U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
__X__ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1996
_____ Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from __________ to ___________.
Commission file number 01-13470
BIG SMITH BRANDS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3005371
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7100 West Camino Real, Suite 201, Boca Raton, Florida 33433
(Address of Principal Executive Offices)
(407) 367-8283
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes__X__ No____
Number of shares of common stock outstanding as of November 13, 1996: 3,930,000
Transitional Small Business Disclosure Format (check one): Yes____ No__X__
<PAGE>
INDEX
Pages
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of September
30, 1996 3
Consolidated Statements of Operations for the three
month and nine month periods ended
September 30, 1996, and 1995 4
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1996 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996, and 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 4
SIGNATURE 17
EXHIBIT INDEX 18
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BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1996
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,814
Temporary investments 192,452
Accounts receivable, less allowance
for doubtful accounts of $136,889 4,847,282
Inventories 8,078,483
Prepaid expenses 344,054
-----------
Total Current Assets 13,476,085
-----------
PROPERTY AND EQUIPMENT, At Cost
Land 20,000
Buildings 471,109
Equipment 2,121,290
Vehicles 81,511
-----------
2,693,910
Less accumulated depreciation 1,273,822
-----------
1,420,088
-----------
OTHER ASSETS
Trademark, less accumulated amortization
of $40,122 475,738
Other 11,106
-----------
486,844
-----------
$15,383,017
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 7,290,563
Checks outstanding in excess of bank balance 160,403
Accounts payable 2,847,554
Accrued expenses 1,439,671
-----------
Total Current Liabilities 11,738,191
-----------
LONG-TERM DEBT 925,737
-----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 1996 - 3,930,000 shares 39,300
Additional paid-in capital 6,315,818
Retained earnings (deficit) (3,636,029)
-----------
2,719,089
-----------
See Notes to Consolidated Financial Statements $15,383,017
===========
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BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30
------------------------------ --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
NET SALES
<S> <C> <C> <C> <C>
Trade $ 6,181,048 $ 6,300,088 $ 14,848,613 $ 15,969,318
Royalties, net of related costs of $303,492
$221,517, and $794,986 and $518,702, respectively 360,767 318,370 1,134,015 690,708
---------- --------- ------------ ------------
6,541,815 6,618,458 15,982,628 16,660,026
COST OF GOODS SOLD 6,161,939 5,350,674 13,798,052 13,439,264
----------- --------- ------------ -----------
GROSS PROFIT 379,876 1,267,784 2,184,576 3,220,762
----------- --------- ----------- ----------
OPERATING EXPENSES
Selling 504,576 525,863 1,396,289 1,263,611
General and administrative 649,148 488,382 1,853,827 1,614,645
Restructuring and Litigation Cost 1,397,481 0 1,397,481 0
------------ --------- ----------- ----------
2,551,205 1,014,245 4,647,597 2,878,256
----------- --------- ----------- ----------
INCOME (LOSS) FROM
OPERATIONS (2,171,329) 253,539 (2,463,021) 342,506
------------ ----------- ------------- ----------
OTHER INCOME (EXPENSE)
Miscellaneous income (6,368) 2,172 (40,771) 29,941
Interest expense (175,516) (225,204) (539,037) (586,973)
------------ ---------- ---------- -----------
(181,884) (223,032) (579,808) (557,032)
------------- ---------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (2,353,213) 30,507 (3,042,829) (214,526)
CREDIT (PROVISION) FOR INCOME TAXES (504,087) (12,745) (235,136) 49,590
-------------- ----------- ---------- -----------
NET INCOME (LOSS) $ (2,857,300) $ 17,762 $(3,277,965) $(164,936)
============== ========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (.73) $ .01 $ (.83) $ (.05)
============== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,930,000 3,605,879 3,930,000 3,605,879
========= ========= ========= =========
See Notes to Consolidated Financial Statements
</TABLE>
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BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Stock,
$.01 par value
-------------------------- Additional Retained Total
paid-in earnings stockholders'
Shares Amount capital (deficit) equity
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 3,930,000 $ 39,300 $ 6,315,818 $ (358,064) $ 5,997,054
Net Income (Loss) - - - (3,277,965) (3,277,965)
--------- ---------- ------------ --------------- -------------
Balances at September 30, 1996 3,930,000 $ 39,300 $ 6,315,818 $ (3,636,029) $ 2,719,089
========= ========== ============ ================ ============
</TABLE>
See Notes to Consolidated Financial Statements
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BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(3,277,965) $ (164,936)
