuremarket risks arising from holdings of its financial instruments will have amaterial impact on its financial position or results of operations.

19

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**ITEM 8—FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

The financial statements required to be filed hereunder are setforth on pages F-1 through F-17 of this report.

**ITEM 9—CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

Not applicable.

**ITEM 9A—CONTROLS AND PROCEDURES**

Based on their evaluation as of December 31, 2004, ourCo-Chief Executive Officers and Chief Financial Officer have concluded that ourinternal controls and disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Act of 1934, as amended) were effective toensure that the information required to be disclosed by us in this annualreport on Form 10-K was recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and instructions for Form 10-K.

There are no changes in our internal controls over financialreporting during the quarter ended December 31, 2004 that have materiallyaffected, or are reasonably likely to materially affect our internal controlsover financial reporting.

Our management, including our Co-Chief Executive Officers andChief Financial Officer, does not expect that our internal controls anddisclosure controls and procedures will prevent all error and all fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute assurance that the objectives of the control system are met.Further, the design of the control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.

**ITEM 9B—OTHER INFORMATION**

None.

**PART III**

**ITEM 10—DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT**

The information required by this item will be contained in theCompany’s Proxy Statement for its 2005 Annual Stockholders Meeting to be filedwith the Securities and Exchange Commission within 120 days after December 31,2004 and is incorporated herein by reference.

**ITEM 11—EXECUTIVE COMPENSATION**

The information required by this item will be contained in theCompany’s Proxy Statement for its 2005 Annual Stockholders Meeting to be filedwith the Securities and Exchange Commission within 120 days after December 31,2004 and is incorporated herein by reference.

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

The information required by this item will be contained in theCompany’s Proxy Statement for its 2005 Annual Stockholders Meeting to be filedwith the Securities and Exchange Commission within 120 days after December 31,2004 and is incorporated herein by reference.

20

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**ITEM 13—CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The information required by this item will be contained in theCompany’s Proxy Statement for its 2005 Annual Stockholders Meeting to be filedwith the Securities and Exchange Commission within 120 days after December 31,2004 and is incorporated herein by reference.

**ITEM 14—PRINCIPAL ACCOUNTING FEES ANDSERVICES**

The information required by this item will be contained in theCompany’s Proxy Statement for its 2005 Annual Stockholders Meeting to be filedwith the Securities and Exchange Commission within 120 days after December 31,2004 and is incorporated herein by reference.

**ITEM 15—EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

(a) (1) List of Financial Statements—see Index toFinancial Statements on page 24.

(2) List ofFinancial Statement Schedules—None

(b) List of Exhibits
| 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*    |   | Form of  Indemnification Agreement between the Registrant and its directors and  officers(1)                                               |
| 10.5     |   | Mossimo License  Agreement, dated as of March 28, 2000, between Mossimo, Inc. and  Target Stores, a division of Target Corporation(2) |
| 10.5.1   |   | Amendment to  License and Design Services Agreement, dated February 1, 2002(7)                                                             |
| 10.5.2   |   | Consent of  Assignment and Amendment to License and Design Services Agreement dated  February 2, 2003(8)                                   |
| 10.5.3   |   | Amendment to  License and Design Services Agreement dated June 20, 2003(9)                                                                 |
| 10.6     |   | Cherokee-Mossimo  Finders Agreement dated March 27, 2000 between Mossimo, Inc. and  Cherokee Inc.(2)                                  |
| 10.7     |   | Lease, dated  June 29, 2000, between the Registrant and Lexington-Broadway Place,  LLC(3)                                                  |
| 10.7.1   |   | First Amendment  to Office Lease dated June 26, 2002(9)                                                                                    |
| 10.7.2   |   | Second Amendment  to Office Lease dated January 1, 2004                                                                                    |
| 10.8     |   | Sunglasses  Agreement, dated as of December 1, 2000, between Mossimo, Inc.,  Marcolin S.P.A. and Target Stores(4)                |
| 10.9*    |   | Amended and  Restated Employment Agreement between the Registrant and Mossimo Giannulli  dated February 1, 2002(7)                         |
| 10.9.1*  |   | Amendment Number  One to the Mossimo Giannulli Employment Agreement, dated September 23,  2002(6)                                          |
| 10.9.2   |   | Amendment Number  Two to the Mossimo Giannulli Employment Agreement, dated March 18,  2002(8)                                              |
| 10.10*   |   | The Mossimo  Giannulli Bonus Plan, dated February 1, 2002, between the Registrant and  Mossimo Giannulli(7)                                |
| 10.10.1* |   | Amendment Number  One to the Mossimo Giannulli Bonus Plan, dated July 1, 2002(5)                                                           |
| 10.11*   |   | The Edwin Lewis  Bonus Plan, dated April 17, 2002, between the Registrant and Edwin  Lewis(5)                                              |
| 10.11.1* |   | Amendment Number  One to the Edwin Lewis Bonus Plan, dated July 1, 2002(5)                                                                 |

21

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| 10.11.2* |   | Amendment Number  Two to the Edwin Lewis Bonus Plan, dated September 23, 2002(6)                                  |
|----------|--------|------------------------------------------------------------------------------------------------------------------------|
| 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 byreference from the Registrant’s Registration Statement on Form S-1 (No. 33-80597),as amended, which became effective February 22, 1996.

(2)          Incorporated byreference from the Registrant’s Current Report on Form 8-K, dated March 28,2000.

(3)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for the Quarterended September 30, 2000.

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

(5)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for the Quarterended June 30, 2002.

(6)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for the Quarterended September 30, 2002.

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

(8)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for the Quarterended March 31, 2003.

(9)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for the Quarterended June 30, 2003.

*                    Indicates a management contract orcompensatory plan or arrangement

22

----

 

**SIGNATURES**

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized on the 31st day of March 2005.
|        | 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 31st day of March 2005.
| /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/ BRETT  WHITE       |   | Director                                                 |   |   |
| Brett White            |   |                                                     |   |   |

 

23

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**MOSSIMO, INC.**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                    | **PAGE** |
|----------------------------------------------------------------------------------------------------|----------|
| REPORT OF  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                           |     | F-1 |   |
| CONSOLIDATED FINANCIAL STATEMENTS:                                                                 |     |   |   |
| Balance sheets as of December 31,  2004 and 2003                                              |     | F-2 |   |
| Statements of operations for the years  ended December 31, 2004, 2003 and 2002                |     | F-3 |   |
| Statements of stockholders’ equity for the  years ended December 31, 2004, 2003 and 2002 |     | F-4 |   |
| Statements of cash flows for the years  ended December 31, 2004, 2003 and 2002                |     | F-5 |   |
| Notes  to consolidated financial statements                                                        |     | F-6 |   |

 

24

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of Mossimo, Inc.:

