**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

### **FORM10-Q**

### ** **

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Quarterly Period Ended March 31, 2005**

 

**or**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Transition Period From                   to                  **

 

##### **Commission File Number: 1-14208**

##### ** **

**MOSSIMO, INC.**

(Exact name of Registrant as specified in its charter)

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

 

**(310) 460-0040**

(Registrant’s telephone number, including area code)

 

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

 

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

 

As of March 31, 2005, the Registrant had 15,738,442shares of Common Stock, $0.001 par value, outstanding.

 

 

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**MOSSIMO, INC.**

 

**FORM10-Q**

For the Three Months Ended March 31, 2004

 
| PART I – FINANCIAL INFORMATION                                                                        |   |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| ITEM 1 – Financial Statements (Unaudited):                                                            |   |
|                                                                                                       |   |
| Condensed  consolidated balance sheets as of March 31, 2005 and December 31,  2004               |   |
|                                                                                                       |   |
| Condensed  consolidated statements of earnings for the three months ended March 31,  2005 and 2004    |   |
|                                                                                                       |   |
| Condensed  consolidated statements of cash flows for the three months ended March 31,  2005 and 2004  |   |
|                                                                                                       |   |
| 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 6 –  Exhibits                                                                                    |   |
|                                                                                                       |   |
| SIGNATURES                                                                                                 |   |
|                                                                                                       |   |
| CERTIFICATIONS                                                                                             |   |

 

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MOSSIMO,INC.

CONDENSEDCONSOLIDATED BALANCE SHEETS

(INTHOUSANDS)

(Unaudited)

 
| ** **                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                         | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ASSETS                                                                                                                                             |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                                    |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                          |       | $                  | 9,252      |                  | $          | 4,903 |   |
| Restricted cash                                                                                                                                    |       | 415                |       | 413                   |       |
| Investments                                                                                                                                        |       | —             |       | 4,800                 |       |
| Accounts receivable                                                                                                                                |       | 7,877              |       | 2,908                 |       |
| Merchandise inventory                                                                                                                              |       | 574                |       | 539                   |       |
| Deferred income taxes                                                                                                                              |       | 1,873              |       | 1,739                 |       |
| Prepaid expenses and other current assets                                                                                                          |       | 581                |       | 436                   |       |
| Total current assets                                                                                                                               |       | 20,572             |       | 15,738                |       |
|                                                                                                                                               |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT, at cost, net of accumulated  depreciation and amortization                                                                 |       | 1,041              |       | 1,117                 |       |
|                                                                                                                                               |       |               |       |                  |       |
| DEFERRED INCOME TAXES                                                                                                                              |       | 4,380              |       | 5,646                 |       |
|                                                                                                                                               |       |               |       |                  |       |
| GOODWILL                                                                                                                                           |       | 212                |       | 212                   |       |
|                                                                                                                                               |       |               |       |                  |       |
| TRADENAME, net                                                                                                                                     |       | 98                 |       | 112                   |       |
|                                                                                                                                               |       |               |       |                  |       |
| OTHER ASSETS                                                                                                                                       |       | 78                 |       | 96                    |       |
|                                                                                                                                               |       | $                  | 26,381     |                  | $          | 22,921 |   |
|                                                                                                                                               |       |               |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                          |       |               |       |                  |       |
|                                                                                                                                               |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                               |       |               |       |                  |       |
| Accounts payable                                                                                                                                   |       | $                  | 851        |                  | $          | 352 |   |
| Accrued liabilities                                                                                                                                |       | 260                |       | 257                   |       |
| Accrued commissions                                                                                                                                |       | 914                |       | 258                   |       |
| Accrued bonuses                                                                                                                                    |       | 681                |       | 206                   |       |
| Total current liabilities                                                                                                                          |       | 2,706              |       | 1,073                 |       |
|                                                                                                                                               |       |               |       |                  |       |
| DEFERRED RENT                                                                                                                                      |       | 141                |       | 135                   |       |
| Total liabilites                                                                                                                                   |       | 2,847              |       | 1,208                 |       |
|                                                                                                                                               |       |               |       |                  |       |
| COMMITMENTS, CONTINGENCIES, AND SUBSEQUENT EVENTS                                                                                                  |       |               |       |                  |       |
|                                                                                                                                               |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                         |       |               |       |                  |       |
| Preferred stock, par value $.001; authorized shares  3,000,000; no shares issued or outstanding                                                    |       | —             |       | —                |       |
| Common stock, par value $.001; authorized shares  30,000,000; issued and outstanding 15,738,442 at March 31, 2005 and December 31,  2004 |       | 15                 |       | 15                    |       |
| Additional paid-in capital                                                                                                                         |       | 39,763             |       | 39,763                |       |
| Accumulated deficit                                                                                                                                |       | (16,244            | )          | (18,065               | )          |
| Net stockholders’ equity                                                                                                                      |       | 23,534             |       | 21,713                |       |
|                                                                                                                                               |       | $                  | 26,381     |                  | $          | 22,921 |   |

 

See accompanying notes to condensed consolidatedfinancial statements

 

2

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MOSSIMO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(IN THOUSANDS, EXCEPT PERSHARE DATA)