Item not requiring cash:
Depreciation, amortization & impairment 373,381 101,861
Deferred income taxes 220,568 25,880
Changes in:
Accounts receivable (1,350,691) (3,040,478)
Inventories 3,429,483 (5,682,174)
Prepaid expenses (134,834) (322,288)
Other Assets 181,858 --
Accounts payable and accrued expenses 712,463 1,607,079
----------- -----------
Net cash provided (used) in operating activities 154,263 (7,475,056)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (413,959) (520,725)
Trademark -- (515,000)
Purchase of temporary investments (65,677) --
----------- -----------
Net cash used in investing activities (479,636) (1,035,725)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance (16,941) 192,790
Proceeds from issuance of stock, net of offering costs -- 6,088,117
Net borrowings under line-of-credit agreement 260,559 2,614,460
Principal borrowings (payments) on long-term debt 141,390 (250,507)
Due to stockholder (50,028) --
Dividends paid -- (100,000)
----------- -----------
Net cash provided by financing activities 334,980 8,544,860
----------- -----------
INCREASE IN CASH AND CASH
EQUIVALENTS 9,607 34,079
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 4,207 18,994
----------- ----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $13,814 $53,073
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
Big Smith Brands, Inc. (the "Company") manufactures and sells quality work
apparel under a variety of brand names, including Big Smith, Smith Mountain
Classics, Big Smith Vintage and currently including the licensed brands,
Caterpillar and Wolverine. The Company anticipates terminating its sales of
Caterpillar and Wolverine branded goods in January 1996. See "Item 2.
Management's Discussion and Analyses of Financial Condition and Results of
Operations - General." The Company markets its products to national chains and
local stores worldwide.
Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements included in its Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995.
NOTE 2: INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-QSB of the Securities and Exchange Commission and in
accordance with generally accepted accounting principles applicable to interim
financial statements, and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements should be read in conjunction with the
audited financial statements and accompanying notes of the Company for the year
ended December 31, 1995, which are included in its Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995.
In the opinion of management of the Company, the accompanying consolidated
financial statements reflect all adjustments necessary (consisting solely of
normal recurring adjustments) to present fairly the financial position of the
Company as of September 30, 1996, and the results of its operations,
stockholders' equity and its cash flows for the nine month period then ended.
The results of operations for the period ended September 30, 1996, are not
necessarily indicative of the results to be expected for the entire year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality."
NOTE 3: INCOME PER SHARE INFORMATION
Net earnings (loss) per share is computed using the weighted average number of
shares of common stock outstanding and common stock equivalent shares from stock
options and warrants unless the effect of common stock equivalents is
anti-dilutive.
NOTE 4: LITIGATION
The Company is currently involved in litigation with Caterpillar, Inc. See "Part
II Other Information. Item 1."
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The discussion and analysis set forth below is for the three month and
nine month periods ended September 30, 1996, and September 30, 1995. It should
be read in conjunction with the Unaudited Financial Statements of the Company
and the related Notes thereto appearing elsewhere in this Form 10-QSB. The
Company's business is seasonal and the Company has experienced and expects to
continue to experience lower revenues and net income in the first half of each
fiscal year as compared to the second half of each fiscal year. This seasonality
is due to increased sales in the apparel industry during the Christmas season
and the increase in sales of the Company's winter weight garments, which sell at
higher per unit prices than the Company's other products, and back-to-school
clothes, during the months of August through November. In addition, the
Company's quarterly results may fluctuate depending upon the timing of delivery
of large orders and the introduction of new product lines or additional labels,
among other things. See "--Seasonality." The Company elected to be treated as an
S corporation for tax purposes under the Internal Revenue Code through February
8, 1995. As a result, the net income (loss) of the Company was taxed, for
federal (and some state) corporate income tax purposes, directly to the
Company's stockholders and not to the Company. Upon consummation of the
Company's initial public offering on February 8, 1995, the Company became a C
corporation for both federal and state tax purposes.