We have auditedthe accompanying consolidated balance sheets of Mossimo, Inc. andsubsidiary as of December 31, 2004 and 2003, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for each of theyears in the three-year period ended December 31, 2004. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable 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 31,2004 and 2003, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2004, inconformity with U.S. generally accepted accounting principals.
| /s/ KPMG LLP            |
|-------------------------|
| Los Angeles, California |
| March 24,  2005    |

 

F-1

----

**MOSSIMO,INC.**CONSOLIDATED BALANCE SHEETS(IN THOUSANDS, EXCEPT SHARE DATA)
| ** **                                                                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ASSETS                                                                                                           |       |                  |       |   |   |
| CURRENT ASSETS:                                                                                                  |       |                  |       |   |   |
| Cash and cash equivalents                                                                                        |       | $                     | 4,903      |   | $ | 4,707 |   |
| Restricted cash                                                                                                  |       | 413                   |       | 4,585 |   |
| Investments                                                                                                      |       | 4,800                 |       | 5,000 |   |
| Accounts receivable                                                                                              |       | 2,908                 |       | 2,007 |   |
| Merchandise inventory                                                                                            |       | 539                   |       | — |   |
| Deferred income taxes                                                                                            |       | 1,739                 |       | 2,738 |   |
| Prepaid expenses and other current assets                                                                        |       | 436                   |       | 282 |   |
| Total current assets                                                                                             |       | 15,738                |       | 19,319 |   |
| PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation  and amortization                          |       | 1,117                 |       | 480 |   |
| DEFERRED INCOME TAXES                                                                                            |       | 5,646                 |       | 6,370 |   |
| GOODWILL                                                                                                         |       | 212                   |       | — |   |
| TRADENAME                                                                                                        |       | 112                   |       | — |   |
| OTHER ASSETS                                                                                                     |       | 96                    |       | 244 |   |
|                                                                                                             |       | $                     | 22,921     |   | $ | 26,413 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                        |       |                  |       |   |   |
| CURRENT  LIABILITIES:                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                 |       | $                     | 352        |   | $ | 525 |   |
| Accrued liabilities                                                                                              |       | 257                   |       | 1,513 |   |
| Accrued commissions                                                                                              |       | 258                   |       | 5,251 |   |
| Accrued bonuses                                                                                                  |       | 206                   |       | 112 |   |
| Total current liabilities                                                                                        |       | 1,073                 |       | 7,401 |   |
| DEFERRED RENT                                                                                                    |       | 135                   |       | — |   |
| TOTAL LIABILITIES                                                                                                |       | $                     | 1,208      |   | $ | 7,401 |   |
| COMMITMENTS,  CONTINGENCIES AND SUBSEQUENT EVENTS                                                                |       |                  |       |   |   |
| 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 15,738,442 in 2004 and 2003 |       | 15                    |       | 15 |   |
| Additional paid-in capital                                                                                       |       | 39,763                |       | 39,763 |   |
| Accumulated deficit                                                                                              |       | (18,065               | )          | (20,766 | ) |
| Net stockholders’ equity                                                                                    |       | 21,713                |       | 19,012 |   |
|                                                                                                             |       | $                     | 22,921     |   | $ | 26,413 |   |

 

See accompanying notes to consolidated financial statements

F-2

----

**MOSSIMO,INC.**CONSOLIDATED STATEMENTS OF OPERATIONS(IN THOUSANDS, EXCEPT PER SHARE DATA)
| ** **                                              | ** ** | **YEARS ENDED DECEMBER 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenue from  license royalties and design service fees |       | $                                           | 18,714     |   | $ | 19,895 |   | $ | 19,881 |   |
| Product sales                                           |       | 1,821                                       |       | — |   | — |   |
| Total revenues                                          |       | 20,535                                      |       | 19,895 |   | 19,881 |   |
| Operating  expenses:                                    |       |                                        |       |   |   |   |   |
| Cost of product sales                                   |       | 1,241                                       |       | — |   | — |   |
| Selling, general and administrative                     |       | 14,843                                      |       | 12,834 |   | 11,925 |   |
| Settlement costs of disputed commissions                |       | 71                                          |       | 643 |   | 600 |   |
| Total operating expenses                                |       | 16,155                                      |       | 13,477 |   | 12,525 |   |
| Operating income                                        |       | 4,380                                       |       | 6,418 |   | 7,356 |   |
| Other (income)  expense:                                |       |                                        |       |   |   |   |   |
| Other, net                                              |       | —                                      |       | — |   | (181 | ) |
| Interest income                                         |       | (104                                        | )          | (23 | ) | (75 | ) |
| Interest expense                                        |       | —                                      |       | — |   | 351 |   |
| Other (income) expense, net                             |       | (104                                        | )          | (23 | ) | 95 |   |
| Income before  income taxes                             |       | 4,484                                       |       | 6,441 |   | 7,261 |   |
| Income tax expense (benefit)                            |       | 1,783                                       |       | 1,875 |   | (6,404 | ) |
| Net income                                              |       | $                                           | 2,701      |   | $ | 4,566 |   | $ | 13,665 |   |
| Net income per  common share:                           |       |                                        |       |   |   |   |   |
| Basic                                                   |       | $                                           | 0.17       |   | $ | 0.29 |   | $ | 0.89 |   |
| Diluted                                                 |       | $                                           | 0.17       |   | $ | 0.29 |   | $ | 0.87 |   |
| Weighted average common  shares outstanding:            |       |                                        |       |   |   |   |   |
| Basic                                                   |       | 15,738                                      |       | 15,613 |   | 15,409 |   |
| Diluted                                                 |       | 15,759                                      |       | 15,658 |   | 15,648 |   |

 

See accompanying notes to consolidated financial statements

F-3

----

**MOSSIMO,INC.**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(IN THOUSANDS)
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | **ADDITIONAL**  | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                        | ** ** | **COMMON STOCK** | ** ** | **PAID-IN** | ** ** | **ACCUMULATED** | ** ** | ** **  | ** ** |
| ** **                                        | ** ** | **SHARES**            | ** ** | **AMOUNT**  | ** ** | **CAPITAL**     | ** ** | **DEFICIT** | ** ** | **TOTAL**  | ** ** |
| BALANCE,  December 31, 2001                  |       | 15,330                |       |        | $          | 15              |       |        |       | $          | 38,304     |   |   |   | $ | (38,997 | ) |   | $ | (678 | ) |
| Issuance of common stock                          |       | 158                   |       |        | —     |            |       |        | 493        |       |       |   | — |   |   | 493 |   |
| Net income                                        |       | —                |       |        | —     |            |       |        | —     |       |       |   | 13,665 |   |   | 13,665 |   |
| BALANCE,  December 31, 2002                  |       | 15,488                |       |        | 15         |            |       |        | 38,797     |       |       |   | (25,332 | ) |   | 13,480 |   |
| Issuance of common stock                          |       | 250                   |       |        | —     |            |       |        | 749        |       |       |   | — |   |   | 749 |   |
| Income tax benefit from exercise of stock options |       | —                |       |        | —     |            |       |        | 217        |       |       |   | — |   |   | 217 |   |
| Net income                                        |       | —                |       |        | —     |            |       |        | —     |       |       |   | 4,566 |   |   | 4,566 |   |
| BALANCE,  December 31, 2003                  |       | 15,738                |       |        | 15         |            |       |        | 39,763     |       |       |   | (20,766 | ) |   | 19,012 |   |
| Net income                                        |       | —                |       |        | —     |            |       |        | —     |       |       |   | 2,701 |   |   | 2,701 |   |
| BALANCE,  December 31, 2004                  |       | 15,738                |       |        | $          | 15              |       |        |       | $          | 39,763     |   |   |   | $ | (18,065 | ) |   | $ | 21,713 |   |