(Unaudited)

 
| ** **                                              | ** ** | **For the Three Months  March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                    |       |                                     |       |   |   |
| Revenue from license royalties and design service  fees |       | $                                        | 7,354      |   | $ | 6,197 |   |
|                                                    |       |                                     |       |   |   |
| Product sales                                           |       | 1,310                                    |       | 26 |   |
|                                                    |       |                                     |       |   |   |
| Total revenues                                          |       | 8,664                                    |       | 6,223 |   |
|                                                    |       |                                     |       |   |   |
| Operating expenses:                                     |       |                                     |       |   |   |
| Cost of product sales                                   |       | 1,038                                    |       | 13 |   |
| Selling, general and administrative                     |       | 4,575                                    |       | 4,200 |   |
| Total operating expenses                                |       | 5,613                                    |       | 4,213 |   |
|                                                    |       |                                     |       |   |   |
| Earnings from operations                                |       | 3,051                                    |       | 2,010 |   |
|                                                    |       |                                     |       |   |   |
| Other income:                                           |       |                                     |       |   |   |
| Interest income                                         |       | 30                                       |       | 27 |   |
| Total other income                                      |       | 30                                       |       | 27 |   |
| Earnings before income taxes                            |       | 3,081                                    |       | 2,037 |   |
|                                                    |       |                                     |       |   |   |
| Income taxes                                            |       | 1,260                                    |       | 847 |   |
|                                                    |       |                                     |       |   |   |
| Net earnings                                            |       | $                                        | 1,821      |   | $ | 1,190 |   |
|                                                    |       |                                     |       |   |   |
| Earnings per common share:                              |       |                                     |       |   |   |
| Basic                                                   |       | $                                        | 0.12       |   | $ | 0.08 |   |
| Diluted                                                 |       | $                                        | 0.12       |   | $ | 0.08 |   |
| Weighted average common shares outstanding:             |       |                                     |       |   |   |
| Basic                                                   |       | 15,738                                   |       | 15,738 |   |
| Diluted                                                 |       | 15,757                                   |       | 15,771 |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

3

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MOSSIMO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(Unaudited)

 
| ** **                                                                       | ** ** | **For the Three Months   Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                        | ** ** | **2004** | ** ** |
|                                                                             |       |                                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |       |                                            |       |   |   |
| Net earnings                                                                     |       | $                                               | 1,821      |   | $ | 1,190 |   |
| Adjustments to reconcile net earnings to net cash  used in operating activities: |       |                                            |       |   |   |
| Depreciation and amortization                                                    |       | 144                                             |       | 58 |   |
| Inventory write-down                                                             |       | 72                                              |       | 13 |   |
| Deferred rent                                                                    |       | 6                                               |       | — |   |
| Provision for bad debt                                                           |       | 31                                              |       | — |   |
| Deferred income taxes                                                            |       | 1,132                                           |       | 828 |   |
| Changes in:                                                                      |       |                                            |       |   |   |
| Accounts receivable                                                              |       | (5,000                                          | )          | (3,445 | ) |
| Merchandise inventory                                                            |       | (107                                            | )          | — |   |
| Prepaid expenses and other current assets                                        |       | (145                                            | )          | (320 | ) |
| Other assets                                                                     |       | 18                                              |       | 204 |   |
| Accounts payable                                                                 |       | 499                                             |       | (314 | ) |
| Accrued liabilities                                                              |       | 3                                               |       | (981 | ) |
| Accrued commissions                                                              |       | 656                                             |       | (4,506 | ) |
| Accrued bonuses                                                                  |       | 475                                             |       | 540 |   |
| Net cash used in operating activities                                            |       | (395                                            | )          | (6,733 | ) |
|                                                                             |       |                                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |       |                                            |       |   |   |
| Proceeds from sale of available-for-sale securities                              |       | 4,800                                           |       | — |   |
| Payments for acquisition of property and equipment                               |       | (54                                             | )          | (556 | ) |
| Acquisition of Modern Amusement                                                  |       | —                                          |       | (375 | ) |
| Net cash provided by (used in) investing activities                              |       | 4,746                                           |       | (931 | ) |
|                                                                             |       |                                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |       |                                            |       |   |   |
| Restricted cash – certificates of deposit                                   |       | (2                                              | )          | 4,585 |   |
| Net cash used in financing activities                                            |       | (2                                              | )          | 4,585 |   |
|                                                                             |       |                                            |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             |       | 4,349                                           |       | (3,079 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period                                   |       | 4,903                                           |       | 9,707 |   |
| CASH AND CASH EQUIVALENTS, end of period                                         |       | $                                               | 9,252      |   | $ | 6,628 |   |
|                                                                             |       |                                            |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                |       |                                            |       |   |   |
| Cash paid during the year for state income taxes                                 |       | $                                               | 26         |   | $ | 35 |   |

 

See accompanying notes tocondensed consolidated financial statements

 

4

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**MOSSIMO, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

1.  BASIS OFPRESENTATION

 

Thecondensed consolidated financial statements presented herein have not beenaudited by independent auditors, but include all material adjustments(consisting of normal recurring adjustments), which are, in the opinion ofmanagement, necessary for a fair statement of the financial condition, resultsof operations and cash flows for the periods presented. However, these resultsare not necessarily indicative of results for any other interim period or forthe full year. The condensed consolidated balance sheet data presented hereinfor December 31, 2004 was derived from the Company’s audited financialstatements for the year then ended, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.

 

On January 16,2004, Mossimo, Inc. acquired substantially all the assets of Modern AmusementLLC through a wholly owned subsidiary, Modern Amusement, Inc. (“ModernAmusement”). The accompanying consolidated financial statements as of and forthe three months ended March 31, 2004 include the account balances andresults of operations of Modern Amusement as of March 31, 2004 and for theperiod from January 16, 2004 to March 31, 2004, respectively. All inter-companyaccounts and transactions have been eliminated in consolidation.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

Certaininformation and footnote disclosures normally included in annual financialstatements in accordance with accounting principles generally accepted in theUnited States of America have been omitted pursuant to the Regulations of theSecurities and Exchange Commission. The Company believes the disclosuresincluded in the accompanying interim condensed consolidated financialstatements and notes thereto are adequate to make the information notmisleading, but should be read in conjunction with the financial statements andnotes thereto included in our Form 10-K for the year ended December 31,2004.

