**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

### **FORM 10-Q**

### ** **

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended March 31, 2006**

 

**or**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period From                    to                    **

 

##### **CommissionFile Number: 1-14208**

##### ** **

**MOSSIMO, INC.**

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **33-0684524**            |
|----------------------------------|------------|---------------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer ID No.) |
| incorporation  or organization)  |       |                      |
|                             |       |                      |
| **2016  Broadway**               |       |                      |
| **Santa  Monica, California**    | ** ** | **90404**                 |
| (Address  of principal           |       | (Zip  Code)               |
| executive  offices)              |       |                      |

 

**(310) 460-0040**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for any shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý  No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. 

 

Large accelerated filer o     AcceleratedFiler o     Non-acceleratedfiler ý

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  ý

 

As of March 31, 2006, the Registrant had 15,908,775 sharesof Common Stock, $0.001 par value, outstanding.

 

 

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**MOSSIMO,INC.**

 

**FORM 10-Q**

For the ThreeMonths Ended March 31, 2006

 
| PART  I – FINANCIAL INFORMATION                                                                       |   |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| ITEM 1 – Financial  Statements (Unaudited):                                                           |   |
| Condensed consolidated balance  sheets as of March 31, 2006 and December 31, 2005                          |   |
| Condensed  consolidated statements of earnings for the three months ended March 31, 2006  and 2005         |   |
| Condensed  consolidated statements of cash flows for the three months ended March 31,  2006 and 2005       |   |
| Notes  to condensed consolidated financial statements                                                      |   |
|                                                                                                       |   |
| ITEM  2 – Management’s Discussion and Analysis of Financial Condition and Results  of Operations |   |
|                                                                                                       |   |
| ITEM  3 – Quantitative and Qualitative Disclosure about Market Risk                                   |   |
|                                                                                                       |   |
| ITEM 4 –  Controls and Procedures                                                                     |   |
|                                                                                                       |   |
| PART II - OTHER  INFORMATION                                                                               |   |
|                                                                                                       |   |
| ITEM 1 – Legal  Proceedings                                                                           |   |
|                                                                                                       |   |
| ITEM 1A – Risk  Factors                                                                               |   |
|                                                                                                       |   |
| ITEM 6 – Exhibits                                                                                     |   |
|                                                                                                       |   |
| SIGNATURES                                                                                                 |   |
|                                                                                                       |   |
| CERTIFICATIONS                                                                                             |   |

 

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MOSSIMO, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS,EXCEPT SHARE DATA)

(Unaudited)

 
| ** **                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ASSETS                                                                                                                                                     |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                                            |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                 |       | $                  | 17,273     |                  | $          | 19,658 |   |
| Restricted cash                                                                                                                                            |       | 732                |       | 726                   |       |
| Accounts  receivable, net                                                                                                                                  |       | 10,296             |       | 4,372                 |       |
| Merchandise  inventory                                                                                                                                     |       | 122                |       | 101                   |       |
| Deferred income  taxes                                                                                                                                     |       | 5,290              |       | 4,004                 |       |
| Prepaid expenses  and other current assets                                                                                                                 |       | 481                |       | 388                   |       |
| Total current  assets                                                                                                                                      |       | 34,194             |       | 29,249                |       |
|                                                                                                                                                       |       |               |       |                  |       |
| PROPERTY AND  EQUIPMENT, at cost, net of accumulated depreciation and amortization                                                                         |       | 867                |       | 893                   |       |
|                                                                                                                                                       |       |               |       |                  |       |
| DEFERRED INCOME  TAXES                                                                                                                                     |       | 1,622              |       | 1,923                 |       |
|                                                                                                                                                       |       |               |       |                  |       |
| TRADENAME                                                                                                                                                  |       | 87                 |       | 90                    |       |
|                                                                                                                                                       |       |               |       |                  |       |
| OTHER ASSETS                                                                                                                                               |       | 43                 |       | 79                    |       |
|                                                                                                                                                       |       | $                  | 36,813     |                  | $          | 32,234 |   |
|                                                                                                                                                       |       |               |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                  |       |               |       |                  |       |
|                                                                                                                                                       |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                      |       |               |       |                  |       |
| Accounts payable                                                                                                                                           |       | $                  | 1,628      |                  | $          | 884 |   |
| Accrued  liabilities                                                                                                                                       |       | 7,014              |       | 503                   |       |
| Accrued  commissions                                                                                                                                       |       | 1,081              |       | 388                   |       |
| Accrued bonuses                                                                                                                                            |       | 787                |       | 3,458                 |       |
| Total current  liabilities                                                                                                                                 |       | 10,510             |       | 5,233                 |       |
|                                                                                                                                                       |       |               |       |                  |       |
| DEFERRED RENT                                                                                                                                              |       | 124                |       | 128                   |       |
| Total  liabilities                                                                                                                                         |       | 10,634             |       | 5,361                 |       |
|                                                                                                                                                       |       |               |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                             |       |               |       |                  |       |
|                                                                                                                                                       |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                |       |               |       |                  |       |
| Preferred stock,  par value $.001; authorized shares 3,000,000; no shares issued or outstanding                                                            |       | —             |       | —                |       |
| Common stock,  par value $.001; authorized shares 30,000,000; issued and outstanding  15,908,775 at March 31, 2006 and and 15,828,754 at December 31, 2005 |       | 15                 |       | 15                    |       |
| Additional  paid-in capital                                                                                                                                |       | 40,702             |       | 40,222                |       |
| Accumulated  deficit                                                                                                                                       |       | (14,538            | )          | (13,364               | )          |
| Net stockholders’  equity                                                                                                                             |       | 26,179             |       | 26,873                |       |
|                                                                                                                                                       |       | $                  | 36,813     |                  | $          | 32,234 |   |

 

See accompanying notes toconsolidated financial statements

 

2

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MOSSIMO, INC.

CONSOLIDATED STATEMENTS OF EARNINGS(IN THOUSANDS, EXCEPT PER SHARE DATA)(Unaduited)

 
| ** **                                              | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                              | ** ** | **March 31,**                      | ** ** |
| ** **                                              | ** ** | **2006**                                | ** ** | **2005** | ** ** |
|                                                    |       |                                    |       |   |   |
| Revenue from  license royalties and design service fees |       | $                                       | 2,561      |   | $ | 7,354 |   |
|                                                    |       |                                    |       |   |   |
| Product sales                                           |       | 2,378                                   |       | 1,310 |   |
|                                                    |       |                                    |       |   |   |
| Total revenues                                          |       | 4,939                                   |       | 8,664 |   |
|                                                    |       |                                    |       |   |   |
| Operating  expenses:                                    |       |                                    |       |   |   |
| Cost of product  sales                                  |       | 1,297                                   |       | 1,038 |   |
| Selling, general  and administrative                    |       | 5,778                                   |       | 4,575 |   |
| Total operating  expenses                               |       | 7,075                                   |       | 5,613 |   |
|                                                    |       |                                    |       |   |   |
| Operating  earnings (loss)                              |       | (2,136                                  | )          | 3,051 |   |
|                                                    |       |                                    |       |   |   |
| Interest income                                         |       | 194                                     |       | 30 |   |
| Earnings (loss)  before income taxes                    |       | (1,942                                  | )          | 3,081 |   |
|                                                    |       |                                    |       |   |   |
| Income taxes                                            |       | (768                                    | )          | 1,260 |   |
|                                                    |       |                                    |       |   |   |
| Net earnings  (loss)                                    |       | $                                       | (1,174     | ) | $ | 1,821 |   |
|                                                    |       |                                    |       |   |   |
| Net earnings  (loss) per common share:                  |       |                                    |       |   |   |
| Basic                                                   |       | $                                       | (0.07      | ) | $ | 0.12 |   |
| Diluted                                                 |       | $                                       | (0.07      | ) | $ | 0.12 |   |
| Weighted average  common shares outstanding:            |       |                                    |       |   |   |
| Basic                                                   |       | 15,889                                  |       | 15,738 |   |
| Diluted                                                 |       | 15,889                                  |       | 15,757 |   |

 

See accompanying notes toconsolidated financial statements

 