 

See accompanying notes to consolidated financial statements

F-4

----

 

**MOSSIMO,INC.**CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)
| ** **                                                                         | ** ** | **YEARS ENDED DECEMBER 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                                        |       |   |   |   |   |
| Net income                                                                         |       | $ 2,701                                |       | $ 4,566 |   | $ 13,665 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 329                                         |       | 257 |   | 227 |   |
| Deferred royalty  income                                                           |       | —                                      |       | — |   | (1,483 | ) |
| Deferred income  taxes                                                             |       | 1,723                                       |       | 1,109 |   | (6,404 | ) |
| Changes in:                                                                        |       |                                        |       |   |   |   |   |
| Restricted cash                                                                    |       | 4,585                                       |       | (4,585 | ) | — |   |
| Accounts receivable                                                                |       | (876                                        | )          | (81 | ) | 32 |   |
| Merchandise inventory                                                              |       | (539                                        | )          | — |   | — |   |
| Prepaid expenses and other current assets                                          |       | (154                                        | )          | (158 | ) | (6 | ) |
| Other assets                                                                       |       | 154                                         |       | (152 | ) | — |   |
| Accounts payable                                                                   |       | (173                                        | )          | (407 | ) | (1,119 | ) |
| Accrued liabilities                                                                |       | (1,121                                      | )          | 181 |   | 570 |   |
| Accrued commissions                                                                |       | (4,993                                      | )          | 2,590 |   | 2,415 |   |
| Accrued bonuses                                                                    |       | 94                                          |       | (953 | ) | 452 |   |
| Net cash provided by operating activities                                          |       | 1,730                                       |       | 2,367 |   | 8,349 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                                        |       |   |   |   |   |
| Proceeds from  sale of available-for-sale securities                               |       | 3,950                                       |       | — |   | — |   |
| Purchases of  available-for-sale securities                                        |       | (3,750                                      | )          | (5,000 | ) | — |   |
| Payments for  acquisition of property and equipment                                |       | (946                                        | )          | (129 | ) | (487 | ) |
| Acquisition of  Modern Amusement                                                   |       | (375                                        | )          | — |   | — |   |
| Net cash used in investing activities                                              |       | (1,121                                      | )          | (5,129 | ) | (487 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                                        |       |   |   |   |   |
| Restricted  cash—certificates of deposit                                      |       | (413                                        | )          |   |   |   |   |
| Proceeds from  issuance of common stock                                            |       | —                                      |       | 749 |   | 493 |   |
| Payments of loan  payable                                                          |       | —                                      |       | (1,066 | ) | (3,751 | ) |
| Net cash used in financing activities                                              |       | (413                                        | )          | (317 | ) | (3,258 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               |       | 196                                         |       | (3,079 | ) | 4,604 |   |
| CASH AND CASH  EQUIVALENTS, beginning of year                                      |       | 4,707                                       |       | 7,786 |   | 3,182 |   |
| CASH AND CASH  EQUIVALENTS, end of year                                            |       | $ 4,903                                |       | $ 4,707 |   | $ 7,786 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |       |                                        |       |   |   |   |   |
| Cash paid during the year for interest                                             |       | $      — |       | $      10 |   | $    249 |   |
| Cash paid during  the year for state income taxes                                  |       | $      60     |       | $    640 |   | $       — |   |

 

See accompanying notes to consolidated financial statements

F-5

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**MOSSIMO, INC.**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**1.   SUMMARY BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTINGPOLICIES**

Mossimo, Inc. (the Company) is a Delaware corporation formedin November 1995, and presently operates as a designer and licensor ofapparel and related products. A substantial amount of the Company’s revenue isderived under an agreement with Target Corporation as further described below.

In January 2004 the Company acquired substantially all theassets of Modern Amusement LLC through a wholly owned subsidiary, ModernAmusement, Inc. (“Modern Amusement”). Modern Amusement designs,merchandises, sources, markets, sells and distributes wholesale apparel andrelated accessories for young men. The products are offered at moderate toupper price points thru traditional specialty store and better department storedistribution channels.

**LICENSINGAGREEMENTS**

The Company entered into a multi-year licensing and designservices agreement with Target Corporation (“Target”) in March 2000,subsequently amended in February 2002, and in February and June 2003,hereinafter referred to as the “Target Agreement”. Under the terms of theTarget Agreement, Target has the exclusive license, for production anddistribution through Target stores, of substantially all Mossimo products soldin the United States.

Under the Target Agreement the Company provides design servicesand has approval rights for product design, marketing and advertisingmaterials. Target collaborates on design and is responsible for product development,sourcing, quality control and inventory management with respect to the Targetlicensed product line. Target is obligated to pay the Company design servicefees and license royalty fees. Total fees payable by Target are based upon apercentage of Target’s net sales of Mossimo branded products, with minimumtotal guaranteed fees of approximately $9.6 million annually. Target fees arebased on net sales achieved multiplied by a rate, as defined in the TargetAgreement. The Company pays a 15 percent commission, based on fees receivedfrom Target, to a third party who assisted the Company in connection withentering into the initial agreement with Target. The Target Agreement issubject to early termination under certain circumstances. If Target is currentwith payments of its obligations under the Target Agreement, Target has theright to renew the Target Agreement, on the same terms and conditions, foradditional terms of two years each. In January 2003, Target exercised its firstrenewal option extending the Target Agreement through January 31, 2006. InJanuary 2005, Target exercised its second renewal option extending the TargetAgreement through January 31, 2008. The next renewal option could be exercisedby Target on or before January 2007, this renewal option could extend theTarget Agreement thru January 2010, if it is exercised by Target.

In addition to the Target Agreement, the Company also licenses itstrademarks and provides design services outside of the United States, and alsolicenses its trademarks for use in collections of eyewear and women’s swimwearand body-wear sold in Target stores in the United States.