 

Certainprior year balances have been reclassified to conform to the current yearpresentation.

 

2.  REVENUERECOGNITION

 

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. During the periods presented herein, a substantial amountof the Company’s revenue from license royalties and design fees were generatedunder the Target Agreement under a rate of 1% to 4% that declines as the contractyear progresses and Target achieves certain levels of retail sales.Accordingly, the Company’s revenues from Target decreases as the yearprogresses. The declining rate is reset each contract year beginning on February 1.Revenue recognized in the first and second quarters of the Company’s calendaryear in connection with the Target Agreement is significantly higher than inthe third and fourth quarters of the Company’s calendar year due to thedeclining rates in the Target Agreement. Revenues from license royalties anddesign service fees under license agreements other than the Target Agreementare generally collected on a quarterly basis, and they range from 1% to 3% ofsales, as defined in the respective agreements.

 

5

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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 of relevantreceivable is reasonably assured, pervasive evidence of an arrangement exists,and the sales price is fixed or determinable.

 

3. INVENTORY

 

We maintaininventories for the Modern Amusement segment of our business. Inventories arevalued at the lower of cost (first-in, first-out) or market and are made up of finishedgoods. The Company continually evaluates its inventories by assessing slowmoving current product as well as prior seasons’ inventory.  Market value of non-current inventory isestimated based on the impact of market trends, an evaluation of economicconditions and the value of current orders relating to the future sales of thistype of inventory.  Management makesreserves against such inventory as seen appropriate, which could reduce ourgross margin, operating income and carrying value of inventories.

 

Our successis largely dependent upon our ability to anticipate the changing fashion trendsof our customers and to respond to those changing trends in a timely manner. Ifwe fail to anticipate, identify or react appropriately to changing styles, trendsor brand preferences of our customers, we may experience lower sales, excessinventories and more frequent and extensive write-downs, which would adverselyaffect our operating results.

 

The Companyhas adopted SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43, Chapter4,” to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material. The adoption of SFAS No. 151 did not have a significant impact on theCompany’s financial position, results of operations or cash flows.

 

4.  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 $619,000and $607,000 under these agreements for the three month periods ended March 31,2005 and 2004, 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.

 

The Company recorded aprovision for income taxes of $1.26 million in the first quarter of 2005compared to a provision for income taxes of $847,000 in the first quarter of2004. Both provisions approximate the Company’s combined effective rate forFederal and California state income taxes.

 

At March 31, 2005, the Company has recorded a total net deferredtax asset of $6.25 million, with $1.87 million classified as current in theaccompanying condensed consolidated balance sheet, as a result of the extensionof the Target Agreement through January 31, 2008. 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 $1.1 million.

 

TheCompany has approximately $16 million and $12 million of federal and state incometax net operating loss carry forwards, respectively, available to offset futuretaxable income which expire in

 

6

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various years through2022. TheCompany expects that future taxable income will be offset in the near-term, forthe most part, by its net operating tax loss carry forwards.

 

Inaddition to the Company’s taxable income being subject to federal, state andlocal income taxes, the Company may be classified as a “personal holdingcompany” from time to time. Personal holding company status results from morethan 50 percent of the value of outstanding stock being owned directly orindirectly by five or fewer individuals, and more than 60 percent of theCompany’s income, as defined, being derived from royalties. Personal holdingcompanies are subject to an additional federal tax at the highest personalincome tax rate on undistributed after tax earnings.

 

Over50 percent of the value of the Company’s outstanding stock is owned by onestockholder, however it is presently anticipated that in 2005, no more than 60percent of the Company’s income, as defined, would be derived from licenseroyalties. Accordingly, at this time the Company is not anticipated to beclassified as a personal holding company at the end of 2005 and the Companyintends to continue to take appropriate measures to avoid being classified as apersonal holding company at the end of 2005 and beyond. However, there can beno assurance that the Company will be successful in its efforts to avoidclassification as a personal holding company at the end of 2005 or in futureyears.

 

6.  EARNINGS PERSHARE 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. Stock options excluded from diluted weighted averageshares outstanding for the three months ended March 31, 2005 and 2004 were510,310 and 441,000, respectively, as they were antidilutive.

 

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

 
| ** **                                    | ** ** | **For the Three Months   March 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                          |       |                                      |       |   |   |
| Earnings as reported                          |       | $                                         | 1,821      |   | $ | 1,190 |   |
| Weighted average shares outstanding - Basic   |       | 15,738                                    |       | 15,738 |   |
| Basic earnings per share                      |       | $                                         | 0.12       |   | $ | 0.08 |   |
|                                          |       |                                      |       |   |   |
| Add: Dilutive effect of stock options         |       | 19                                        |       | 33 |   |
| Weighted average shares outstanding - Diluted |       | 15,757                                    |       | 15,771 |   |
| Diluted earnings per share                    |       | $                                         | 0.12       |   | $ | 0.08 |   |

 

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.

 

The Companyaccounts 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, “Accounting for Stock-Based

 

7

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Compensation”, which requires presentationof the pro forma effect of the fair value based method on net earnings and netearnings per share in the financial statement footnotes.