3

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MOSSIMO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)(Unaudited)

 
| ** **                                                                                  | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                  | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                                  | ** ** | **2006**                                | ** ** | **2005** | ** ** |
|                                                                                        |       |                                    |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                      |       |                                    |       |   |   |
| Net eanings  (loss)                                                                         |       | $                                       | (1,174     | ) | $ | 1,821 |   |
| Adjustments to  reconcile net earnings (loss) to net cash provided by operating activities: |       |                                    |       |   |   |
| Depreciation and  amortization                                                              |       | 80                                      |       | 144 |   |
| Inventory  write-down                                                                       |       | 63                                      |       | 72 |   |
| Deferred rent                                                                               |       | (4                                      | )          | 6 |   |
| Provision for  bad debt                                                                     |       | 153                                     |       | 31 |   |
| Deferred income taxes                                                                       |       | (985                                    | )          | 1,132 |   |
| Excess tax  benefit from stock-based compensation                                           |       | (39                                     | )          | — |   |
| Stock-based  compensation                                                                   |       | 48                                      |       | — |   |
| Changes in:                                                                                 |       |                                    |       |   |   |
| Accounts  receivable                                                                        |       | (6,077                                  | )          | (5,000 | ) |
| Merchandise  inventory                                                                      |       | (84                                     | )          | (107 | ) |
| Prepaid expenses  and other current assets                                                  |       | (93                                     | )          | (145 | ) |
| Other assets                                                                                |       | 36                                      |       | 18 |   |
| Accounts payable                                                                            |       | 744                                     |       | 499 |   |
| Accrued  liabilities                                                                        |       | 6,550                                   |       | 3 |   |
| Accrued  commissions                                                                        |       | 693                                     |       | 656 |   |
| Accrued bonuses                                                                             |       | (2,671                                  | )          | 475 |   |
| Net cash used by  operating activities                                                      |       | (2,760                                  | )          | (395 | ) |
|                                                                                        |       |                                    |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                      |       |                                    |       |   |   |
| Proceeds from  sale of available-for-sale securities                                        |       | —                                  |       | 4,800 |   |
| Payments for  acquisition of property and equipment                                         |       | (51                                     | )          | (54 | ) |
| Net cash  provided by (used by) investing activities                                        |       | (51                                     | )          | 4,746 |   |
|                                                                                        |       |                                    |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                      |       |                                    |       |   |   |
| Restricted cash  – certificates of deposit                                             |       | (6                                      | )          | (2 | ) |
| Excess tax  benefit from stock-based compensation                                           |       | 39                                      |       | — |   |
| Proceeds from  issuance of common stock                                                     |       | 393                                     |       | — |   |
| Net cash  provided by (used by) financing activities                                        |       | 426                                     |       | (2 | ) |
|                                                                                        |       |                                    |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                       |       | (2,385                                  | )          | 4,349 |   |
| CASH AND CASH  EQUIVALENTS, beginning of year                                               |       | 19,658                                  |       | 4,903 |   |
| CASH AND CASH  EQUIVALENTS, end of year                                                     |       | $                                       | 17,273     |   | $ | 9,252 |   |
|                                                                                        |       |                                    |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                          |       |                                    |       |   |   |
| Cash paid during  the year for state income taxes                                           |       | $                                       | —     |   | $ | 26 |   |

 

See accompanying notes toconsolidated financial statements

 

4

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**MOSSIMO,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1. BASISOF PRESENTATION

 

The condensed consolidatedfinancial statements presented herein have not been audited, but include allmaterial adjustments (consisting of normal recurring adjustments), which are,in the opinion of management, necessary for a fair statement of the financialcondition, results of operations and cash flows for the periods presented.However, these results are not necessarily indicative of results for any otherinterim period or for the full year. The condensed consolidated balance sheetdata presented herein for December 31, 2005 was derived from the Company’saudited consolidated financial statements for the year then ended, but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America.

 

The consolidatedfinancial statements include the accounts of Mossimo, Inc. and its wholly-ownedsubsidiary, Modern Amusement, Inc. All significant inter-company balances andtransactions have been eliminated in consolidation.

 

On January 16, 2004, Mossimo, Inc.acquired substantially all the assets of Modern Amusement LLC through a whollyowned subsidiary, Modern Amusement, Inc. (“Modern Amusement”). All inter-companyaccounts and transactions have been eliminated in consolidation.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

Certain information andfootnote disclosures normally included in annual financial statements inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to the Regulations of the Securities andExchange Commission. The Company believes the disclosures included in theaccompanying interim condensed consolidated financial statements and notesthereto are adequate to make the information not misleading, but should be readin conjunction with the financial statements and notes thereto included in ourForm 10-K for the year ended December 31, 2005.

 

As of March 31, 2006, the Company entered into anagreement and plan of merger by and among the Company, Iconix Brand Group,Inc., Moss Acquisition Corp., a wholly-owned subsidiary of Iconix, and MossimoGiannulli, the Chairman and Co-Chief Executive Officer and 64.6% stockholder ofthe Company (“Merger Agreement”). Pursuant to the agreement, the Companyexpects to merge with and into Moss Acquisition Corp. which would be thesurviving company. The proposed merger is described in the Company’s CurrentReport on Form 8-K filed with the Securities and Exchange Commission on April6, 2006, with the merger agreement attached as Exhibit 2.1 to the Form 8-K.

 

As consideration forinvestment banking services provided in connection with Mossimo’s negotiationand evaluation of the proposed merger and any alternative proposals, Mossimohas agreed to pay B. Riley & Co., Inc. an investment banking fee of$600,000. This fee is not contingent on the completion of any transaction.Bryant R. Riley, a director of Mossimo, is chairman and chief executive officerof B. Riley & Co., Inc.

 

5

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*Share-BasedCompensation*

 

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”)which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors for employee stockoptions based on estimated fair values. SFAS 123(R) supersedes the Company’sprevious accounting under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) for periods beginning on or after January1,  2006. In March 2005, the Securitiesand Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)relating to SFAS 123(R). The Company has applied the relevant provisions of SAB107 in its adoption of SFAS 123(R).

 

TheCompany adopted SFAS 123(R) using the modified prospective method, whichrequires the application of the accounting standard as of January 1, 2006,the first day of the Company’s 2006 fiscal year. The Company’s consolidatedfinancial statements as of and for the three months ended March 31, 2006reflect the impact of SFAS 123(R). In accordance with the modified prospectivetransition method, the Company’s consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R)for the three months ended March 31, 2006 was $48,000.

 

SFAS123(R) requires companies to estimate the fair value of share-based paymentawards on the date of grant using an option-pricing model. The value of theportion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in the Company’s consolidated statementof earnings. Prior to the adoption of SFAS 123(R), the Company accounted forstock-based compensation in accordance with Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations. The Company followed the pro forma disclosure requirements ofSFAS No. 123, “Accounting for Stock-Based Compensation”, which requirespresentation of the pro forma effect of the fair value based method on netearnings and net earnings per share in the financial statement footnotes.

 

Stock-basedcompensation expense recognized during the period is based on the value of theportion of share-based payment awards that is ultimately expected to vestduring the period. Stock-based compensation expense recognized in the Company’sconsolidated statement of earnings for the three months ended March 31,2006 included compensation expense for share-based payment awards granted priorto, but not yet vested as of December 31, 2005 based on the grant date fairvalue estimated in accordance with the pro forma provisions of SFAS 123. TheCompany uses the straight-line single option method of attributing the value ofthe share-based compensation expense. As stock-based compensation expenserecognized in the consolidated statement of earnings for the first quarter of2006 is based on awards ultimately expected to vest, it has been reduced forestimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. In the Company’s pro forma informationrequired under SFAS 123 for the periods prior to 2005, the Company accountedfor forfeitures as they occurred.

 

Uponadoption of SFAS 123(R), the Company will continue to use the Black-Scholesoption pricing model for valuation of share-based awards granted beginning in2006. The Company’s determination of fair value of share-based payment awardson the date of grant using an option-pricing model is affected by the Company’sstock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, theCompany’s expected stock price volatility over the term of the awards, andactual and projected employee stock option exercise behaviors.

 

2. REVENUE RECOGNITION

 

Revenue from licenseroyalties and design service fees are recognized in accordance with the termsof the underlying agreements, which is generally after the design services areperformed, and as the licensee achieves sales of the Company’s products. Duringthe periods presented herein, a substantial amount of the Company’s revenuefrom license royalties and design fees were generated under the TargetAgreement under a rate of 1% to 4% that declines as the contract yearprogresses and Target 

 

6

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achieves certain levels of retail sales. Accordingly, the Company’srevenues from Target decreases as the year progresses. The declining rate isreset each contract year beginning on February 1. Revenue recognized in thefirst and second quarters of the Company’s calendar year in connection with theTarget Agreement is significantly higher than in the third and fourth quartersof the Company’s calendar year due to the declining rates in the TargetAgreement. Revenues from license royalties and design service fees underlicense agreements other than the Target Agreement are generally collected on aquarterly basis, and they range from 2% to 5% of sales, as defined in therespective agreements.