The Company is currently engaged in litigation with Caterpillar, Inc.
(the "Caterpillar litigation") with respect to the Company's rights to continue
to manufacture, and sell Caterpillar branded products. The Company believes that
its agreement with Caterpillar (the "Agreement") licensing it to manufacture and
sell such products, has not properly been terminated and that it remains
licensed to produce such goods through December 31, 1999, the expiration date of
its license. On August 19, 1996, the District Court ruled that the license had
been properly terminated, a ruling which the Company is currently appealing.
There can be no assurance, however, that the outcome will be favorable to the
Company and that the license will be preserved, and if the outcome is not
favorable, such outcome could have a material adverse effect on the financial
condition of the Company. See "Other Information, Item 1. Legal Proceedings."
Because of the uncertainty arising from the litigation, management has decided
to refocus the Company's efforts on development of Company owned brands. In this
connection, during the three months ended September 30, 1996, the Company has
increased its efforts to liquidate its inventory of Caterpillar branded goods,
written down the value of certain inventory of Caterpillar branded goods,
downsized certain production functions devoted primarily to production of such
goods, and has begun implementing plans for increased sales and marketing and
production efforts in connection with its Big Smith branded products.
The following discussion and analysis should be read in conjunction
with the Company's financial statements appearing elsewhere in this report.
Results of Operations
Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995
Net trade sales, for the three months ended September 30, 1996,
decreased by $.12 million, or 1.9%, to $6.18 million from $6.30 million for the
three months ended September 30, 1995. Net trade sales for the three months
ended June 30, 1996, of Caterpillar branded products, Big Smith and other
branded products, and private label products were $1.96 million, $3.51 million
and $.71 million, respectively, as compared with $1.70 million, $2.91 million
and $1.69 million, respectively, for the three months ended September 30, 1995.
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<PAGE>
The increase in sales of Caterpillar branded products resulted from price
reductions and increased marketing reflecting the Company's efforts to liquidate
its remaining inventory of Caterpillar branded products. The increase in Big
Smith and other branded products primarily reflects an increase in sales of Big
Smith branded products to Walmart due to the increased demand for Big Smith
branded outerwear. The decrease in private label sales resulted from the
discontinuance in 1996 of private label programs for Kmart. For the three months
ended September 30, 1996, sales of Caterpillar branded products, Big Smith and
other branded products, and private label products accounted for 31.7%, and
56.8% and 11.5% of net trade sales, respectively, as compared with 27%, 46.2%
and 26.8% of net trade sales, respectively, for the three months ended September
30, 1995. The Company has begun implementing its plans to increase marketing and
sales of Big Smith branded products.
Net royalties from distributors for the manufacture and sale of goods
under the Caterpillar labels abroad net of related costs for the three months
ended September 30, 1996, increased by $42,000 to $361,000 from $318,000 for the
three months ended September 30, 1995. This increase was due to the increased
manufacture and sale of Caterpillar branded products by distributors,
particularly in the United Kingdom. In the event that the final outcome of the
litigation with Caterpillar is adverse to the Company, the Company would be
required to cease its sales of Caterpillar branded products through distributors
and otherwise, on January 10, 1997, which would mark the end of a six month
grace period provided in the contract with Caterpillar. As a result of an
alleged failure to timely provide Caterpillar a royalty report and to pay
certain royalties, Caterpillar notified the Company on November 8, 1996, that it
regarded the grace period as terminated, which contention the Company disputes.
Gross profit, excluding that from net royalties, for the three months
ended September 30, 1996, decreased by $.93 million to $.02 million, or .3% of
net trade sales, compared to $.95 million, or 15.1% of net trade sales, for the
three months ended September 30, 1995. This decrease was primarily due to an
$817,000 write-down of inventory primarily due to the Caterpillar litigation,
and to an increase of approximately $192,000 in sales of closeouts and
irregulars at approximately $127,000 below cost. See "Other Information, Item 1,
Legal Proceedings."