 

If compensation expensewas determined based on the fair value method, the Company’s net earnings and earningsper share would have resulted in the approximate pro forma amounts indicatedbelow for the three month periods ended March 31, 2005, and 2004 (inthousands, except per share data):

 
| ** **                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                              |       |     |       |     |       |
| Actual net earnings                                                               |       | $        | 1,821      |     | $          | 1,190 |   |
| Less: Total Compensation as if the fair value method  was used, net of tax effect |       | (16      | )          | (74      | )          |
| Pro forma net earnings                                                            |       | $        | 1,805      |     | $          | 1,116 |   |
|                                                                              |       |     |       |     |       |
| Earnings per share:                                                               |       |     |       |     |       |
| Basic - as reported                                                               |       | $        | 0.12       |     | $          | 0.08 |   |
| Basic - pro forma                                                                 |       | $        | 0.11       |     | $          | 0.07 |   |
|                                                                              |       |     |       |     |       |
| Diluted - as reported                                                             |       | $        | 0.12       |     | $          | 0.08 |   |
| Diluted - pro forma                                                               |       | $        | 0.11       |     | $          | 0.07 |   |

 

7.  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

SFAS No. 153- In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets.”  SFAS No. 153 amends APB Opinion No. 29, “Accountingfor Nonmonetary Transactions,” by replacing the exception for exchanges ofsimilar productive assets with an exception for exchanges that do not havecommercial substance.  A transaction has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  SFAS No. 153 is effective for fiscal periodsbeginning after June 15, 2005.  The Company does not expect theadoption of SFAS No. 153 to have any effect on our financial position, resultsof operations or cash flows.

 

SFAS No.123R - In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment: an amendment of FASB Statements No.123 and 95,” which requires companies to recognize in their income statementthe grant-date fair value of stock options and other equity-based compensationissued to employees.  SFAS No. 123R iseffective for the Company on January 1, 2006.  Accordingly, we will adopt SFAS No. 123R inour first quarter of 2006. See Note 1 “Earnings Per Share and Stock OptionPlans,” for the pro forma effects of how SFAS No. 123R would have affected theresults of earnings in the three months ended March 31, 2005 and 2004.  We are currently assessing the impact thisprospective change in accounting will have but believe that it will not have amaterial impact on our reported financial position or results of operations.

 

8.  LITIGATION

 

On April 12,2005, Mossimo Giannulli offered to acquire all of the outstanding publicly heldcommon stock of the Company at a price of $4.00 per share. Since then, sixpurported class action lawsuits have been filed in the Court of Chancery of theState of Delaware.  Each of thecomplaints asserts that the Directors have breached their fiduciary duties tothe Company’s shareholders, and seeks an injunction preventing theacquisition.  The Company anticipatesthat the actions will be consolidated under the first case to be filed, Kahnv. Mossimo, Inc., et al., Civil Action No. 1246-N.

 

The Companyand its Board of Directors intend to vigorously defend the lawsuits.  On April 19, 2005, the Board ofDirectors appointed a Special Committee to consider and evaluate Mr. Giannulli’sproposal.

 

8

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The Companyis involved in certain other legal and administrative proceedings andthreatened legal and administrative proceedings from time to time in the normalcourse of business. While the outcome of such proceedings and threatenedproceedings cannot be predicted with certainty, in the opinion of management,the ultimate resolution of these matters individually or in the aggregate isnot expected to have a material adverse effect on the Company’s business as awhole.

 

9.  SEGMENTINFORMATION

 

The Companyoperates in two business segments: Mossimo and Modern Amusement (Modern).  The following tables summarize variousfinancial amounts for each of our business segments (in thousands):

 
| **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 adminstravtive epsneses |       | 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    |       |
|                                              |            |             |            |            |            |           |            |  |  |  |

 

Segment information for the three monthsended March 31, 2004 is not presented as the operations of ModernAmusement were negligible.

 

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.

•                  Gross profit is derived by reducing sales of the Modern segment of$1.31 million by $1.04 million of cost of sales to arrive at a gross profit ofapproximately $272,000.

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

 

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

 

**FORWARD LOOKING INFORMATION**

 

Thisreport on Form 10-Q contains certain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward lookingstatements relate to matters such as the Company’s future operating results,the success and longevity of its licensing program with Target in the UnitedStates, Hudson’s Bay Company in Canada, and other licensees, and the Company’ssuccess in executing its business plan for Modern Amusement. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as assumptions made by and information currently available to theCompany’s management. The words “anticipate”, “believe”, “may”, “estimate”, “plan”,“expect”, “future”, “intend”, “will”, “should”, “continue” and similarexpressions, variations of such terms or the negative of such terms as they relateto the Company or its management when used in this document, are intended toidentify such forward-looking statements. In particular, the forward lookingstatements in this Form 10-K include, 

 

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among other things,statements regarding or expectations about our future revenues and earnings.Forward looking statements include known or unknown risks and uncertaintiesthat may cause our results, performance and stock price to be materiallydifferent from the forward looking statements. Such statements are based onmanagement’s current expectations and are subject to certain risks,uncertainties and assumptions, including those described in our Form 10-K forthe year ended December 31, 2004 under “Business—Risk Factors”. Should oneor more risks or uncertainties materialize, or should underlying assumptionsprove incorrect, the Company’s actual results, performance or achievementscould differ 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,adverse changes in licensee or consumer acceptance of products bearing theMossimo or Modern Amusement name as a result of fashion trends or otherwise,the ability and/or commitment of Target and our other licensees to manufactureand market Mossimo branded products, our dependence on Target for most of ourrevenue, our dependence on key management personnel and the other factorsdescribed in our Form 10-K for the year ended December 31, 2004 under “Business—RiskFactors.” Accordingly, undue reliance should not be placed on theseforward-looking statements.

 

Thisdiscussion and analysis should be read in conjunction with the Company’s financialstatements for the year ended December 31, 2004 in our annual report onForm 10-K.

 

**Overview**

 

Mossimo, Inc. presentlyoperates as a designer and licensor of apparel and related products under the “Mossimo”brand and other brands it owns or may acquire. The Company licenses the Mossimobrand to third parties domestically and internationally.  Our primary domestic licensee is TargetCorporation.  In addition to the TargetAgreement, the Company also licenses its Mossimo trademarks and provides designservices outside of the United States, and also licenses its Mossimo trademarksfor use in collections of eyewear and women’s swimwear and body-wear sold inTarget stores in the United States.