 

On March 31, 2006, the Company and Target restated theTarget Agreement. The restated Target Agreement extends Target’s exclusivelicense to produce and distribute substantially all Mossimo-branded productssold in the United States, its territories and possessions through Targetretail stores or any other retail store or other merchandising activityoperated by Target or its affiliates, including direct mail and Internetmerchandising until January 31, 2010.

 

Under the restated Target Agreement, the Company willensure the availability of Mossimo Giannulli, the Co-Chief Executive Officer ofthe Company, to provide the services of creative director in connection withMossimo-branded products sold though Target stores. Target will pay the Companyan annual guaranteed minimum fee of $9,625,000 for each contract year (definedas each period from February 1 through January 31 during the term of theagreement), against which Target may charge back and offset certain amounts. Asamended, the agreement requires the Company to pay Target a one-time,nonrefundable reimbursement of fees paid by Target related to contract year2006 revenues in the amount of $6,000,000 on or before June 30, 2006.

 

Modern Amusementrecognizes wholesale operations revenue from the sale of merchandise whenproducts are shipped, FOB Modern Amusement’s distribution facilities, and thecustomer takes title and assumes risk of loss, collection is reasonablyassured, pervasive evidence of an arrangement exists, and the sales price isfixed or determinable.

 

3. INVENTORY

 

The Company maintains inventories for theModern Amusement segment. Inventories are valued at the lower of cost(first-in, first-out) or market and are made up primarily of finished goods. TheCompany continually evaluates its inventories by assessing slow moving currentproduct as well as prior seasons’ remaining 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. Management makes reserves againstsuch inventory as seen appropriate, which reduces our gross margin, operatingincome and carrying value of inventories.

 

4. EXECUTIVE BONUS PLANS

 

The Company has bonus plans covering two executiveofficers which are administered by the Compensation Committee of the Board ofDirectors, and that provide for discretionary bonuses based on the Company’soverall performance, with the total amount of the bonuses not to exceed apercent (as defined) of the excess over the minimum total guaranteed fees, ifany, of license royalties paid to the Company under the Target Agreement, andas defined in each of the respective bonus plans. The Company has expensed$732,000 and $619,000 under these agreements for the three month periods endedMarch 31, 2006 and 2005, respectively.

 

5. INCOME TAXES

 

The Company accounts forincome taxes in accordance with Statement of Financial Accounting Standard (“SFAS”)No. 109, “Accounting for Income Taxes”. Deferred taxes result from therecognition of the income tax benefit to be derived from the Company’s netoperating loss carry forward for income taxes purposes.

 

7

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The Company recorded a benefit for income taxes of $768,000for the three months ended March 31, 2006, compared to a provision for incometaxes of $1.3 million for the three months ended March 31, 2005. Bothprovisions approximate the Company’s combined effective rate as estimated forthe entire fiscal year, for Federal and California state income taxes. Theincome tax rate for the three months ended March 31, 2006 is 39.5% compared to40% for the comparable period of the prior year.

 

At March 31, 2006, the Company has recorded a total net deferredtax asset of $6.91 million, with $5.92 million classified as current in theaccompanying condensed consolidated balance sheet, primarily reflecting theextension of the Target Agreement through January 31, 2010. The Company hasconsidered the projected taxable income from the Target Agreement and otheragreements in its estimate of deferred tax asset recoverability and hasrecorded a valuation allowance for its net deferred tax assets of $245,000 as ofMarch 31, 2006 compared to $245,000 as of December 31, 2005. The valuationallowance relates principally to foreign tax credits for which there isuncertainty about their recoverability.

 

The Company hasapproximately $6.4 million and $4.9 million of federal and state income tax netoperating loss carry forwards, respectively, available to offset future taxableincome which expire in various years through 2022. The Company expects that futuretaxable income will be offset in the near-term, for the most part, by itsnet operating tax loss carry forwards.

 

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 the highest personal income tax rate onundistributed after tax earnings.

 

Over 50 percent of thevalue of the Company’s outstanding stock is owned by one stockholder, howeverit is presently anticipated that in 2006, no more than 60 percent of theCompany’s income, as defined, would be derived from license royalties.Accordingly, at this time the Company is not anticipating being classified as apersonal holding company at the end of 2006 and the Company intends to continueto take appropriate measures to avoid being classified as a personal holdingcompany at the end of 2006 and beyond. However, there can be no assurance thatthe Company will be successful in its efforts to avoid classification as apersonal holding company at the end of 2006 or in future years.

 

6. EARNINGS PER SHARE AND STOCK OPTION PLANS

 

Basic earnings per share is computed by dividing netearnings available to common stockholders by the weighted average number ofcommon shares outstanding. Diluted earnings per share includes the effect ofpotential shares outstanding, including dilutive stock options, using thetreasury stock method. Securities excluded from diluted weighted average sharesoutstanding are comprised of stock options.

 

Thereconciliation between earnings and weighted average shares outstanding forbasic and diluted earnings per share is as follows (amounts in thousands,except per share data):

 

8

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| ** **                                   | ** ** | **Three months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                         |       |                             |       |   |   |
| Net earnings  (loss)                         |       | $                                | (1,174     | ) | $ | 1,821 |   |
| Weighted average  number of common shares:   |       |                             |       |   |   |
| Basic                                        |       | 15,889                           |       | 15,738 |   |
| Effect of  dilutive securities-stock options |       | —                           |       | 19 |   |
| Diluted                                      |       | 15,889                           |       | 15,757 |   |
|                                         |       |                             |       |   |   |
| Earnings (loss)  per share:                  |       |                             |       |   |   |
| Basic                                        |       | $                                | (0.07      | ) | $ | 0.12 |   |
| Effect of  dilutive securities-stock options |       | —                           |       | — |   |
| Diluted                                      |       | $                                | (0.07      | ) | $ | 0.12 |   |
|                                         |       |                             |       |   |   |
| Excluded  securities - antidilutive          |       | 130                              |       | 510 |   |

 

TheCompany adopted the Mossimo, Inc. 1995 Stock Option Plan (the “1995 Plan”),which provides for the grant of stock options, stock appreciation rights andother stock awards to certain officers and key employees of the Company and tocertain advisors or consultants to the Company. In addition, the Companyadopted a Non-Employee Directors Stock Option Plan (the “Directors Plan”) thatprovides for the grant of stock options to non-employee directors. Stockoptions issued to employees are granted at the market price on the date ofgrant, generally vest at 33% per year, and generally expire ten years from thedate of grant.  We issue new shares of common stock upon exercise of stockoptions. This plan expired at the annual meeting held on December 15, 2005,therefore, no additional share will be issued under this plan.

 

TheCompany adopted the Mossimo, Inc 2005 stock Option Plan (the “2005 Plan) toreplace the 1995 Plan and the Directors Plan both of which terminated as ofDecember 31, 2005. The 2005 Plan provides for the grant of stock options tocertain officers, key employees and non-employee directors. A total of1,500,000 shares have been reserved for issuance under the 2005 Plan. Optionsgranted under the 2005 Plan will have an exercise price equal to the fairmarket value of the common stock on the date of grant. Options will beexercisable in accordance with vesting schedules to be established by theCompensation Committee. As of March 31, 2006, no options have been grantedunder the 2005 Plan.

 

9

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A summary of option activity follows:

 
| ** **                                     | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**      | ** ** | ** **    | ** ** |
|------------------------------------------------|------------|------------|------------|--------------|------------|-------------------|------------|---------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**       | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **   | ** ** | **Remaining**     | ** ** | ** **    | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Contractual**   | ** ** | **Aggregate** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Average**  | ** ** | **Term (in** | ** ** | **Intrinsic** | ** ** |
| ** **                                     | ** ** | **Shares** | ** ** | **Price**    | ** ** | **years)**        | ** ** | **Value**     | ** ** |
|                                           |       |       |       |         |       |              |       |          |       |
| Outstanding, at  December 31, 2005             |       | 554,331    |       | 6.34         |       |              |       |          |       |
| Granted                                        |       | —     |       | —       |       |              |       |          |       |
| Exercised                                      |       | (80,021    | )          | 4.91         |       |              |       |          |       |
| Canceled/forfeited                             |       | (25,000    | )          | 5.33         |       |              |       |          |       |
|                                           |       |       |       |         |       |              |       |          |       |
| Outstanding, at  March 31, 2006                |       | 449,310    |       | 6.35         |       | 5.70              |       | $             | 484,010    |   |
|                                           |       |       |       |         |       |              |       |          |       |
| Vested and  expected to vest at March 31, 2006 |       | 449,310    |       | 6.35         |       | 5.70              |       | $             | 484,010    |   |
|                                           |       |       |       |         |       |              |       |          |       |
| Options  exercisable, at March 31, 2006        |       | 323,310    |       | 7.17         |       | 5.54              |       | $             | 326,471    |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value (the difference between our closingstock price on March 31, 2006 and the exercise price, multiplied by the numberof in-the-money options) that would have been received by the option holdershad all option holders exercised their options on March 31, 2006.  Thisamount changes based on the fair market value of our stock. Total intrinsicvalue of options exercised for the quarter ended March 31, 2006 was $96,471. Asof March 31, 2006, total unrecognized stock-based compensation expense relatedto non-vested stock options was approximately $285,000, which is expected to berecognized over a weighted average period of approximately 2 years.