Selling expenses decreased by $.02 million to $.51 million, or 8.3% of
net trade sales, for the three months ended September 30, 1996, from $.53
million, or 8.4% of net trade sales, for the three months ended September 30,
1995. This decrease resulted principally from a decrease of $61,000 in
advertising and a $53,000 decrease in shipping expense resulting from the
decrease in trade sales, which were partially offset by an increase of $74,000
in travel and entertainment expense resulting primarily from increased marketing
efforts. General and administrative expenses increased to $.65 million, or 10.5%
of net trade sales during the three months ended September 30, 1996, from $.49
million, or 7.8% of net trade sales, for the three months ended September 30,
1995. This increase resulted primarily from an increase in payroll and related
fringe benefits of $28,000, and $28,000 in professional fees and other costs
relating to the Company's European operations, and a write-off of accounts
receivable of $71,000 related to Caterpillar branded products.
During the three months ended September 30, 1996, the Company accrued
or incurred an aggregate of $1.40 million of restructuring and litigation costs
in connection with the Caterpillar litigation which included costs such as legal
and professional, impairment write-downs, plant shutdown costs, employee
termination costs, other costs related to foreign operations and other related
costs.
The Company's interest expense for the three months ended
September 30, 1996, was $.18 million, or 2.9% of net trade sales, as compared
with $.23 million, or 3.7% of net trade sales, for the three months ended
September 30, 1995. This decrease resulted from the decrease in inventory which
led to decreased borrowings for the period.
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<PAGE>
At December 31, 1995, the Company recorded a net deferred tax asset of
$220,568 relating to expected future utilization of its net operating loss
carryforwards and for the tax effects of certain timing differences. The Company
continued to recognize a credit income tax provision relating to operating
losses for the first two quarters of 1996. The Company is not currently able to
determine that future utilization of loss carryforwards is more likely than not
and, therefore, has established a valuation allowance equal to the amount of the
net deferred tax asset previously recorded.
As a result of the foregoing, the Company's net loss for the three
months ended September 30, 1996, increased to $2,857,300 from a net income of
$17,762 for the three months ended September 30, 1995.
Nine Months Ended September 30, 1996 Compared to the Nine Months Ended September
30, 1995
Net trade sales, for the nine months ended September 30, 1996,
decreased by $1.12 million, or 7.0%, to $14.85 million from $15.97 million for
the nine months ended September 30, 1995. Net trade sales for the nine months
ended September 30, 1996, of Caterpillar branded products, Big Smith and other
branded products, and private label products were $5.26 million, $6.93 million
and $2.66 million, respectively, as compared with $2.84 million, $7.21 million
and $5.92 million, respectively, for the nine months ended September 30, 1995.
The increase in sales of Caterpillar branded products resulted primarily from
the reestablishment of the Company's distribution channels for Caterpillar
branded products following a disruption of those channels and the Company's
efforts to liquidate its remaining inventory of Caterpillar branded products.
The decrease in Big Smith and other branded products reflected unusually high
Walmart sales during the first three months of 1995 due to the carryover to 1995
of certain orders from 1994 which was only partially offset by increased sales
to Walmart during the three months ended September 30, 1996. The decrease in
private label sales resulted from the discontinuance in 1996 of private label
programs for Kmart and Walls Corporation. For the nine months ended September
30, 1996, sales of Caterpillar branded products, Big Smith and other branded
products, and private label products accounted for 35.4%, and 46.7% and 17.9% of
net trade sales, respectively, as compared with 17.8%, 45.1% and 37.1% of net
trade sales, respectively, for the nine months ended September 30, 1995. The
Company has begun implementing its plans to increased marketing and sales of Big
Smith branded products.