 

The Company entered intoa multi-year licensing and design services agreement with Target in March 2000which was subsequently amended in April 2002, and in February and June 2003(hereinafter referred to as the “Target Agreement”). Under the terms of theTarget Agreement, Target has the exclusive license, for production anddistribution through Target stores, of substantially all Mossimo brandedproducts sold in the United States. The Company, therefore can not enter intoany other wholesale or retail licensing agreements in the United States withrespect to the Mossimo brand.

 

Under the TargetAgreement the Company provides design services and has approval rights forproduct design, marketing and advertising materials. Target collaborates ondesign and is responsible for product development, sourcing, quality control andinventory management with respect to the Target licensed product line. Targetis obligated to pay the Company design service fees and license royalty fees.Total fees payable by Target are based upon a percentage of Target’s net salesof Mossimo brand products that varies according to the volume of sales ofmerchandise. Target has agreed to pay minimum guaranteed fees of approximately$9.6 million annually. Target’s fees are based on net sales achieved multipliedby a rate, as defined in the Target Agreement. The Company pays a 15%commission, based on fees received from Target, to a third party who assistedthe Company in connection with entering into the initial agreement with Target.The Target Agreement is subject to early termination under certain circumstances.If Target is current with payments of its obligations under the TargetAgreement, Target has the right to renew the Target Agreement, on the sameterms and conditions, for additional terms of two years each.  In January 2005, Target exercised itssecond renewal options extending the Target Agreement through January 31,2008.

 

The Company has licensedthe exclusive right to manufacture and distribute eyewear bearing its Mossimotrademarks through specialty retail stores such as opticians, optical chainsand specialty eyeglass and sunglass stores pursuant to a license agreement withthe Marcolin Group. This agreement 

 

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ended on December 31, 2004. The Company in theprocess of negotiating a new agreement with Lantis Acquisition Corp.

 

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

 

In May 2002, the Companyentered into an agreement with Hudson’s Bay Company. Under the agreement, theCompany provides product design services, and has granted a license for theMossimo trademark to Hudson’s Bay Company exclusively in Canada, in return forlicense royalties and design service fees. Hudson’s Bay Company collaborates onproduct design, and is responsible for manufacturing, importing, marketing,advertising, selling and distributing merchandise bearing the Mossimotrademark. The initial term of the agreement is three years beginning in May2002, with a five-year extension at the option of Hudson’s Bay Company. Hudson’sBay Company fully launched the Mossimo product in mid-March 2003 fordistribution through its Zellers stores in Canada.  We are currently negotiating an extension ofthe contract.

 

The Company enters intoother International licensing agreements of its Mossimo branded products forcertain geographical territories when the Company believes such arrangementsprovide effective manufacturing, distribution and marketing of suchproducts.  Historically, very littleactivity has occurred outside the United States.

 

In January 2004,the Company acquired Modern Amusement, which is focused on design anddistribution of premium branded west coast-lifestyle casual sportswear appareland related accessories for young men and young women under the ModernAmusement brand. The products are offered at moderate to upper price pointsthrough traditional specialty stores and better department store distributionchannels.  The Modern Amusement businessincludes sourcing manufactured products, wholesale distribution, inventorymanagement, marketing, promoting, and advertising of apparel and relatedaccessories under the Modern Amusement brand. While the Modern Amusementbusiness is relatively small, as the Company expands into the wholesaleproducts business, it will encounter increased exposure to excess and obsoleteinventories, potential delays and cancellations from sourcing manufacturedproducts domestically and internationally, and product returns and allowancesfrom retail customers, as well as marketing, promotion and advertisingexpenditures that may not result in successful campaigns.

 

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

 

Net salesfor Modern Amusement for the quarter ended March 31, 2005 were $1.31million with a gross profit margin of 21%. SG&A expense for Modern Amusement for the quarter ended March 31,2005 was $958,000.  For quarter ended March 31,2005, Modern Amusement had an operating loss of $686,000.  Modern Amusement’s total assets as of March 31,2005 were $3.16 million.

 

***Results of Operations***

# *ThreeMonths Ended March 31, 2005 and 2004*

# * *

*Revenues*

 

Totalrevenue from license royalties and design service fees in the first quarter of2005 were $7.4 million compared to $6.2 million in the first quarter of2004.  For the three months ended March 31,2005, 89% of the Company’s revenue from license royalties and design fees weregenerated under the Target Agreement, compared to 88% for the same period in2004. 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 

 

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the third and fourthquarters due to the declining rates in the Target Agreement. Revenues fromlicense royalties and design service fees under license agreements other thanthe Target Agreement are generally collected on a quarterly basis, and theyrange from 1% to 3% of sales, as defined in the respective agreements.

 

Design service fees and royalties recognized under theTarget Agreement were $6.6 million in the first quarter of 2005 compared to $5.5million in the first quarter of 2004. The twenty percent increase reflects growthin sales of women’s apparel, accessories and shoes. Royalties and designservice fees from customers other than Target increased to $755,000 in thefirst quarter of 2005 from $715,000 in the first quarter of 2004. The increasewas due primarily to $60,000 in additional royalties received from Mexico.  The Company’s revenues generated under theTarget Agreement are expected to increase modestly as Target adds new storesand the Company continues to maximize its opportunities with Target.

 

Modern Amusement achieved gross retail sales of$1.31 million in the first quarter of 2005 compared to $26,000 for the periodof January 16, 2004 to March 31, 2004.  These sales generated a gross profit of approximately$272,000 for the first quarter of 2005 compared to $13,000 for the period January 16,2004 to March 31, 2004.  We experienced a low profit margin due to offprice sales.  We expect margins toimprove as regular price sales become a larger percentage of total sales.