 

The following tablesummarizes stock-based compensation expense, net of tax, related to employeestock options under SFAS 123(R) for the three March 31, 2006 which wasallocated as follows (in thousands):

 

| ** **                                                                      | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**                            | ** ** |
| ** **                                                                      | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                                                                            |       |                                          |       |   |   |
| Stock-based  compensation expense included in operating expenses                |       | 48                                            |       | — |   |
|                                                                            |       |                                          |       |   |   |
| Tax benefit                                                                     |       | (19                                           | )          | — |   |
|                                                                            |       |                                          |       |   |   |
| Stock-based  compensation expense related to employee stock options, net of tax |       | 29                                            |       | — |   |

 

As noted above, the impact of net earningsfrom the adoption of SFAS 123(R) was a reduction in net earnings of $29,000 or$0.00 per diluted share. Prior to the adoption of SFAS 123(R), we presented alltax benefits resulting from the exercise of stock options as operating cashflows in our consolidated statement of cash flows. SFAS 123(R) requires suchbenefits to be recorded as financing cash flows. The impact of this changes innot material to our statement of cash flows.

 

Before January 1, 2006, the Companyaccounted for stock-based compensation in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, andrelated interpretations. The Company follows the pro forma disclosurerequirements of SFAS No. 123, 

 

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“Accounting for Stock-Based Compensation”, which requirespresentation of the pro forma effect of the fair value based method on netearnings and net earnings per share in the financial statement footnotes.

 

If compensation expense was determined based on thefair value method, the Company’s net earnings and earnings per share would haveresulted in the approximate pro forma amounts indicated below for the threemonth period ended March 31, 2005 (in thousands, except per share data):

 

| ** **                                                                                                                                   | ** ** | **Three months** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **March 31,**    | ** ** |
| ** **                                                                                                                                   | ** ** | **2005**              | ** ** |
|                                                                                                                                         |       |                  |       |
| Net earnings as  reported                                                                                                                    |       | $                     | 1,821      |   |
|                                                                                                                                         |       |                  |       |
| Deduct:                                                                                                                                      |       |                  |       |
| Total  stock-based employee compensation expense determined under fair market value based  method for all awards, net of related tax effects |       | (16                   | )          |
|                                                                                                                                         |       |                  |       |
| Pro forma net  earnings                                                                                                                      |       | $                     | 1,805      |   |
|                                                                                                                                         |       |                  |       |
| Earnings per  share – basic and diluted                                                                                                 |       |                  |       |
| As reported –  basic                                                                                                                    |       | $                     | 0.12       |   |
| As reported –  diluted                                                                                                                  |       | $                     | 0.12       |   |
|                                                                                                                                         |       |                  |       |
| Pro forma –  basic                                                                                                                      |       | $                     | 0.12       |   |
| Pro forma –  diluted                                                                                                                    |       | $                     | 0.11       |   |

 

The fair value of each option grant was estimated asof the grant date using the Black-Scholes option-pricing model for the quarterended March 31, 2005, assuming risk-free interest rates of 4.28 percent;volatility of approximately 84 percent; zero dividend yield; and expected livesof 6.50 years. There were no options granted in the first quarter of 2006. Proforma disclosure for the quarter ended March 26, 2006 is not presented becausethe amounts are recognized in the consolidated financial statements.

 

The expected term of the options represents theestimated period of time until exercise and is based on historical experienceof similar options, giving consideration to the contractual terms, vestingschedules and expectations of future employee behavior. Expected stock pricevolatility is based on the historical volatility of our stock for the periodequal to the expected term. The risk-free interest rate is based on the U.S.Treasury yield in effect at the time of grant with an equivalent remainingterm. The Company has not paid dividends in the past and does not currentlyplan to pay any dividends in the near future.

 

7  LITIGATION

 

On April 12, 2005, Mossimo Giannullioffered to acquire all of the outstanding publicly held common stock of Mossimoat a price of $4.00 per share. Following the announcement, six purported classaction lawsuits were filed in the Court of Chancery of the State of Delaware. Eachof the complaints asserted that the Mossimo directors breached their fiduciaryduties to Mossimo’s stockholders, and sought an injunction preventing theacquisition. On April 19, 2005, the Board of Directors appointed a SpecialCommittee to consider and evaluate Mr. Giannulli’s proposal. The SpecialCommittee retained Houlihan Lokey and Gibson Dunn & Crutcher to serve asthe Committee’s independent financial advisor and legal counsel, respectively,with respect to the Committee’s evaluation of Mr. Giannulli’s proposal. On May27, 2005, the above referenced cases were consolidated under the followingcaption:  In re Mossimo, Inc. ShareholderLitigation, Consolidated Civil Action No.1246-N (the “Action”).

 

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On October 10, 2005, Mossimo and otherdefendants entered into a Memorandum of Understanding (“MOU”) to settle theAction. Under the terms of the MOU, Mr. Giannulli agreed that his proposal toacquire all of Mossimo’s outstanding shares would be priced at $5.00 per shareand that the tender offer pursuant to which the acquisition was proposed to beconsummated would be conditioned upon no less than 50 percent of all publicstockholders of Mossimo unaffiliated with Mr. Giannulli accepting or approvingthe tender offer. The MOU further provided that plaintiffs’ lead counsel wouldbe afforded the opportunity to comment on and suggest inclusions to the disclosuresmade to the Company’s public stockholders in conjunction with the acquisition. Inaddition, the Company agreed to negotiate in good faith with the plaintiffs’lead counsel concerning the amount of attorney fees and expenses to be paid,subject to Delaware Chancery Court approval. The Company also agreed to paywhatever fee and expense amount the Delaware Chancery Court might have awardedto plaintiffs’ lead counsel. In consideration of these terms, the partiesagreed that they would fully and finally release and discharge all claimsagainst each other.

 

The settlement was conditioned on theconsummation of the acquisition by Mr. Giannulli, the negotiation of adefinitive stipulation of settlement and the entry of a Final Order andJudgment approving the settlement by the Delaware Chancery Court. On November14, 2005 Giannulli announced that he had withdrawn the proposal to acquire theoutstanding shares of the Company that he did not already own. The provisionsof the MOU have thus become moot. The Action remains on file. Under the mergeragreement, Mossimo and Mr. Giannulli are required to use their best efforts tohave the litigation withdrawn and terminated with prejudice or settle it to thereasonable satisfaction of Iconix.

 

On April 12, 2006, a purported shareholderclass action lawsuit was filed in the Superior Court of the State of Californiafor the County of Los Angeles entitled Laborers’ Local #231 Pension Fund vs.Mossimo, Inc. et al. The lawsuit alleges that Mossimo and its board of directorsbreached their fiduciary duties and engaged in self-dealing in approving themerger agreement and seeks, among other relief, to enjoin the proposed mergerof the Mossimo with Iconix, the rescission of any agreements entered into inconnection with the proposed merger, and costs, including attorney’s fees. Mossimoand its directors believe the allegations in the complaint are without meritand intend to defend the claims vigorously.