Net royalties from distributors for the manufacture and sale of goods
under the Caterpillar labels abroad net of related costs for the nine months
ended September 30, 1996, increased by $.66 million to $1.13 million from $.69
million for the nine months ended September 30, 1995. This increase was due to
the increased manufacture and sale of Caterpillar branded products by
distributors, particularly in the United Kingdom. In the event that the final
outcome of the litigation with Caterpillar is adverse to the Company, the
Company would be required to cease its sales of Caterpillar branded products
through distributors and otherwise, on January 10, 1997, which would mark the
end of a six month grace period provided in the contract with Caterpillar. As a
result of an alleged failure to timely provide Caterpillar a royalty report and
to pay certain royalties, Caterpillar notified the Company on November 8, 1996,
that it regarded the grace period as terminated, which contention the Company
disputes.
Gross profit, excluding that from net royalties, for the nine months
ended September 30, 1996, decreased by $1.48 million to $1.05 million, or 7.1%
of net trade sales, from $2.53 million, or 15.8% of net trade sales, for the
nine months ended September 30, 1995. This decrease was primarily due to an
$817,000 the write-down of inventory primarily due in sales to the Caterpillar
litigation, an increase of approximately $385,000 of close outs and irregulars
at approximately $361,0001 below cost and unabsorbed overhead of approximately
$224,000 related to the partial plant shutdowns to facilitate the reduction of
certain categories of
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<PAGE>
the Company's inventory during the first quarter of 1996, which were only
partially offset by the increased sales of Caterpillar branded goods.
Selling expenses increased by $.14 million to $1.40 million, or 9.4% of
net trade sales, for the nine months ended September 30, 1996, from $1.26
million, or 7.9% of net trade sales, for the nine months ended September 30,
1995. This increase in selling expenses resulted principally from an increase of
$124,000 in royalty expense resulting from increased domestic sales by the
Company of Caterpillar branded products, an increase of $43,000 in travel and
entertainment expense and a $44,000 increase in sample expense related to the
development of new Caterpillar branded product lines, which were only partially
offset by the decrease of $120,000 in shipping expense resulting from the
decrease in trade sales. General and administrative expenses increased by $.24
million to $1.85 million, or 12.5% of net trade sales during the nine months
ended September 30, 1996, from $1.61 million, or 10.1% of net trade sales, for
the nine months ended September 30, 1995. This increase was primarily due to an
increase of $98,000 in payroll and related fringe benefits and a change in
accounting procedure to inclusion in general and administrative expense of
certain insurance and postage of $56,000, rather than in cost of goods sold as
was done in 1995 and an increase of $41,000 costs associated with being a public
Company.
During the nine months ended September 30, 1996 the Company accrued or
incurred an aggregate of $1.40 million of restructuring and litigation costs in
connection with the Caterpillar litigation which included costs such as legal
and professional, impairment write-downs, plant shutdown costs, employee
termination costs, other costs related to foreign operations and other related
costs.
The Company's interest expense for the nine months ended September 30,
1996, decreased to $.54 million, or 3.6% of net trade sales, as compared with
$.59 million, or 3.7% of net trade sales, for the nine months ended September
30, 1995. This decrease resulted from the decrease in inventory which led to
decreased borrowings for the period.
At December 31, 1995, the Company recorded a net deferred tax asset of
$220,568 relating to expected future utilization of its net operating loss
carryforwards and for the tax effects of certain timing differences. The Company
continued to recognize a credit income tax provision relating to operating
losses for the first two quarters of 1996. The Company is not currently able to
determine that future utilization of loss carryforwards is more likely than not
and, therefore, has established a valuation allowance equal to the amount of the
net deferred tax asset previously recorded.
As a result of the foregoing, the Company's net loss for the nine
months ended September 30, 1996, increased to $3,277,965 from a net loss of
$164,936 for the nine months ended September 30, 1995.
Liquidity and Capital Resources
The Company has financed its growth primarily with borrowings under its
line of credit and, since the consummation of its initial public offering, with
the proceeds of such offering. Cash provided by operating activities increased
to $.15 million during the nine months ended September 30, 1996, as compared
with cash used in operating activities of $7.5 million in the nine months ended
September 30, 1995. During the first half of each year, the Company typically
experiences negative cash flow from operations due to the build-up of inventory
in preparation for increased sales volume in the second half of each year.
During 1996 in accordance with managements plans to reduce inventory, however,
certain plants were partially shutdown during the first quarter resulting in the
decrease of cash used in operating activities. See "--Seasonality."