 

*Cost of product sales*

 

Cost ofsales in the first quarter of 2005 resulted entirely from Modern Amusementproduct sales.  Cost of salesapproximated 79% of sales.  Cost of salesincludes all costs and expenses incurred prior to the receipt of finished goodsat the Company’s distribution facilities. These costs include, but are notlimited to, product cost, inbound freight charges, purchasing and receivingcosts, inspection costs, insurance, duty, and brokers’ fees.

 

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

 

Selling, general and administrative expenses increasedto $4.58 million for the three months ended March 31, 2005 from $4.2million for the 2004 period.  This increasewas primarily due to $480,000 increase in selling, general and administrativeexpenses incurred in the first quarter of 2005 by the operations of ModernAmusement, offset by some operational improvements in the Mossimo segment.  Operating expenses for the Mossimo segment,as a percent of revenues from royalties and design service fees, decreased to49% in the first quarter of 2005 compared to 60% for the first quarter of2004.  The decrease was primarily due tothe increase of revenues while S, G & A expenses remained constant.

 

Selling expenses, comprised of commissions due to athird party who assisted the Company in connection with entering into the initialagreement with Target, decreased slightly to $987,000 in the first quarter of2005 compared to $1 million in the first quarter of 2004.  Even though revenues from Target increasedfrom the first quarter of 2004 to 2005, the first quarter of 2004 included anaccrual up of interest expense owing on the unpaid commissions to the thirdparty.

 

General and administrative expenses include payrollfor the Company’s officers and its design staff, travel, facilities, insurance,legal and professional fees, and other design related expenses for purchasedservices and artwork used in the design process. Salaries and related costs forthe Mossimo segment remained relatively consistent at $952,000 for the first quarter2005, compared to $969,000 for the first quarter 2004. Also included in generaland administrative expenses are accruals for bonuses of $619,000 in the firstquarter of 2005, compared to $607,000 in the first quarter of 2004, which aredue under bonus plans covering two executive officers of the Company. Design,artwork and sample costs decreased to $125,000 in the first quarter of 2005from $150,000 in the first quarter of 2004.

 

Operating expenses in the first quarter of 2004 alsoinclude $110,000 of costs in connection with a legal dispute with the third party who assisted theCompany in connection with entering into the initial agreement with Target. This litigation was completed in thefirst quarter of 2004.

 

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Selling, general and administrative expenses incurredby Modern Amusement were $958,000 in the first quarter of 2005 compared to$478,000 in the period from its acquisition to March 31, 2004.  These costs consisted primarily of salary andrelated costs of $316,000 compared to $190,000 in period from its acquisitionto March 31, 2004, consulting fees of $75,000 compared to $83,000 inperiod from its acquisition to March 31, 2004, and tradeshow and samplescosts of $189,000 compared to $146,000 in period from its acquisition to March 31,2004.  The increase in each of the abovementioned expenses is associated with the anticipated growth of the ModernAmusement brand.

 

*Interest income*

 

The Company earned $30,000 in interest income in thefirst quarter of 2005, compared to $27,000 in the first quarter of 2004. Nointerest expense was incurred in the first quarter of 2005.

 

*Income taxes*

 

The Company recorded aprovision for income taxes of $1.26 million in the first quarter of 2005compared to a provision for income taxes of $847,000 in the first quarter of2004. Both provisions approximate the Company’s effective tax rate for Federaland California state income taxes.

 

TheCompany has approximately $16 million and $12 million of federal and state incometax net operating loss carry forwards, respectively, available to offset futuretaxable income 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 earnings for the first quarter of2005 were $1.8 million, or $0.12 per diluted share, compared to net earnings of$1.2 million, or $0.08 per diluted share for the first quarter of 2004 due tothe factors discussed above.

 

***Liquidity and Capital Resources***

* *

Our sourcesof liquidity and capital resources as of March 31, 2005 consisted of $9.3million of cash and cash equivalents, and $0.4 million of short-term restrictedcash, as well as potential future cash flows from operations primarilyresulting from the Target agreement.  Asof March 31, 2005 we had working capital of approximately $17.9 million.  The increase in working capital is due to theincrease of accrued revenue from Target in the first quarter of 2005 comparedto the fourth quarter of 2004.

 

The Companyestablished a revolving line of credit with a bank in the amount of $300,000 inFebruary 2004.  The line of creditwas established to open letters of credit with foreign suppliers for finishedgoods.  The line of credit was increasedto $400,000 in June of 2004, and subsequently increased to $500,000 in January of2005.  The line of credit is secured bytwo certificates of deposit totaling approximately $415,000.  There is no expiration date for this line,and there are no covenants.  There is afee charged per letter of credit opened and closed.  Open letters of credit at March 31, 2005were approximately $444,000.

 

We believethat the Company’s sources of liquidity and capital will be sufficient to meetour expected operational and capital needs for the next 12 months and likelywill be sufficient to meet our operating needs for the foreseeable future andat least through January 2008, which is the most recently extendedcontract term with Target.

 

As of March 31,2005 cash and cash equivalents were $9.3. During the first quarter of 2005, net cash used by operating activitieswere $395,000.  Cash used in operatingactivities includes primarily $1.8 million of net earnings and the changes indeferred income taxes of $1.1 million, accounts payable of $499,000, accruedcommissions of $656,000, and accrued bonuses of $475,000, primarily offset by a

 

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change in accounts receivable of $5.0million.  The change was due to theincrease in accrued revenue from Target, which increases accrued commissionspayable to a third party and accrued bonuses.

 

Net cashprovided by investing activities was generated from the sale of securities of$4.8 million, classified as available-for-sale. Capital expenditures for the 2005 quarter were $53,000 and are notexpected to material for the balance of the 2005 year.