 

8  SEGMENTINFORMATION

 

The Company operates in two businesssegments: Mossimo (design and licensing services) and Modern Amusement (Modern)(wholesale). The following tables summarize various financial amounts for eachof our business segments (in thousands):

 

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| **Quarter ended March 31, 2006** | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                             |       | $           | 2,561      |       | $          | 2,378     |       | $ | 4,939 |   |
| Gross Profit                                         |       | —      |       | 1,081      |       | 1,081     |       |
| Depreciation and  Amortization                       |       | 26          |       | 54         |       | 80        |       |
| Selling, general  and administrative expenses        |       | 4,672       |       | 1,106      |       | 5,778     |       |
| Operating Income  (loss)                             |       | (1,149      | )          | (25        | )          | (1,174    | )          |
| Interest Income                                      |       | 194         |       | —     |       | 194       |       |
| Total Assets                                         |       | 33,491      |       | 3,322      |       | 36,813    |       |
| Capital  Expenditures                                |       | 13          |       | 38         |       | 51        |       |
|                                                      |            |             |            |            |            |           |            |  |  |  |

 
| **Quarter ended March 31, 2005** | ** ** | **Mossimo** | ** ** | **Modern** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------|------------|-----------|------------|
| Revenues                                             |       | $           | 7,354      |       | $          | 1,310     |       | $ | 8,664 |   |
| Gross Profit                                         |       | —      |       | 272        |       | 272       |       |
| Depreciation and  Amortization                       |       | 61          |       | 83         |       | 144       |       |
| Selling, general  and administrative expenses        |       | 3,617       |       | 958        |       | 4,575     |       |
| Operating Income  (loss)                             |       | 3,737       |       | (686       | )          | 3,051     |       |
| Interest Income                                      |       | 30          |       | —     |       | 30        |       |
| Total Assets                                         |       | 23,222      |       | 3,159      |       | 26,381    |       |
| Capital  Expenditures                                |       | 8           |       | 46         |       | 54        |       |
|                                                      |            |             |            |            |            |           |            |  |  |  |

 

The following information should beconsidered when reading the above table:

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

•                  Corporate overhead has been allocated to the Mossimo segment.

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

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

•                  Revenue from countries other than the United States did notaccount for 10% or more of total revenue.

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

•                  Gross profit is derived by reducing sales of the Modern segment of$2.38 million by $1.30 million of cost of sales for the threemonths ended March 31, 2006 toarrive at a gross profit of approximately $1.08 million.

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

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARDLOOKING INFORMATION**

 

This report on Form 10-Qcontains certain forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Theseforward looking statements relate to matters such as the Company’s futureoperating results, the success and longevity of its licensing program withTarget in the United States, Hudson’s Bay Company in Canada, and otherlicensees, and the Company’s success in executing its business plan for ModernAmusement. Such forward-looking statements are based on the beliefs of theCompany’s management as well as assumptions made by and information currentlyavailable to the Company’s management. The words “anticipate”, “believe”, “may”,“estimate”, “plan”, “expect”, “future”, “intend”, “will”, “should”, “continue”and similar expressions, variations of such terms or the negative of such termsas they relate to the Company or its management when used in this document, areintended to identify such forward-looking statements. In particular, theforward looking statements in this Form 10-K include, among other things,statements regarding or expectations about our future revenues and earnings.Forward 

 

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looking statements include known or unknown risks and uncertaintiesthat may cause our results, performance and stock price to be materiallydifferent from the forward looking statements. Such statements are based onmanagement’s current expectations and are subject to certain risks,uncertainties and assumptions, including those described in our Form 10-K forthe year ended December 31, 2005 under “Business—Risk Factors”. Should one ormore risks or uncertainties materialize, or should underlying assumptions proveincorrect, the Company’s actual results, performance or achievements coulddiffer materially from those expressed in, or implied by such forward-lookingstatements. The Company’s future operations, financial performance, businessand share price may be affected by a number of factors, including but notlimited to the financial condition of the apparel industry and the retailindustry, the overall level of consumer spending, the effect of intensecompetition from other apparel lines, within and outside of Target Stores, adversechanges in licensee or consumer acceptance of products bearing the Mossimo orModern Amusement name as a result of fashion trends or otherwise, the abilityand/or commitment of Target and our other licensees to manufacture and marketMossimo branded products, our dependence on Target for most of our revenue, ourdependence on key management personnel and the other factors described in ourForm 10-K for the year ended December 31, 2005 under “Business—Risk Factors.”Accordingly, undue reliance should not be placed on these forward-lookingstatements.

 

This discussion andanalysis should be read in conjunction with the Company’s financial statementsfor the year ended December 31, 2005 in our annual report on Form 10-K.

 

As of March 31, 2006, the Company entered into anagreement and plan of merger by and among the Company, Iconix Brand Group,Inc., Moss Acquisition Corp., a wholly-owned subsidiary of Iconix, and MossimoGiannulli, the Chairman and Co-Chief Executive Officer and 64.6% stockholder ofthe Company (“Merger Agreement”). Pursuant to the agreement, the Companyexpects to merge with and into Moss Acquisition Corp. which would be thesurviving company. The proposed merger is described in the Company’s CurrentReport on Form 8-K filed with the Securities and Exchange Commission on April6, 2006, with the merger agreement attached as Exhibit 2.1 to the Form 8-K.

 

**Overview**

 

Mossimo, Inc. presently operates as a designer andlicensor of apparel and related products under the “Mossimo” brand and otherbrands it owns or may acquire. The Company licenses the Mossimo brand to thirdparties domestically and internationally. Our primary domestic licensee isTarget Corporation. In addition to our licensing agreement with Target, whichwe refer to in this quarterly report as the Target Agreement, the Company alsolicenses its Mossimo trademarks and provides design services outside of theUnited States, and also licenses its Mossimo trademarks for use in collectionsof eyewear and women’s swimwear and body-wear sold in Target stores in theUnited States.

 

The Company entered into a multi-year licensing anddesign services agreement with Target in March 2000 which was subsequentlyamended in April 2002, and in February and June 2003. Under theterms of the Target Agreement, Target has the exclusive license, for productionand distribution through Target stores, of substantially all Mossimo brandedproducts sold in the United States. The Company, therefore can not enter intoany other wholesale or retail licensing agreements in the United States withrespect to the Mossimo brand.

 

Under the Target Agreement the Company provides designservices and has approval rights for product design, marketing and advertisingmaterials. Target collaborates on design and is responsible for productdevelopment, sourcing, quality control and inventory management with respect tothe Target-licensed product line. On March 31, 2006, the Company and Targetrestated the Target Agreement. The restated Target Agreement extends Target’sexclusive license to produce and distribute substantially all Mossimo-brandedproducts sold in the United States, its territories and possessions throughTarget retail stores or any other retail store or other merchandising activityoperated by Target or its affiliates, including direct mail and Internetmerchandising until January 31, 2010.

 

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Under the restated Target Agreement, the Company willensure the availability of Mossimo Giannulli, the Co-Chief Executive Officer ofthe Company, to provide the services of creative director in connection withMossimo-branded products sold though Target stores. Target will pay the Companyan annual guaranteed minimum fee of $9,625,000 for each contract year (definedas each period from February 1 through January 31 during the term of theagreement), against which Target may charge back and offset certain amounts. Asamended, the agreement requires the Company to pay Target a one-time,nonrefundable reimbursement of fees paid by Target related to contract year2006 revenues in the amount of $6,000,000 on or before June 30, 2006.

 

As consideration forinvestment banking services provided in connection with Mossimo’s negotiationand evaluation of the proposed merger and any alternative proposals, Mossimohas agreed to pay B. Riley & Co., Inc. an investment banking fee of$600,000. This fee is not contingent on the completion of any transaction.Bryant R. Riley, a director of Mossimo, is chairman and chief executive officerof B. Riley & Co., Inc.

 

Target may renew the Restated Target Agreement, on thesame terms and conditions, for additional terms of two years each by giving theCompany written notice of its intent to renew at least one year prior to theend of the current term. The Company pays a 15% commission, based on feesreceived from Target, to a third party who assisted the Company in connectionwith entering into the initial agreement with Target. The Target Agreement issubject to early termination under certain circumstances.

 

The Company licensed the exclusive right tomanufacture and distribute eyewear bearing its Mossimo trademarks throughspecialty retail stores such as opticians, optical chains and specialtyeyeglass and sunglass stores pursuant to a license agreement with the MarcolinGroup. This agreement ended on December 31, 2004 and we are currently notgenerating revenue in this area. The Company is currently negotiating alicensing agreement with Luxottica Retail for the production and distributionof the Mossimo branded product line of optical frames. The Company expectsLuxottica Retail will sell Mossimo branded eyewear through Target stores.

 

The Company has licensed the exclusive right tomanufacture and distribute women’s swimwear and bodywear bearing its Mossimotrademarks through Target stores in the United States pursuant to a licenseagreement with The Lunada Bay Corporation. This agreement extends throughSeptember 30, 2007, and is renewable annually.