In May 2002, the Company entered into an exclusive agreementwith Hudson’s Bay Company. Under the agreement, the Company provides productdesign services, and licenses the Mossimo trademark to Hudson’s Bay Company forexclusive use in Canada. The Company receives license royalties and designservice fees. Hudson’s Bay Company collaborates on product design, and isresponsible for manufacturing, importing, marketing, advertising, selling anddistributing merchandise bearing the Mossimo trademark. The initial term of theagreement is three years beginning in May 2002, with a five-year extensionat the option of Hudson’s Bay Company. Hudson’s Bay Company fully launched theMossimo branded product in mid-March 2003 for distribution through itsZellers stores in Canada.

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**BASIS OF PRESENTATION**

The consolidated financial statements include the accounts ofMossimo, Inc. and its wholly-owned subsidiary, Modern Amusement, Inc.All significant intercompany balances and transactions have been eliminated inconsolidation.

**USE OF ESTIMATES**

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof 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 fromlicense royalties and design service fees are recognized in accordance with theterms of the underlying agreements, which is generally after the designservices are performed, and as the licensee achieves sales of the Company’sproducts. During the periods presented herein, a substantial amount of theCompany’s revenue from license royalties and design fees were generated underthe Target Agreement under a rate that declines as the contract year progressesand Target achieves certain levels of retail sales. Accordingly, the Company’srevenues from Target decrease as the year progresses. The declining rate isreset each contract year beginning on February 1. Revenue recognized inthe first and second quarters of the Company’s calendar year in connection withthe Target Agreement is significantly higher than in the third and fourthquarters of the Company’s calendar year due to the declining rates in theTarget Agreement. Revenue from license royalties and design service fees aregenerally collected on a quarterly basis, and they range from one percent toseven percent of sales, as defined in the respective agreements.

Modern Amusement recognizes wholesale operations revenue from thesale of merchandise when products are shipped and the customer takes title andassumes risk of loss, collection of relevant receivable is probable, pervasiveevidence of an arrangement exists, and the sales price is fixed ordeterminable.

**CASH AND CASH EQUIVALENTS**

Cash and cash equivalents include temporary investment of cash inliquid interest bearing accounts and marketable securities.

**INVESTMENTS**

Short-term investments, which consist of market auction rate preferredsecurities are classified as “available for sale” under the provisions of SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities.”Accordingly, the short-term investments are reported at fair value, with anyunrealized gains and losses included as a separate component of stockholders’equity, net of applicable taxes. Realized gains and losses, interest anddividends are included in interest expense, net. The fair value of theshort-term investments approximated cost at December 31, 2004 and December 31,2003.

**INVENTORIES**

Inventories are valued at the lower of cost (first-in, first-out)or market. The Company continually evaluates its inventories by assessing slowmoving current product as well as prior seasons’ inventory. Market value ofnon-current inventory is estimated based on the impact of market trends, anevaluation of economic conditions and the value of current orders relating tothe future sales of this type of inventory.

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**PROPERTY AND EQUIPMENT**

Property and equipment are stated at cost, net of accumulateddepreciation and amortization. Depreciation is calculated using thestraight-line method over the estimated useful life of the asset, which isgenerally three to ten years for furniture, fixtures, and equipment. Amortizationof leasehold improvements is calculated using the straight line method over theshorter of its useful life or the remaining term of the lease. The Companyevaluates the impairment of long-lived assets when certain triggering eventsoccur. If such assets are determined to be impaired, a write-down to fairmarket value is recorded.

**GOODWILL AND TRADENAME**

The Companyaccounts for goodwill in accordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”*which is an impairment-only approach. Under SFAS No. 142, properaccounting treatment requires annual assessment for any impairment of thecarrying value of goodwill based upon an estimation of the fair value of thereporting unit. As of December 31, 2004, recognized goodwill is allocatedto the Modern Amusement segment. Acquired intangible assets with finite livesare amortized over their estimated useful life. An impairment is indicated ifthe undiscounted future cash flows attributable to the finite lived intangibleasset is less than its carrying value.

The Modern Amusement trade name acquired during 2004 and valued at$112,000 is amortized over its estimated useful life of 10 years.

**SEGMENTS**

The Company operates in two business segments: Mossimo and ModernAmusement(Modern).Inaccordance with SFAS No. 131, “*DisclosureAbout Segments of an Enterprise and Related Information”,*theCompany’s principal segments are grouped between the generation of revenuesfrom products and royalties. The Mossimo segment derives its revenues fromroyalties associated from the use of its brand names with Target. The Productsegment derives its revenues from the design, and distribution of apparel todepartment stores and other retail outlets, principally throughout the UnitedStates.

**INCOME TAXES**

The Company accounts for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes”. Deferred income taxes are provided for temporarydifferences between the amounts of assets and liabilities for financial and taxreporting purposes. Deferred tax assets are reduced by a valuation allowancewhen it is estimated to be more likely than not that some portion of thedeferred tax assets will not be realized. Accounting for income taxes arefurther explained in Note 5.

**STOCK-BASED COMPENSATION**

The Company accounts forstock-based compensation in accordance with Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations. The Company follows the pro forma disclosure requirements ofSFAS No. 123, “Accounting for Stock-Based Compensation”, which requirepresentation of the pro forma effect of the fair value based method on netincome and net income per share in the financial statement footnotes.

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Ifcompensation expense was determined based on the fair value method, the Company’snet income and net income per share would have resulted in the approximate proforma amounts indicated below for the years ended December 31, 2004, 2003and 2002 (*in thousands, except per share data*):
| ** **                                                                                       | ** ** | **2004**                                                                | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                       | ** ** | **(in thousands,  except for per share data)** | ** ** |
| Net income as  reported                                                                          |       | $                                                                       | 2,701      |     | $          | 4,566    |       | $ | 13,665 |   |
| Add: Stock-based  employee compensation expense included in reported net income                  |       | —                                                                  |       | —   |       | —   |       |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method |       | (305                                                                    | )          | (298     | )          | (1,788   | )          |
| Pro forma net income                                                                             |       | $                                                                       | 2,396      |     | $          | 4,268    |       | $ | 11,877 |   |
| Earnings per  share:                                                                             |       |                                                                    |       |     |       |     |       |
| Basic—as reported                                                                           |       | $                                                                       | 0.17       |     | $          | 0.29     |       | $ | 0.89 |   |
| Basic—pro forma                                                                             |       | $                                                                       | 0.15       |     | $          | 0.27     |       | $ | 0.77 |   |
| Diluted—as reported                                                                         |       | $                                                                       | 0.17       |     | $          | 0.29     |       | $ | 0.89 |   |
| Diluted—pro forma                                                                           |       | $                                                                       | 0.15       |     | $          | 0.27     |       | $ | 0.77 |   |

 

The fair value of eachoption grant was estimated as of the grant date using the Black-Scholesoption-pricing model for the years ended December 31, 2004, 2003 and 2002,assuming risk-free interest rates of approximately 3.7 percent, 1.9 percent,and 3.9 percent, respectively; volatility of approximately 45 percent, 50percent, and 80 percent, respectively; zero dividend yield; and expected livesof five years for all periods.