 

We have acommission obligation under an agreement with a third party for 15% of feesreceived from Target for the duration of the Target agreement through January 2008,and for subsequent extensions if they are exercised by Target.  Fees incurred under this obligation were $987,000in the first quarter of 2005, compared to $1.0 million in the first quarter of2004.

 

In January 2004we completed the acquisition of the Modern Amusement and we amended ourfacility lease increasing our space from approximately 6,000 square feet toapproximately 9,000 square feet, and extending the lease term thru July 2009.The expanded facility is intended to also accommodate Modern Amusement. Thefuture annual obligation under the amended lease varies each year, starts atapproximately $290,000 in 2004, increasing to $334,000 in 2008. The purchaseprice of the Modern Amusement assets of $375,000 was funded with existing cash.  The expected cash requirements in 2005 forModern Amusement are approximately $1.4 million, and is comprised primarily ofselling, general, and administrative expenses. Most of this working capital will be satisfied through operating cashflows, and we do not expect to incur any significant capital expenditures.

 

The Companyis approached from time to time by parties seeking to sell their businesses,brands and related trademarks. Should an established viable business andmarketable brand become available on favorable terms, the Company may beinterested in pursuing such an acquisition and may elect to fund suchacquisition, in whole or in part, with available cash as well as differentfinancing alternatives, including the issuance of debt instruments and / or equitysecurities.

 

**Critical Accounting Policies**

 

REVENUE RECOGNITION

 

Revenue from license royalties and designservice fees are recognized in accordance with the terms of the underlyingagreements, which is generally after the design services are performed, and asthe licensee achieves sales of the Company’s products.  Revenue from license royalties and designservice fees are generally collected on a quarterly basis, and they range fromone percent to six percent of sales as defined in the respective agreements.  During the periods presented herein, asubstantial amount of the Company’s revenue from license royalties and designfees were generated under the Target Agreement under a declining rate as theyear progresses and Target achieves certain levels of retail sales.Accordingly, the Company’s revenues from Target decrease as the yearprogresses. The declining rate is reset each contract year beginning on February 1.Revenue recognized in the first and second quarters of the Company’s calendaryear in connection with the Target Agreement is significantly higher than inthe third and fourth quarters of the Company’s calendar year due to thedeclining rates in the Target Agreement.  If Target sales of Mossimobranded products increase in the future, as a result of opening new stores orotherwise, the minimum rate of fees may apply earlier in the Company’s futurecalendar years, shifting additional revenue recognition to the first half ofthe year, and potentially reducing the revenue recognition in the second halfof 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.   Thewrite-off for bad debt for the current quarter was approximately $31,000

 

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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 of relevantreceivable is reasonably assured, pervasive evidence of an arrangement exists,and the sales price is fixed or determinable.

 

INVENTORY

 

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

 

To theextent that management’s estimates of price reductions necessary to rapidlysell inventory differ from actual results, additional price reductions may berequired that could reduce our gross margin, operating income and the carryingvalue of inventories. Our success is largely dependent upon our ability toanticipate the changing fashion tastes of our customers and to respond to thosechanging tastes in a timely manner. If we fail to anticipate, identify or reactappropriately to changing styles, trends or brand preferences of our customers,we may experience lower sales, excess inventories and more frequent andextensive markdowns, which would adversely affect our operating results.

 

IMPAIRMENTOF LONG-LIVED ASSETS

 

The Companyaccounts for goodwill in accordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”*which is an impairment-only approach. Under SFAS No. 142, proper accountingtreatment requires annual assessment for any impairment of the carrying valueof goodwill based upon an estimation of the fair value of the reportingunit.  As of March 31, 2005, recognized goodwill is allocated to theModern Amusement segment. Acquired intangible assets with finite lives areamortized over their estimated useful life.  An impairment is indicated ifthe undiscounted future cash flows attributable to the finite lived intangibleasset is less than its carrying value.

 

We evaluatethe recoverability of our identifiable intangible assets and other long-livedassets in accordance with SFAS No. 144 that generally requires management toassess these assets for recoverability when events or circumstances indicate apotential impairment by estimating the undiscounted cash flows to be generatedfrom the use and ultimate disposition of these assets.

 

The ModernAmusement trade name acquired during 2004 and valued at $112,000 is amortizedover its estimated useful life of 10 years.

 

DEFERRED TAX ASSET VALUATION

 

The Company accounts for income taxes inaccordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accountingfor Income Taxes”. Deferred taxes result from the recognition of the income taxbenefit to be derived from the Company’s net operating loss carry forward forincome taxes purposes.  As of March 31,2005 the Company has approximately $16 million and $12 million of federal andstate income tax net operating loss carry forwards, respectively, available tooffset future taxable income which expire in various years through 2022.  Inaccordance with the provisions of SFAS No. 109 the Company records a valuationallowance to reduce deferred tax assets to the amount expected to “more likelythan not” be realized in future tax returns. The Company monitors its profitability and considers the credit andcollections risk of future fees under its agreements, particularly inconnection with the Target Agreement. Should we determine that we would not be able to realize all or part ofour net deferred tax assets in the future, adjustments to the valuationallowance for deferred tax assets may be required.

 

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Inaddition to the Company’s taxable income being subject to federal, state andlocal income taxes, the Company may be classified as a “personal holdingcompany” from time to time. Personal holding company status results from morethan 50 percent of the value of outstanding stock being owned directly orindirectly by five or fewer individuals, and more than 60 percent of theCompany’s income, as defined, being derived from royalties. Personal holdingcompanies are subject to an additional federal tax at the highest personalincome tax rate on undistributed after tax earnings.