 

In May 2002, the Company entered into an agreementwith Hudson’s Bay Company. Under the agreement, the Company provided productdesign services, and granted a license for the Mossimo trademark to Hudson’sBay Company exclusively in Canada, in return for license royalties and designservice fees. Hudson’s Bay Company collaborated on product design, and wasresponsible for manufacturing, importing, marketing, advertising, selling anddistributing merchandise bearing the Mossimo trademark. The initial term of theagreement was three years beginning in May 2002. The agreement expired in Mayof 2005, we expect to receive royalty payments through the third quarter of2006. There are no plans to renew the agreement.

 

The Company enters into other International licensingagreements of its Mossimo branded products for certain geographical territorieswhen the Company believes such arrangements provide effective manufacturing,distribution and marketing of such products. Historically, very little activityhas occurred outside the United States.

 

In January 2004, the Company acquiredModern Amusement, which is focused on design and distribution of premiumbranded west coast-lifestyle casual sportswear apparel and related accessoriesfor young men and young women under the Modern Amusement brand. The productsare offered at moderate to upper price points through traditional specialtystores and better department store distribution channels. The Modern Amusementbusiness includes sourcing manufactured products, wholesale distribution,inventory management, marketing, promoting, and advertising of apparel andrelated accessories under the Modern Amusement brand. While the ModernAmusement business is relatively small, as the Company expands into thewholesale products business, it will encounter increased exposure to excess andobsolete inventories, potential delays and cancellations from sourcing 

 

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manufactured products domesticallyand internationally, and product returns and allowances from retail customers,as well as marketing, promotion and advertising expenditures that may notresult in successful campaigns.

 

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

 

Net sales for Modern Amusement for thequarter ended March 31, 2006 were $2.38 million with a gross profit margin of 45%.Selling, general and administrative expense for Modern Amusement for thequarter ended March 31, 2006 was $1.11 million. For quarter ended March 31, 2006,Modern Amusement had an operating loss of $25,000. Modern Amusement’s totalassets as of March 31, 2006 were $3.32 million.

 

In the Merger Agreement,the Company agreed that prior to the closing of the merger, it would sell allof the capital stock of Modern Amusement to Mr. Giannulli for $2,000,000.

 

On January 1, 2006,the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors for employee stock options based onestimated fair values. The Company adopted SFAS 123(R) using the modifiedprospective method, which requires the application of the accounting standardas of January 1, 2006, the first day of the Company’s year 2006. TheCompany’s consolidated financial statements as of and for the three monthsended March 31, 2006 reflect the impact of SFAS 123(R). In accordance with themodified prospective transition method, the Company’s consolidated financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R). Stock-based compensation expense recognizedduring the three month period ended March 31, 2006, was $48,000 beforeincome tax, and is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. As of March 31,2006, total unrecognized stock-based compensation expense related to non-vestedstock options was approximately $285,000, which is expected to be recognizedover a weighted average period of approximately 2 years.

 

Prior to the adoption ofSFAS 123(R), the Company accounted for stock-based compensation in accordancewith Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations. The Company followed the proforma disclosure requirements of SFAS No. 123, “Accounting for Stock-BasedCompensation”, which requires presentation of the pro forma effect of the fairvalue based method on net earnings and net earnings per share in the financialstatement footnotes. During the three month period ended March 31, 2005, nostock-based compensation expense was recognized in earnings. The pro formaeffect of the fair value method on net earnings and earnings per share for thethree month period ended March 31, 2005 is presented in Note 6 in the Company’sinterim consolidated financial statements. The impact on the financialstatements from the adoption of SFAS 123(R) was not material for the firstquarter ended March 31, 2006.

 

***Results of Operations***

# *Three Months EndedMarch 31, 2006 and 2005*

# * *

*Revenues*

 

Total revenue fromlicense royalties and design service fees in the first quarter of 2006 decreasedto $2.6 million compared to $7.4 million for the first quarter of 2005. Thedecrease was due to a one time nonrefundable fee reimbursement of $6.0 millionto Target under the Mossimo Restated License Agreement dated March 31, 2006.Exclusive of the impact of this item, total revenues from license royalties anddesign service fees for the first quarter of 2006 would have been $8.6 millioncompared to $7.4 for the first quarter of 2005. For the first quarter of 2006,73% of the Company’s revenue from license royalties and design fees weregenerated under the Target Agreement, compared to 89% for the same period in2005. Exclusive of the nonrefundable fee reimbursement of $6.0 million toTarget under 

 

16

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the Mossimo Restated License Agreement dated March 31, 2006, 92% of theCompany’s revenues from license royalties and design fees would have beengenerated under the Target agreement compared to 89% for the same period in2005. The royalty rate under the Target Agreement declines, as the contract yearprogresses and Target achieves certain levels of retail sales, from 4% to 1%.The declining royalty rate is reset each contract year beginning on February 1.Accordingly, revenue recognized in the first and second quarters of the Company’scalendar year is significantly higher than in the third and fourth quarters dueto the declining rates in the Target Agreement. Revenues from license royaltiesand design service fees under license agreements other than the TargetAgreement are generally collected on a quarterly basis, and they range from 2%to 5% of sales, as defined in the respective agreements.

 

Design service fees and royalties recognized under theTarget Agreement were $1.9 million in the first quarter of 2006 compared to $6.6million in the first quarter of 2004. The 71% decrease was due to a one time nonrefundablefee reimbursement of $6.0 million to Target under the Mossimo Restated LicenseAgreement dated March 31, 2006. Royalties and design service fees fromcustomers other than Target decreased to $703,000 in the first quarter of 2006 comparedto $755,000 in the first quarter of 2005. The decrease was due mainly to reducedroyalties received from our women’s swimwear and bodywear licensee, and Canada.

 

ModernAmusement achieved gross retail sales of $2.38 million in the first quarter of2006 compared to $1.31 million for the first quarter of 2005. These salesgenerated a gross profit of approximately $1.08 million and a gross profitmargin of 45% for the first quarter of 2006 compared to $272,000 for the first quarterof 2005. We experienced a higherprofit margin due to better buying and a proportionality smaller amount of offprice sales compared to regular priced sales.

 

*Cost of product sales*

 

Cost of sales in the first quarter of 2006resulted entirely from Modern Amusement product sales. Cost of salesapproximated 45% of sales. Cost of sales includes all costs and expensesincurred prior to the receipt of finished goods at the Company’s distributionfacilities. These costs include, but are not limited to, product cost, inboundfreight charges, purchasing and receiving costs, inspection costs, insurance,duty, and brokers’ fees.

 

*Selling,general and administrative expenses (S, G & A)*

 

Selling, general and administrative expenses(SG&A) for both the Mossimo segment and the Modern Amusement segment increasedby approximately $1.2 million or 26% from $4.58 million in the first quarter of2005 to $5.78 million in first quarter of 2006.

 

Selling, general and administrativeexpenses (SG&A) for the Mossimo segment increased by approximately $1.05million or 29% from $3.62 million in the first quarter of 2005 compared to $4.67million in the first quarter of 2006. The increases were due to a number offactors. First, accruedexecutive officer bonuses increased $113,000 (executive bonuses were increasedto $732,000 for the first quarter of 2006 from $619,000 for the first quarterof 2005 consistent with the Company’s comparative performance.) These bonuseswhich are determined at the discretion of the Compensation Committee, inaccordance with a performance criteria outlined in respective bonus plans, andare subject to a maximum annual amount based on a percent of Target licenseroyalty fees in excess of the minimum annual fee, are estimated and accrued ona quarterly basis, with a final determination made by the CompensationCommittee at the end of each year. Second, commissions due to a third party whoassisted the Company in connection with entering into the initial agreementwith Target increased by $193,000. Third, costs of $49,000 were incurred forlegal and financial advisor expenses for the Company and its special committeeassociated with the review and consideration of the transaction proposed byMossimo Giannulli for the acquisition of all of the companies remainingoutstanding shares and pending litigation relating to the proposal. Fourth,$90,000 in fees associated with the merger of Mossimo and Iconix Brand Group,Inc. were incurred. Fifth, travel expenses increased by $133,000. Sixth, asconsideration for investment banking services provided in connection withMossimo’s negotiation and evaluation of the proposed merger and any alternativeproposals, Mossimo has agreed to pay B. Riley & Co., Inc. aninvestment 

 

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banking fee of $600,000. This fee is not contingent on thecompletion of any transaction. Bryant R. Riley, a director of Mossimo, is chairmanand chief executive officer of B. Riley & Co., Inc.