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

The Company’s balance sheets include the following financialinstruments: cash and cash equivalents, restricted cash, securitiesavailable-for-sale, accounts receivable, accounts payable, accrued liabilities,accrued commissions, and accrued bonuses. The Company considers the carryingvalue of these instruments to approximate fair value for these instrumentsbecause of the relatively short period of time between origination and theirexpected realization or settlement, and applicable interest rates reflectcomparable rates currently available to the Company on obligations undersimilar terms.

**COMPUTATION OF PER SHARE AMOUNTS**

Basic and diluted earnings per share are computedusing the methods prescribed by SFAS 128, “Earnings per Share.” Basic incomeper share is computed as net income divided by the weighted average number ofcommon shares outstanding during the period. Diluted income per share giveseffect to all dilutive potential common share equivalents outstanding duringthe period. The computation of diluted income per share does not assume theconversion or exercise of securities that would have an anti-dilutive effect.

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Thecomputation of basic and diluted income per common share for income fromcontinuing operations is as follows (*in thousands, except pershare data*):
| ** **                                                                                                                   | ** ** | **2004**                                                                | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                   | ** ** | **(in thousands,  except for per share data)** | ** ** |
| Income available  to common shareholders—basic and diluted                                                              |       | $                                                                       | 2,701      |     | $          | 4,566    |       | $ | 13,665 |   |
| Basic weighted average common shares                                                                                         |       | 15,738                                                                  |       | 15,613   |       | 15,409   |       |
| Exercise of stock  options                                                                                                   |       | 21                                                                      |       | 45       |       | 239      |       |
|                                                                                                                         |       | 15,759                                                                  |       | 15,658   |       | 15,648   |       |
| Net income per  share:                                                                                                       |       |                                                                    |       |     |       |     |       |
| Basic income per common share                                                                                                |       | $                                                                       | 0.17       |     | $          | 0.29     |       | $ | 0.89 |   |
| Diluted income per common share                                                                                              |       | $                                                                       | 0.17       |     | $          | 0.29     |       | $ | 0.87 |   |
| Potential common  shares excluded from diluted income per share since their effect would be antidilutive—stock  options |       | 468                                                                     |       | 554      |       | 531      |       |

 

**IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS**

SFAS No. 153—InDecember 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets.” SFAS No. 153 amends APB Opinion No. 29, “Accountingfor Nonmonetary Transactions,” by replacing the exception for exchanges ofsimilar productive assets with an exception for exchanges that do not havecommercial substance. A transaction has commercial substance if the future cashflows of the entity are expected to change significantly as a result of theexchange. SFAS No. 153 is effective for fiscal periods beginning after June 15,2005. We do not expect the adoption of SFAS No. 153 to have any effect onour financial position, results of operations or cash flow.

SFAS No. 123R—InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123R, “Share-Based Payment: an amendment of FASB Statements No. 123and 95,” which requires companies to recognize in their income statement thegrant-date fair value of stock options and other equity-based compensationissued to employees. SFAS No. 123R is effective for interim or annualperiods beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 123Rin our third quarter of 2005. See Note 1 Summary of Business Description andSignificant Accounting Policies—Stock-Based Compensation for the pro formaeffects of how SFAS No. 123R would have affected results of operations in2004, 2003 and 2002. We are currently assessing the impact this prospectivechange in accounting will have but believe that it will not have a material andadverse impact on our reported financial position or results of operations.

SFAS No. 151—InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs: anamendment of ARB No. 43, Chapter 4,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial. SFAS No. 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. We do not believe theprovisions of SFAS No. 151, when applied, will have any impact on ourfinancial position, results of operations or cash flow.

SAB 104—In December 2003,the SEC issued Staff Accounting Bulletin (SAB) No. 104, RevenueRecognition (SAB No. 104), which codifies, revises and rescinds certainsections of SAB No. 101, Revenue Recognition, in order to make thisinterpretive guidance consistent with current authoritative accounting andauditing guidance and SEC rules and regulations. The changes noted in SABNo. 104 did not have a material effect on the Company’s results of operationsor financial position.

In November 2002, the FASB issued FASB Interpretation No. 45(“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others”. This interpretationclarifies the requirements of a guarantor in accounting for and disclosing 

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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 made to conform to currentyear presentation. These reclassifications have no impact on reported netincome.

**2.   BUSINESSACQUISITION**

On January 16, 2004, Mossimo, Inc.acquired substantially all the assets of Modern Amusement LLC through a whollyowned subsidiary, Modern Amusement for cash. Modern Amusement designs,merchandises, sources, markets, sells and distributes wholesale apparel andrelated accessories for young men and young women. The “Modern Amusement”registered brand is principally focused on premium west coast-lifestyle appareland related accessories. The products are offered at moderate to upper pricepoints through traditional specialty store and higher-end department storedistribution channels. This line of business is expected to diversify theCompany’s current design and licensing business of its Mossimo brand productthrough mass retail distribution channels. The acquisition was accounted for asa purchase whereby the purchase price was allocated to the assets acquiredbased on fair values. The excess purchase price over the amount allocated tothe assets acquired has been allocated to goodwill, in the accompanyingconsolidated balance sheet at December 31, 2004. In the fourth quarter of2004, the Company completed the appraisal of Modern Amusement, and allocated$112,000 of the purchase price to tradename. 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    |   |

 

**3.   MAJOR CUSTOMER AND ACCOUNTS RECEIVABLE**

A substantialamount of the Company’s revenue and accounts receivable are derived under theTarget Agreement. The accounts receivable are held without collateral, and aresubject to normal credit risk assumed by the Company. Revenue from licenseroyalties and design service fees from Target were approximately 79 percent in2004, 88 percent in 2003, and 92 percent in 2002, of total revenue. Accountsreceivable from target for 2004 and 2003 were 59% and 78%, respectively, oftotal accounts receivable.

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Modern Amusement extends credit to customers in the normal courseof business, subject to established credit limits. Accounts receivable, net, inthe consolidated balance sheets, consists of amounts due from customers net ofallowance for doubtful accounts. The allowance for doubtful accounts isdetermined by reviewing accounts receivable aging and evaluating individualcustomer receivables, considering customers’ financial condition, credithistory and current economic conditions. The write-off for bad debt for thecurrent year was approximately $8,000

**4.   CREDITFACILITY WITH BANK**

The Company established a revolving line of credit with a bank inthe amount of $300,000 in February 2004. The line of credit wasestablished to open letters of credit with foreign suppliers for finished goods.The line of credit was increased to $400,000 in June of 2004, andsubsequently increased to $500,000 in January of 2005. The line of creditis secured by two certificates of deposit totaling approximately $413,000. Thereis no expiration date for this line, and there are no covenants. There is a feecharged per letter of credit opened. Open letters of credit at December 31,2004 was approximately $469,000.