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<PAGE>
At September 30, 1996, and September 30, 1995, working capital was
approximately $1.9 million and $14.0 million, respectively. This decrease
resulted primarily from the reclassification of the Company's line of credit
with Mercantile Business Credit Inc. ("MBCI") as current debt and reductions in
inventory and accounts receivable. Working capital may vary from time to time as
a result of seasonal inventory requirements, the level of trade credit available
and the level of accounts receivable balances.
At September 30, 1996, the Company had a $9 million line of credit with
MBCI, with borrowing levels based upon a specified percentage of eligible
accounts receivable and inventories. The amount outstanding under the credit
line as of September 30, 1996, and September 30, 1995, was $7.0 million, and
$8.7 million respectively. The line of credit bore interest at the MBCI prime
rate plus a premium interest factor. This premium interest factor varied from
1.5 to 2.0 percent, based upon the Company's leverage ratio. MBCI has amended
the loan agreement, retroactive to February 16, 1995, to provide for interest at
the MBCI prime rate plus a premium interest factor of 0.75 percent. If the
Company's pre-tax net income for the twelve month period ending on December 31,
1996, is at least $1.5 million, no premium interest will be charged for 1997. If
the Company's pre-tax net income for the twelve month periods ending 1996 is not
at least $1.5 million respectively, the premium interest factor will remain at
0.75 percent. The line of credit also permits overadvances for up to 120 days
per year, peaking at $.5 million. The overadvance portion of the line of credit
has an interest rate equal to the prime rate as published by MBCI plus an
interest premium factor of 1.75. The line of credit is secured by the Company's
accounts receivable, inventory, property and equipment and general intangibles
and matures on September 30, 1997 with one year renewals. The Company believes
that at such time it will be able to renew such line of credit or obtain similar
working capital financing from a similar institution.
At September 30, 1996, the Company classified all of the debt under the
MBCI line of credit as current maturity due to the scheduled maturity of the
line credit on September 30, 1997. Additionally, the Company was not in
compliance with certain financial loan covenants under the MBCI line of credit.
The Company will enter into discussions with the lender concerning the renewal
of such line for a long term period and the formal waiver of such noncompliance,
in the event of such renewal and waiver, such debt would be reclassified as long
term debt.
Capital Expenditures
Capital expenditures totaled $413,959 for the nine months ended
September 30, 1996. These expenditures consisted primarily of purchases of
computer related equipment.
Intangible Assets
In 1995, the Company purchased the Big Smith trademark for the seven
countries in Europe in which the Company did not previously have trademark
rights for an aggregate purchase price of $500,000, payable over four years.
Seasonality
The Company's sales are generally higher in the last six months of the
year as compared to the first six months of the year both in terms of revenues
generated and, to a lesser extent, total garments sold. This seasonality is due
to an increase in sales of winter weight garments, which sell at higher prices,
combined with continued sales of regular weight garments. This seasonality has a
significant impact on the cash flow of the Company since the Company's inventory
levels typically tend to increase during the first half of the year in
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<PAGE>
preparation for anticipated higher sales levels in the second half of the year.
See"- Liquidity and Capital Resources."
Forward Looking Statements
Certain statements contained in this discussion may be deemed forward
looking statements that involve a number of risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
the status of relations between the Company and its primary licensors,
customers, licensees, and distributors, unanticipated changes in the U.S. and
international economies, business conditions and growth in the workwear industry
and the level of growth in retail sales generally, the timely development and
acceptance of new products, the impact of competitive products and pricing,
changes in the cost of raw materials, changes in product mix, the outcome of
litigation in which the Company is involved, along with product delays and other
risks detailed from time to time in the Company's SEC reports, including but not
limited to the report on Form 10-KSB for the year ended December 31, 1995. See
"Part II -- Other Information Item 1. Legal Proceedings."