 

Selling, general and administrativeexpenses for the Modern Amusement segment for the first quarter of 2006 were$1.1 million compared to $958,000 for the first quarter of 2005. The increasewas primarily due to: (i) commissions of $105,000, (ii) sample costs of$50,000, (iii) outsourcing of $67,000,(iv) advertising and promotion of$43,000, and (v) bad debts of $33,000. These costs were offset primarily bydecreases in consulting fees of $50,000, and tradeshow costs of $27,000. Theseincreases in selling, general and administrative expenses were associated withthe growth of the Modern Amusement brand.

 

*Interestincome*

 

As aresult of higher average cash balances of $19.2 million for the period ended March31, 2006 compared to average cash balance of $9.9 million for the same periodin 2005, the Company earned $193,000 in interest income the first quarter of2006, compared to $30,000 in the first quarter of 2005. No interest expense wasincurred in the first quarter of 2006.

 

*Incometaxes*

 

The Company recorded a benefit for income taxes of $768,000in the first quarter of 2006 compared to a provision for income taxes of $1.3million in the first quarter of 2005. Both provisions approximate the Company’seffective tax rate for Federal and California state income taxes.

 

The Company hasapproximately $6.4 million and $4.9 million of federal and state income tax netoperating loss carry forwards, respectively, available to offset future taxableincome which expire in various years through 2022. The Company expects that futuretaxable income will be offset in the near-term, for the most part, by itsnet operating tax loss carry forwards.

 

*Netearnings*

 

The Company’s net loss for the first quarter of 2006were $1.17 million, or $0.07 per diluted share, compared to a net earnings of $1.8million, or $0.12 per diluted share for the first quarter of 2005 due to thefactors discussed above.

 

***Liquidity and Capital Resources***

* *

Our sources of liquidity and capital resourcesas of March 31, 2006 consisted of $17.3 million of cash and cash equivalents,and $732,000 of short-term restricted cash, as well as potential future cashflows from operations primarily resulting from the Target agreement. As of March31, 2006 we had working capital of approximately $23.7 million compared to $24.0million at December 31, 2005.

 

During the three months ended March 31,2006, net cash used by operating activities were $2.8 million. Cash used inoperating activities includes primarily $1.17 million of net losses, reductionsin deferred taxes of $985,000, accounts receivable of $6.1 million, and accruedbonuses of $2.7, primarily offset by a increases in accounts payable of $744,000,and accrued liabilities of $6.6 million. The change was primarily due to theincrease in accrued liabilities generated from a one time nonrefundablefee reimbursement of $6.0 million to Target under the Mossimo Restated LicenseAgreement dated March 31, 2006.

 

Net cash used by investing activities wasgenerated from capital expenditures of $51,000 for the quarter ended March 31,2006. Capital expenditures are not expected to be material for the balance ofthe 2006 year.

 

Net cash provided by financing activitieswas generated primarily from the exercise of stock options in the amount of $393,000.

 

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The Company established a revolving lineof credit with a bank in the amount of $300,000 in February 2004. The line ofcredit was established to open letters of credit with foreign suppliers forfinished goods for Modern Amusement. The line of credit was increased to$400,000 in June of 2004, and subsequently increased to $500,000 in January of2005 and increased again to $900,000 in May of 2005. The line of credit issecured by three certificates of deposit totaling approximately $732,000, whichis recorded as restricted cash in our consolidated balance sheet. There is noexpiration date for this line, and there are no covenants. There is a feecharged per letter of credit opened and closed. Open letters of credit at March31, 2006 were approximately $389,000.

 

We have a commission obligation under anagreement with a third party for 15% of fees received from Target for theduration of the Target agreement through January 2010, and for subsequentextensions if they are exercised by Target. Fees incurred under this obligationwere $1.19 million in the first quarter of 2006, compared to $987,000 in the firstquarter of 2005.

 

In January 2004 we completed theacquisition of the Modern Amusement and we amended our facility leaseincreasing our space from approximately 6,000 square feet to approximately9,000 square feet, and extending the lease term thru July 2009. The expandedfacility is intended to also accommodate Modern Amusement. The future annualobligation under the amended lease varies each year, initially at approximately$290,000 in 2004, increasing to $334,000 in 2008. The purchase price of theModern Amusement assets of $375,000 was funded with existing cash. The expectedcash requirements in 2006 for Modern Amusement are approximately $600,000, andis comprised primarily of selling, general, and administrative expenses. Mostof this working capital will be satisfied through operating cash flows, and wedo not expect to incur any significant capital expenditures.

 

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

 

We believe that the Company’s sources ofliquidity and capital will be sufficient to meet our expected operational andcapital needs for the next 12 months and likely will be sufficient to meet ouroperating needs for the foreseeable future and at least through January 2010,which is the most recently extended contract term with Target.

 

**CriticalAccounting Policies**

 

REVENUE RECOGNITION

 

Revenuefrom license royalties and design service fees are recognized in accordancewith the terms of the underlying 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 tofive percent of sales as defined in the respective agreements. During theperiods presented herein, a substantial amount of the Company’s revenue fromlicense royalties and design fees were 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 beginning onFebruary 1. Revenue recognized in the first and second quarters of the Company’scalendar year in connection with the Target Agreement is significantly higherthan in the third and fourth quarters of the Company’s calendar year due to thedeclining rates in the Target Agreement. If Target sales of Mossimo brandedproducts increase in the future, as a result of opening new stores orotherwise, the minimum rate of fees may apply earlier in the Company’s future 

 

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calendar years, shiftingadditional revenue recognition to the first half of the year, and potentiallyreducing the revenue recognition in the second half of the year.

 

ModernAmusement extends credit to customers in the normal course of business, subjectto established credit limits. Accounts receivable, net, in the consolidatedbalance sheets, consists of amounts due from customers net of allowance fordoubtful accounts. The allowance for doubtful accounts is determined byreviewing accounts receivable aging and evaluating individual customerreceivables, considering customers’ financial condition, credit history andcurrent economic conditions.

 

ModernAmusement recognizes wholesale operations revenue from the sale of merchandisewhen products are shipped, FOB Modern Amusement’s distribution facilities, andthe customer takes title and assumes risk of loss, collection is reasonablyassured, pervasive evidence of an arrangement exists, and the sales price isfixed or determinable.

 

INVENTORY

 

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

 

To the extent that management’s estimatesof price reductions necessary to rapidly sell inventory differ from actualresults, additional price reductions may be required that could reduce ourgross margin, operating income and the carrying value of inventories. Oursuccess is largely dependent upon our ability to anticipate the changingfashion tastes of our customers and to respond to those changing tastes in atimely manner. If we fail to anticipate, identify or react appropriately tochanging styles, trends or brand preferences of our customers, we mayexperience lower sales, excess inventories and more frequent and extensivemarkdowns, which would adversely affect our operating results.

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

We evaluate the recoverability of ouridentifiable intangible assets and other long-lived assets in accordance withSFAS No. 144 that generally requires management to assess these assets forrecoverability when events or circumstances indicate a potential impairment byestimating the undiscounted cash flows to be generated from the use andultimate disposition of these assets.

 

The Modern Amusement trade name acquiredduring 2004 and valued at $112,000 is amortized over its estimated useful lifeof 10 years.

 

DEFERREDTAX ASSET VALUATION

 

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”(SFAS 109). Deferred taxes primarily result from the recognition of the incometax benefit to be derived from the Company’s net operating loss carry forwardfor income taxes purposes. As of March 31, 2006, the Company has approximately$6.4 million, and $4.9 million of federal and state income tax net operatingloss carry-forwards, respectively, available to offset future taxable income,which expires in various years through 2022. In accordance with the provisionsof SFAS No. 109 the Company records a valuation allowance to reduce deferredtax assets to the amount expected to “more likely than not” be realized infuture tax returns. The Company monitors its profitability and considers thecredit and collections risk of future fees under its agreements, particularlyin connection with the Target Agreement. Should we determine that we would notbe able to realize all or part of our net deferred tax assets in the future,adjustments to the valuation allowance for deferred tax assets may be required.

 

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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 undistributed aftertax earnings.

 

Over 50 percent of thevalue of the Company’s outstanding stock is owned by one stockholder. In 2005,2004 and 2003, less than 60 percent of the Company’s income as defined wasderived from license royalties, accordingly the Company is not classified as apersonal holding company and is not subject to the personal holding companytax. The Company intends to continue to take appropriate measures to avoidbeing classified as a personal holding company in future years. However, therecan be no assurance that the Company will be successful in its efforts to avoidclassification as a personal holding company in the future.