**5.   INCOMETAXES**

The provision (benefit) for income taxesconsists of the following for the years ended December 31:
| ** **                                  | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(IN THOUSANDS)** | ** ** |
| Current:                                    |       |                    |       |     |       |     |       |
| Federal                                     |       | $                       | 40         |     | $          | 162      |       | $ | — |   |
| State                                       |       | 20                      |       | 604      |       | —   |       |
|                                        |       | 60                      |       | 766      |       | —   |       |
| Deferred:                                   |       |                    |       |     |       |     |       |
| Federal                                     |       | 1,481                   |       | 1,032    |       | (5,444   | )          |
| State                                       |       | 242                     |       | 77       |       | (960     | )          |
|                                        |       | 1,723                   |       | 1,109    |       | (6,404   | )          |
| Total provision  (benefit) for income taxes |       | $                       | 1,783      |     | $          | 1,875    |       | $ | (6,404 | ) |

 

The provision (benefit) for income taxesmay differ from the amount of tax determined by applying the federal statutoryrate to pretax earnings. The components of this difference consist of thefollowing for the years ended December 31:
| ** **                                           | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(IN THOUSANDS)** | ** ** |
| Provision on  earnings at federal statutory tax rate |       | $                       | 1,518      |     | $          | 2,198    |       | $ | 2,460 |   |
| State tax  provision, net of federal tax effect      |       | 260                     |       | 375      |       | 430      |       |
| Decrease in  valuation allowance                     |       | —                  |       | —   |       | (9,146   | )          |
| Other, including  alternative minimum tax            |       | 5                       |       | (698     | )          | (148     | )          |
| Total provision  (benefit) for income taxes          |       | $                       | 1,783      |     | $          | 1,875    |       | $ | (6,404 | ) |

 

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Significant components of the Company’sdeferred income taxes are as follows as of December 31:
| ** **                          | ** ** | **2004**                | ** ** | **2003** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                          | ** ** | **(IN THOUSANDS)** | ** ** |
| Deferred income  tax assets:        |       |                    |       |     |       |
| Net operating loss carry-forwards   |       | $                       | 7,631      |     | $          | 8,456 |   |
| Alternative minimum taxes and other |       | 861                     |       | 1,759    |       |
| Total                               |       | 8,492                   |       | 10,215   |       |
| Less valuation  allowance           |       | (1,107                  | )          | (1,107   | )          |
| Total net deferred tax asset        |       | $                       | 7,385      |     | $          | 9,108 |   |
| Current portion                     |       | $                       | 1,739      |     | $          | 2,738 |   |
| Long-term portion                   |       | 5,646                   |       | 6,370    |       |
| Total net  deferred tax asset       |       | $                       | 7,385      |     | $          | 9,108 |   |

 

The Companyconsiders projected taxable income from the Target Agreement and otheragreements in deriving its estimate of deferred tax asset recoverability. As aresult of the extension of the Target Agreement through January 31, 2008,the reevaluation of its forecasted operating results and resultant taxableincome during the extended term of the Target Agreement, management believesrealization of its net deferred tax assets is more likely than not.

As of December 31,2004, the Company has approximately $20 million, and $16 million of federal andstate income tax net operating loss carry forwards, respectively, available tooffset future taxable income, which expire in various years through 2022.

In accordance withthe Tax Reform Act of 1986, the benefits from net operating losses carriedforward may be impaired or limited in certain circumstances. Events which maycause limitations in the amount of net operating losses that the Company mayutilize in any one year include, but are not limited to, a cumulative ownershipchange of more than 50 percent over a three-year period. The impact oflimitations, if any that may be imposed upon future issuances of equitysecurities cannot be determined at this time.

In addition to theCompany’s taxable income being subject to federal, state and local incometaxes, the Company may be classified as a “personal holding company” from timeto time. Personal holding company status results from more than 50 percent ofthe value of outstanding stock being owned directly or indirectly by five orfewer individuals, and more than 60 percent of the Company’s income, asdefined, being derived from royalties. Personal holding companies are subjectto an additional federal tax at a 15 percent tax rate on undistributedafter tax earnings.

Over 50 percent of the value of the Company’s outstanding stock isowned by one stockholder, and in 2002 and 2001, more than 60 percent of theCompany’s income, as defined, was derived from license royalties. Accordingly,the Company was classified as a personal holding company in 2002. However, nopersonal holding company tax was due in 2002 because the Company recognizedcertain expenses for tax purposes in 2002 that had been recognized in previousyears for financial reporting purposes, and which offset the taxable incomesubject to personal holding company tax in 2002. In 2004 and 2003, less than 60 percentof the Company’s income as defined was derived from license royalties,accordingly the Company is not classified as a personal holding company and isnot subject to the personal holding company tax. The Company intends tocontinue to take appropriate measures to avoid being classified as a personalholding company in future years. However, there can be no assurance that theCompany will be successful in its efforts to avoid classification as a personalholding company in the future.

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**6.   PROPERTYAND EQUIPMENT**

Property and equipment consists of thefollowing at December 31:
| ** **                                 | ** ** | **2004**                | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(IN THOUSANDS)** | ** ** |
| Furniture and  fixtures                    |       | $                       | 420        |     | $          | 307 |   |
| Leasehold  improvements                    |       | 1,282                   |       | 604      |       |
| Equipment                                  |       | 422                     |       | 247      |       |
|                                       |       | 2,124                   |       | 1,158    |       |
| Accumulated  depreciation and amortization |       | 1,007                   |       | 678      |       |
|                                       |       | $                       | 1,117      |     | $          | 480 |   |

 

**7.   EMPLOYEEBENEFIT PLANS**

The Company has a defined contribution plan under Section 401(k) ofthe Internal Revenue Code covering all full-time employees, and providing formatching contributions by the Company, as defined in the plan. Contributionsmade to the plan were $13,300 in 2004, $14,000 in 2003 and $3,100 in 2002.

**8.   COMMITMENTSAND CONTINGENCIES**

The Company leasesits office and design studio under an operating lease agreement effectivethrough July 2009, providing for annual lease payments of approximately$306,000 in 2005, $315,000 in 2006, $324,000 in 2007, $334,000 in 2008, and$196,000 in 2009. Rent expense was approximately $384,000 in 2004, $260,000 in2003 and $155,000 in 2002.