 

Over50 percent of the value of the Company’s outstanding stock is owned by onestockholder, however it is presently anticipated that in 2005, no more than 60percent of the Company’s income, as defined, would be derived from licenseroyalties. Accordingly, at this time the Company is not anticipated to beclassified as a personal holding company at the end of 2005 and the Companyintends to continue to take appropriate measures to avoid being classified as apersonal holding company at the end of 2005 and beyond. However, there can beno assurance that the Company will be successful in its efforts to avoidclassification as a personal holding company at the end of 2005 or in futureyears.

 

IMPACTOF RECENT ACCOUNTING PRONOUNCEMENTS

 

SFAS No. 153- In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets.”  SFAS No. 153 amends APB Opinion No. 29, “Accountingfor Nonmonetary Transactions,” by replacing the exception for exchanges ofsimilar productive assets with an exception for exchanges that do not havecommercial substance.  A transaction has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  SFAS No. 153 is effective for fiscal periodsbeginning after June 15, 2005.  We do not expect the adoption of SFASNo. 153 to have any effect on our financial position, results of operations orcash flows.

 

SFAS No.123R - In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment: an amendment of FASB Statements No.123 and 95,” which requires companies to recognize in their income statementthe grant-date fair value of stock options and other equity-based compensationissued to employees.  SFAS No. 123R iseffective for interim or annual periods beginning after December 15,2005.  Accordingly, we will adopt SFASNo. 123R in our first quarter of 2006. See Note 1 Summary of BusinessDescription and Significant Accounting Policies – Stock-Based Compensation forthe pro forma effects of how SFAS No. 123R would have affected results ofoperations for the first quarter ended March 31, 2005 and 2004.  We are currently assessing the impact thisprospective change in accounting will have but believe it will not have amaterial impact on our reported results of operations.

 

INFLATION

 

The Companydoes not believe that the relatively moderate rates of inflation experienced inthe United States over the last three years have had a significant effect onits operations. Since the Company’s future revenues are based on a percentageof sales of licensed products by licensees, the Company does not anticipatethat inflation will have a material impact on future operations.

 

EXCHANGERATES

 

The Companyreceives United States dollars for all its revenue from license royalties anddesign service fees, other than from its business in Canada, which began in2003 and does not represent a substantial amount of revenue at this time.During the last three fiscal years, exchange rate fluctuations have not had amaterial impact on the Company’s operating results. The Company does not engagein hedging activities with respect to exchange rate risk.

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

** **

The Companymakes temporary investments of cash in liquid interest bearing accounts andmarketable securities. The Company does not use interest rate swaps, futurescontracts or options on 

 

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futures, or other types of derivativefinancial instruments. The Company does not believe that future market risksarising from holdings of its financial instruments will have a material impacton its financial position or results of operations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

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

 

There are nochanges in our internal controls over financial reporting during the quarterended March 31, 2005 that have materially affected, or are reasonablylikely to materially affect our internal controls over financial reporting.

 

Ourmanagement, including our Co-Chief Executive Officers and Chief FinancialOfficer, does not expect that our internal controls and disclosure controls andprocedures will prevent all error and all fraud. A control system, no matterhow well conceived and operated, can provide only reasonable, not absoluteassurance that the objectives of the control system are met. Further, thedesign of the control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1. LEGALPROCEEDINGS**

** **

On April 12,2005, Mossimo Giannulli offered to acquire all of the outstanding publicly heldcommon stock of the Company at a price of $4.00 per share. Since then, sixpurported class action lawsuits have been filed in the Court of Chancery of theState of Delaware.  Each of thecomplaints asserts that the Directors have breached their fiduciary duties tothe Company’s shareholders, and seeks an injunction preventing theacquisition.  The Company anticipatesthat the actions will be consolidated under the first case to be filed, Kahnv. Mossimo, Inc., et al., Civil Action No. 1246-N.

 

The Companyand its Board of Directors intend to vigorously defend the lawsuits.  On April 19, 2005, the Board ofDirectors appointed a Special Committee to consider and evaluate Mr. Giannulli’sproposal.

 

The Companyis involved in certain other legal and administrative proceedings andthreatened legal and administrative proceedings from time to time in the normalcourse of business. While the outcome of such proceedings and threatenedproceedings cannot be predicted with certainty, in the opinion of management,the ultimate resolution of these matters individually or in the aggregate isnot expected to have a material adverse effect on the Company’s business as awhole.

 

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**ITEM 6. EXHIBITS**

 

Thefollowing exhibits are included herein:

 
| 31.1 |   | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Act of 1934 |
|------|--------|-------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal Executive  Officer as required by Rule 13a - 14(a) of the Securities Act of 1934 |
| 31.3 |   | Certification of Principal Financial Officer  as required by Rule 13a - 14(a) of the Securities Act of 1934 |
| 32.1 |   | Certification of Principal Financial  Officer as required by Rule 13a - 14(a) of the Securities Act of 1934 |
| 32.2 |   | Certification of Principal Executive  Officer as required by Rule 13a - 14(b) of the Securities Act of 1934 |
| 32.3 |   | Certification of Principal Financial  Officer as required by Rule 13a - 14(b) of the Securities Act of 1934 |

 

 SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized on the thirteenthday of May 2005.

 

 
| MOSSIMO, INC.                                 |   |
|-----------------------------------------------|--------|
|                                          |   |
| /s/ MOSSIMO GIANNULLI                         |   |   |
| Mossimo Giannulli                             |   |
| Chairman and Co-Chief Executive Officer       |   |
| May 13, 2005                                  |   |
|                                          |   |
| /s/ EDWIN LEWIS                               |   |   |
| Edwin Lewis                                   |   |
| Vice-Chairman and Co-Chief Executive  Officer |   |
| May 13, 2005                                  |   |
|                                          |   |
| /s/ VICKEN FESTEKJIAN                         |   |   |
| Vicken Festekjian                             |   |
| Chief Financial Officer                       |   |
| May 13, 2005                                  |   |
|                                               |        |  |  |

 

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