 

RECENTACCOUNTING PRONOUNCEMENTS

 

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections — areplacement of APB Opinion No. 20 and FASB Statement No. 3.” Thisstatement applies to all voluntary changes in accounting principle and changesrequired by an accounting pronouncement where no specific transition provisionsare included. SFAS No. 154 requires retrospective application toprior periods’ financial statements of changes in accounting principle, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. Retrospective application is limited to thedirect effects of the change; the indirect effects should be recognized in theperiod of the change. This statement carries forward without change theguidance contained in APB Opinion No. 20 for reporting the correction ofan error in previously issued financial statements and a change in accountingestimate. However, SFAS No. 154 redefines restatement as the revisingof previously issued financial statements to reflect the correction of anerror. The provisions of SFAS No. 154 are effective for accountingchanges and corrections of errors made in fiscal periods that begin afterDecember 15, 2005, although early adoption is permitted. Theimplementation of this standard did not have a material impact on its financialcondition and results of operations.

 

INFLATION

 

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

 

EXCHANGE RATES

 

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

 

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

** **

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

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

Based on their evaluation as of March 31,2006, our Co-Chief Executive Officers and Chief Financial Officer haveconcluded that our internal controls and disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, asamended) were effective to ensure that the information required to be disclosedby us in this quarterly report on Form 10-Q was recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andinstructions for Form 10-Q.

 

There are no changes in our internalcontrols over financial reporting during the three monthsended March 31, 2006  that have materially affected, or arereasonably likely to materially affect our internal controls over financialreporting.

 

Our management, including our Co-ChiefExecutive Officers and Chief Financial Officer, does not expect that ourinternal controls and disclosure controls and procedures will prevent all errorand all fraud. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute assurance that the objectives of thecontrol system are met. Further, the design of the control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.

 

**PART II –OTHER INFORMATION**

 

**ITEM1. LEGAL PROCEEDINGS**

** **

On April 12, 2005, Mossimo Giannullioffered to acquire all of the outstanding publicly held common stock of Mossimoat a price of $4.00 per share. Following the announcement, six purported classaction lawsuits were filed in the Court of Chancery of the State of Delaware. Eachof the complaints asserted that the Mossimo directors breached their fiduciaryduties to Mossimo’s stockholders, and sought an injunction preventing theacquisition. On April 19, 2005, the Board of Directors appointed a SpecialCommittee to consider and evaluate Mr. Giannulli’s proposal. The SpecialCommittee retained Houlihan Lokey and Gibson Dunn & Crutcher to serve asthe Committee’s independent financial advisor and legal counsel, respectively,with respect to the Committee’s evaluation of Mr. Giannulli’s proposal. On May27, 2005, the above referenced cases were consolidated under the followingcaption:  In re Mossimo, Inc. ShareholderLitigation, Consolidated Civil Action No.1246-N (the “Action”).

 

On October 10, 2005, Mossimo and otherdefendants entered into a Memorandum of Understanding (“MOU”) to settle theAction. Under the terms of the MOU, Mr. Giannulli agreed that his proposal toacquire all of Mossimo’s outstanding shares would be priced at $5.00 per shareand that the tender offer pursuant to which the acquisition was proposed to beconsummated would be conditioned upon no less than 50 percent of all publicstockholders of Mossimo unaffiliated with Mr. Giannulli accepting or approvingthe tender offer. The MOU further provided that plaintiffs’ lead counsel wouldbe afforded the opportunity to comment on and suggest inclusions to thedisclosures made to the Company’s public stockholders in conjunction with theacquisition. In addition, the Company agreed to negotiate in good faith withthe plaintiffs’ lead counsel concerning the amount of attorney fees andexpenses to be paid, subject to Delaware Chancery Court approval. The Companyalso agreed to pay whatever fee and expense amount the Delaware Chancery Courtmight have awarded to plaintiffs’ lead counsel. In consideration of theseterms, the parties agreed that they would fully and finally release and dischargeall claims against each other.

 

The settlement was conditioned on theconsummation of the acquisition by Mr. Giannulli, the negotiation of adefinitive stipulation of settlement and the entry of a Final Order andJudgment approving the settlement by the Delaware Chancery Court. On November14, 2005 Giannulli announced that he had withdrawn the proposal to acquire theoutstanding shares of the Company that he did not already own. The provisionsof the MOU have thus become moot. The Action remains on file. Under the Merger 

 

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Agreement, Mossimo and Mr. Giannulli are required to use theirbest efforts to have the litigation withdrawn and terminated with prejudice orsettle it to the reasonable satisfaction of Iconix.

 

On April 12, 2006, a purported shareholderclass action lawsuit was filed in the Superior Court of the State of Californiafor the County of Los Angeles entitled Laborers’ Local #231 Pension Fund vs.Mossimo, Inc. et al. The lawsuit alleges that Mossimo and its board ofdirectors breached their fiduciary duties and engaged in self-dealing inapproving the merger agreement and seeks, among other relief, to enjoin theproposed merger of the Mossimo with Iconix, the rescission of any agreements enteredinto in connection with the proposed merger, and costs, including attorney’sfees. Mossimo and its directors believe the allegations in the complaint arewithout merit and intend to defend the claims vigorously.

 

**ITEM1.A. RISK FACTORS**

** **

A description of the riskfactors associated with our business is contained in Item 1A, “Risk Factors,”of our 2005 Annual Report on Form 10-K/A filed with the Securities and ExchangeCommission on May 1,  2006 and incorporated herein by reference. Thesecautionary statements are to be used as a reference in connection with anyforward-looking statements. The factors, risks and uncertainties identified inthese cautionary statements are in addition to those contained in any othercautionary statements, written or oral, which may be made or otherwiseaddressed in connection with a forward-looking statement or contained in any ofour subsequent filings with the Securities and Exchange Commission.

 

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**ITEM 6.EXHIBITS**

 
| **EXHIBIT NO.** | ** ** | **DESCRIPTION** |
|----------------------|------------|-----------------|
| ** **           | ** ** | ** **      |
| 2.1                  |       |            | Agreement and Plan of Merger dated as of  March 31, 2006 by and among Mossimo, Inc., Mossimo Giannulli, Moss  Acquisition Corp. and Iconix Brand Group, Inc.(1) |
|                 |       |            |   |
| 3.1                  |       |            | Certificate of Incorporation of Mossimo,  Inc. (2) |
|                 |       |            |   |
| 3.2                  |       |            | Bylaws of Mossimo, Inc. (2) |
|                 |       |            |   |
| 10.1                 |       |            | Restated License Agreement between  Mossimo, Inc. and Target Brands, Inc. dated March 31, 2006(3) |
|                 |       |            |   |
| 31.1                 |       |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Exchange  Act of 1934 |
|                 |       |            |   |
| 31.2                 |       |            | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Exchange  Act of 1934 |
|                 |       |            |   |
| 31.3                 |       |            | Certification of Principal Financial  Officer as required by Rule 13a - 14(a) of the Securities Exchange  Act of 1934 |
|                 |       |            |   |
| 32.1                 |       |            | Certification of Principal Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |
|                 |       |            |   |
| 32.2                 |       |            | Certification of Principal Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |
|                 |       |            |   |
| 32.3                 |       |            | Certification of Principal Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |

 

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NOTES:

 

(1)             Incorporated by reference to Exhibit 2.1 to Mossimo’s CurrentReport on Form 8-K, filed with the Securities and Exchange Commission onApril 6, 2006.

 

(2)             Incorporated by reference to Mossimo’s Registration Statement onForm S-1 (No. 33-80597), as amended, which became effectiveFebruary 22, 1996.

 

(3)             Incorporated by reference to Exhibit 10.13 to Mossimo’sAmendment No. 1 to Annual Report on Form 10-K, filed with theSecurities and Exchange Commission on May 1, 2006.

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized on the nineteenth day of May 2006.

 

 
| MOSSIMO,  INC.                                |
|-----------------------------------------------|
|                                          |
| /s/ MOSSIMO GIANNULLI                         |   |
| Mossimo Giannulli                             |
| Chairman and Co-Chief Executive Officer       |
| May 19, 2006                                  |
|                                          |
| /s/ EDWIN LEWIS                               |   |
| Edwin Lewis                                   |
| Vice-Chairman and Co-Chief Executive  Officer |
| May 19, 2006                                  |
|                                          |
|                                          |
| /s/ VICKEN FESTEKJIAN                         |   |
| Vicken Festekjian                             |
| Chief Financial Officer                       |
| May 19, 2006                                  |

 

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