The Company has abonus program with its two top executives. Under this program bonuses payableto the Co-Chief Executive Officers’ are determined at the discretion of theCompensation Committee of the Board of Directors, are subject to approval bythe Board of Directors, and can not exceed a formula based on a percentage offees paid by Target to the Company, as defined in the respective bonus plans ofthese two officers. Bonus expense in connection with the bonus plans of thesetwo officers was $607,000 in 2004, $1,854,000 in 2003 and $2,300,000 in 2002.

We had a disputeover the commissions payable to a third party which relate to our agreementwith Target. In June 2003, we had deposited with the court approximately$4,585,000 which was classified as restricted cash. Additional costs ofapproximately $71,000 were incurred and expensed in 2004. The dispute wasresolved in the second quarter of 2004, and the funds were distributed to thethird party. As part of the settlement the Company is required to pay a fee tothe third party of fifteen percent of applicable revenues from the Targetagreement. Fees incurred under this arrangement were $2.6 million in 2004, $2.6million in 2003 and $2.7 million in 2002. Under this agreement, we have acommission obligation for 15% of fees received from Target for the duration ofthe Target agreement thru January 2008, and for subsequent extensions ifthey are exercised by Target. The future commissions are based on the minimumroyalty and design fee payment from target of approximately $9.6 millionthrough January 2008.

The Company established a revolving line of credit with a bank inthe amount of $300,000 in February 2004. The line of credit wasestablished to open letters of credit with foreign suppliers for finished goods.The line of credit was increased to $400,000 in June of 2004, andsubsequently increased to $500,000 in January of 2005. The line of creditis secured by two certificates of deposit totaling approximately $413,000. Thereis no expiration date for this line, and there are no covenants. There is a feecharged per letter of credit opened. Open letters of credit at December 31,2004 were approximately $469,000.

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**9.   STOCKHOLDERS’EQUITY**

The Company adopted the Mossimo, Inc. 1995 StockOption Plan (the “1995 Plan”), which provides for the grant of stock options,stock appreciation rights and other stock awards to certain officers and keyemployees of the Company and to certain advisors or consultants to the Company.A total of 1,500,000 shares have been reserved for issuance under the 1995Plan. Options granted thereunder have an exercise price equal to the fairmarket value of the common stock on the date of grant. In April 2000, theCompany amended the 1995 Plan so that an optionee’s vesting in such optionsautomatically terminates when the optionee’s employment with the Company isterminated for reasons other than retirement, disability or death. As of December 31,2004 there are 362,000 shares of common stock under the 1995 Plan that areavailable for future grant.

The Company’s Non-Employee Directors Stock Option Plan(the “Directors Plan”) provides for the automatic grant to each of the Company’snon-employee directors of (i) an option to purchase 30,000 shares ofcommon stock on the date of such director’s initial election or appointment tothe Board of Directors and (ii) an option to purchase 3,000 shares ofcommon stock on each anniversary thereof on which the director remains on theBoard of Directors. A total of 250,000 shares have been reserved under theDirectors Plan. Options granted thereunder have an exercise price equal to thefair market value of the common stock on the date of grant. As of December 31,2004 there were 41,000 shares of common stock under the Directors Plan thatwere available 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,
| ** **                                                           | ** ** | **2004**   | ** ** | **2003**                     | ** ** | **2002**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                                                           | ** ** | **Shares** | ** ** | **Weighted  Average  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Price** | ** ** |
| Outstanding,  beginning of year                                      |       | 625,310    |       |                         | $          | 7.23       |       |   | 992,075 |   |   | $ | 7.34 |   |   | 623,325 |   |   | $ | 4.03 |   |   |
| Granted                                                              |       | 210,000    |       |                         | 3.77       |       |       | 549,000 |   |   | 4.13 |   |   | 539,000 |   |   | 9.11 |   |   |
| Exercised                                                            |       | —     |       |                         | —     |       |       | (250,400 | ) |   | 3.40 |   |   | (158,000 | ) |   | 3.12 |   |   |
| Canceled                                                             |       | (150,000   | )          |                         | 8.43       |       |       | (665,365 | ) |   | 6.06 |   |   | (12,250 | ) |   | 4.81 |   |   |
| Outstanding, end of year                                             |       | 685,310    |       |                         | 5.90       |       |       | 625,310 |   |   | 7.23 |   |   | 992,075 |   |   | 7.34 |   |   |
| Options exercisable, end of year                                     |       | 475,310    |       |                         |       |       |       | 281,000 |   |   |   |   |   | 347,000 |   |   |   |   |   |
| Weighted average  fair value of options granted during the year |       |       |       |                         | $          | 1.80       |       |   |   |   |   | $ | 2.18 |   |   |   |   |   | $ | 5.53 |   |   |

 

Outstandingstock options for the Plans at December 31, 2004 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 12/31/2004** | ** ** | **Life** | ** ** | **Price** | ** ** | **at 12/31/2004** | ** ** | **Price** | ** ** |
| $0.88 - $1.88                      |       |                         | 36,000     |                   |       |   | 5.32 |   |   |   | $ | 1.71 |   |   |   | 36,000 |   |   |   | $ | 1.71 |   |   |
| $2.50 - $3.60                      |       |                         | 80,000     |                   |       |   | 8.51 |   |   |   | 3.20 |   |   |   | 35,000 |   |   |   | 2.87 |   |   |
| $3.80 - $5.10                      |       |                         | 419,000    |                   |       |   | 8.75 |   |   |   | 4.50 |   |   |   | 254,000 |   |   |   | 4.92 |   |   |
| $6.42 - $9.61                      |       |                         | 110,000    |                   |       |   | 6.67 |   |   |   | 8.18 |   |   |   | 110,000 |   |   |   | 8.18 |   |   |
| $10.63 - $25.38                    |       |                         | 40,310     |                   |       |   | 1.64 |   |   |   | 23.43 |   |   |   | 40,310 |   |   |   | 23.43 |   |   |
|                               |       |                         | 685,310    |                   |       |   | 7.79 |   |   |   | 5.90 |   |   |   | 475,310 |   |   |   | 6.85 |   |   |

 

F-15

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**10.   SEGMENTINFORMATION**

The Company operates in two businesssegments: Mossimo and Modern Amusement (Modern). The following tables summarizevarious financial amounts for each of our business segments (in thousands):
| **2004**             | ** ** | ** ** | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|----------------------|------------|------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues             |       | $          | 18,714     |        | $          | 1,821      |       | $         | 20,535     |   |
| Gross Profit         |       | —     |       | 580         |       | 580        |       |
| Depreciation         |       | 229        |       | 100         |       | 329        |       |
| Operating Income     |       | 6,601      |       | (2,221      | )          | 4,380      |       |
| Interest Income      |       | 104        |       | —      |       | 104        |       |
| Total Assets         |       | 20,201     |       | 2,720       |       | 22,921     |       |
| Capital Expenditures |       | 87         |       | 879         |       | 966        |       |
|                      |            |            |            |             |            |            |            |           |            |  |  |  |

 

The followinginformation should be considered when reading the above table:

·       The Company has no inter-segmentrevenue or expense.