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On June 25, 1996, Big Smith Global Ltd. ("BSG"), a wholly owned
subsidiary of the Company, holding the rights to the Company's agreement with
Caterpillar, Inc. ("Caterpillar") licensing the use by the Company of the
Caterpillar and related trademarks, received a purported notice of termination
of the Agreement, citing purported violations of the Agreement. On July 11,
1996, the Company received from the High Court of Justice, Chancery Division,
London, England, preliminary injunctive relief under section 21 of the Trade
Mark Act of 1994 of the United Kingdom barring Caterpillar from threatening the
Company's international distributors with trademark infringement based on the
purported termination.
On July 9, 1996, the Company was served with a summons and complaint
naming it, BSG and S. Peter Lebowitz, the Company's CEO, defendants in a suit by
Caterpillar in the U.S. District Court for the Central District Court of
Illinois (the "District Court"). In its complaint, Caterpillar seeks declaratory
judgment that its purported termination of the Agreement was proper. Based upon
such purported termination, Caterpillar also alleges trademark infringement,
unfair competition, false advertising, and breach of contract, and seeks
injunctive relief and unspecified damages.
On July 18, 1996, Caterpillar filed an emergency motion for summary
judgment seeking a determination that the Agreement had been properly
terminated. The defendants have filed responsive pleadings. On July 26, 1996,
the defendants filed an answer to the summons and complaint stating affirmative
defenses of failure to assert a claim, waiver, amendment, promissory estoppel,
equitable estoppel, laches, failure to provide an opportunity to cure, unclean
hands and misuse, and counterclaims for breach of contract, tortious
interference with contractual relations, interference with prospective business
relations, conspiracy, commercial disparagement and breach of franchise
agreement. S. Peter Lebowitz also filed an additional motion to dismiss for
failure to state a claim against him in his individual capacity. On July 29,
1996, the Company filed a motion for a preliminary injunction against
Caterpillar's purported termination of the Agreement.
On August 19, 1996, the District Court entered an order (the "August
19th Order") denying the Company's motion for a preliminary injunction and
granting Caterpillar's motion for summary judgment on the grounds that the
Company had breached the Agreement by failing to obtain certain agreements from
manufacturers producing Caterpillar branded apparel as was required under the
Agreement, and that the Agreement permitted Caterpillar to terminate based upon
such breach regardless of whether or not it was material. On September 24, 1996,
the District Court denied the Defendant's request for reconsideration.
On September 24, 1996, the District Court certified for appeal the
question of whether Illinois common law has a "good cause" requirement for
terminating a franchise agreement that meets the definition of a franchise under
Illinois law, but does not involve a franchise located in the State of Illinois
and stayed further action in the pending litigation until the Court of Appeals
rules on the certified question. On October 4, 1996, the Defendants filed a
Petition for Permission to Appeal with the Seventh Circuit Court of Appeals, and
on October 15, 1996, Caterpillar filed a response to such petition.
Provided a favorable outcome is obtained in the Court of Appeals, the
defendants intend to press their claim that Illinois common law barred
Caterpillar from terminating the Agreement based upon
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immaterial breaches by the Company. To date, the Court of Appeals has not ruled
on whether it will hear the appeal. Regardless of whether the results of the
appeal are favorable, the Company has additional claims against Caterpillar
which it intends to pursue.
There can be no assurance, however, that the outcome will be favorable
to the Company and that the Agreement will be preserved, and if the outcome is
not favorable such outcome could have a material adverse effect on the financial
condition of the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a)
EXHIBIT TABLE
Exhibit
No. Description
--- -----------
3(a) Form of Restated Certificate of Incorporation.
(b) By-laws.
4(a) Form of Common Stock Purchase Warrant.
(b) Form of Warrant Agreement.
(b) No reports on Form 8-K have been filed during the quarter for which
report is being filed.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIG SMITH BRANDS, INC.
Registrant
Date: November 19, 1996 /s/ Terry L. Dober
-------------------------
Terry L. Dober
Vice President of Finance
(Principal Accounting
and Financial Officer)
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EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3(a) Form of Restated Certificate of Incorporaton*
(b) By-laws.*
4(a) Form of Common Stock Purchase Warrant.*
(b) Form of Warrant Agreement.*
- --------------------------
* Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2 (No. 33-85302), as
amended, declared effective on February 8, 1995 ("Form SB-2").
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