·       Corporate overhead has beenallocated to the Mossimo segment.

·       The provision for income tax is notallocated to business segments.

·       All long-lived assets weregeographically located in the United States.

·       Revenue from countries other thanthe United States did not account for 10% or more of total revenue.

·       During 2003 and 2002, the Companyoperated only the Mossimo segment.

·       Gross profit is derived by reducing sales of the Modern segment of$1.821 million by $1.241 million of cost of sales to arrive at a gross profitof approximately $580,000.

**11.   VALUATION AND QUALIFYINGACCOUNTS**

As of December 31, 2004 and 2003there is no allowance for doubtful accounts or sales returns recorded. Changesin the allowances for doubtful accounts, and for sales returns and markdownsfor 2002 were as follows:
| ** **                                       | ** ** | **BALANCE AT  BEGINNING  PERIOD** | ** ** | **ADDITIONS  CHARGED TO  COSTS AND  EXPENSES** | ** ** | **DEDUCTIONS** | ** ** | **BALANCE  AT END OF  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 accountspreviously reserved.

F-16

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**12.**   UNAUDITED INTERIM FINANCIALINFORMATION

The following tables set forth certainselected interim financial data for the Company by quarter for the years ended December 31,2004 and 2003.
| ** **                           | ** ** | **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 |   |
| Income (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 income (loss)                    |       |                                                               | 1,190      |   |   |   | 1,007 |   |   |   | (125 | ) |   |   | 629 |   |   | 2,701 |   |
| Net income (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 |   |

 
| ** **                           | ** ** | **YEAR ENDED DECEMBER 31, 2003**               | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **FIRST**                                                          | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **QUARTER**                                                        | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **YEAR** | ** ** |
| ** **                           | ** ** | **(IN THOUSANDS, EXCEPT PER SHARE DATA)** | ** ** |
| INCOME STATEMENT DATA:               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                       |       |                                                               | $          | 5,868 |   |   |   | $ | 6,858 |   |   |   | $ | 4,176 |   |   |   | $ | 2,993 |   |   | $ | 19,895 |   |
| Income (loss) before income taxes    |       |                                                               | 2,328      |   |   |   | 3,075 |   |   |   | 1,050 |   |   |   | (12 | ) |   | 6,441 |   |
| Provision (benefit) for income taxes |       |                                                               | 930        |   |   |   | 1,230 |   |   |   | 420 |   |   |   | (705 | ) |   | 1,875 |   |
| Net income (loss)                    |       |                                                               | 1,398      |   |   |   | 1,845 |   |   |   | 630 |   |   |   | 693 |   |   | 4,566 |   |
| Net income (loss)  per share:        |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                |       |                                                               | $          | 0.09 |   |   |   | $ | 0.12 |   |   |   | $ | 0.04 |   |   |   | $ | 0.04 |   |   | $ | 0.29 |   |
| Diluted                              |       |                                                               | 0.09       |   |   |   | 0.12 |   |   |   | 0.04 |   |   |   | 0.04 |   |   | 0.29 |   |

----

Note (b): Income (loss) before income taxes in the fourth quarterreflects a reversal of accrued bonuses of $1.13 million.

F-17

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**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*       |       | Form of Indemnification Agreement between the Registrant  and its directors and officers(1)                                                |
| 10.5        |       | Mossimo License Agreement, dated as of March 28, 2000,  between Mossimo, Inc. and Target Stores, a division of Target  Corporation(2) |
| 10.5.1      |       | Amendment to License and Design Services Agreement, dated  February 1, 2002(7)                                                             |
| 10.5.2      |       | Consent of Assignment and Amendment to License and Design  Services Agreement dated February 2, 2003(8)                                    |
| 10.5.3      |       | Amendment to License and Design Services Agreement dated  June 20, 2003(9)                                                                 |
| 10.6        |       | Cherokee-Mossimo Finders Agreement dated March 27, 2000  between Mossimo, Inc. and Cherokee Inc.(2)                                   |
| 10.7        |       | Lease, dated June 29, 2000, between the Registrant and  Lexington-Broadway Place, LLC(3)                                                   |
| 10.7.1      |       | First Amendment to Office Lease dated June 26, 2002(9)                                                                                     |
| 10.7.2      |       | Second Amendment to Office Lease dated January 1, 2004                                                                                     |
| 10.8        |       | Sunglasses Agreement, dated as of December 1, 2000, between  Mossimo, Inc., Marcolin S.P.A. and Target Stores(4)                 |
| 10.9*       |       | Amended and Restated Employment Agreement between the Registrant  and Mossimo Giannulli dated February 1, 2002(7)                          |
| 10.9.1*     |       | Amendment Number One to the Mossimo Giannulli Employment  Agreement, dated September 23, 2002(6)                                           |
| 10.9.2      |       | Amendment Number Two to the Mossimo Giannulli Employment  Agreement, dated March 18, 2002(8)                                               |
| 10.10*      |       | The Mossimo Giannulli Bonus Plan, dated February 1, 2002,  between the Registrant and Mossimo Giannulli(7)                                 |
| 10.10.1*    |       | Amendment Number One to the Mossimo Giannulli Bonus Plan, dated  July 1, 2002(5)                                                           |
| 10.11*      |       | The Edwin Lewis Bonus Plan, dated April 17, 2002, between  the Registrant and Edwin Lewis(5)                                               |
| 10.11.1*    |       | Amendment Number One to the Edwin Lewis Bonus Plan, dated  July 1, 2002(5)                                                                 |
| 10.11.2*    |       | Amendment Number Two to the Edwin Lewis Bonus Plan, dated  September 23, 2002(6)                                                           |
| 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                           |

  

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| 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 byreference from the Registrant’s Registration Statement on Form S-1 (No.33-80597), as amended, which became effective February 22, 1996.

(2)          Incorporated byreference from the Registrant’s Current Report on Form 8-K, dated March 28, 2000.

(3)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for theQuarter ended September 30, 2000.

(4)          Incorporated byreference from the Registrant’s Annual Report on Form 10-K for the yearended December 31, 2000.

(5)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for theQuarter ended June 30, 2002.

(6)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for theQuarter ended September 30, 2002.

(7)          Incorporated byreference from the Registrant’s Annual Report on Form 10-K for the yearended December 31, 2002.

(8)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for theQuarter ended March 31, 2003.

(9)          Incorporated byreference from the Registrant’s Quarterly Report on Form 10-Q for theQuarter ended June 30, 2003.

  

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