SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NO.: 01-13470
BIG SMITH BRANDS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 13-3005371
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7100 West Camino Real, Suite 201, Boca Raton, Florida 33433
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Issuer's telephone number: (561) 367-8283
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Classes on Which Registered
Common Stock, $.01 par value Pacific Stock Exchange
Common Stock Purchase Warrants Nasdaq SmallCap Market
Securities registered under Section 12(g) of the Exchange Act: NONE
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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 ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form 10-KSB, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $23,103,145.
As of March 31, 1997, Registrant had 3,930,000 shares of Common Stock
outstanding ($.01 par value). On that Date, the aggregate market value of the
Common Stock held by persons other than those who may be deemed affiliates of
Registrant was $7,575,625 (based on the average of the reported high and low
sales prices on NASDAQ on such date).
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company is an apparel company which has been engaged since 1985
primarily in the manufacture and sale of quality work apparel ("workwear") under
its own brand names Big Smith, Smith Mountain Classics, Big Smith Vintage and
Big Smith Kids. In addition, the Company manufactures and sells workwear to mass
merchandisers for sale under their private labels. From January 1, 1991 through
January 12, 1997, the Company sold products under the licensed brand names
Caterpillar and Cat, which sales ceased due to a license dispute and purported
termination by Caterpillar, Inc. ("Caterpillar"). See "Item 3. Legal
Proceedings."
As a result of its dispute with Caterpillar, the Company has
reevaluated its direction and has determined to refocus its efforts on
development of its Company-owned brands, including primarily Big Smith and its
related brands. The Company believes that it can significantly increase its
domestic and international market share for this brand. In particular, the
recent announcement by Osh Kosh B'Gosh, Inc., a leading manufacturer of men's
workwear that it intends to cease to manufacture its workwear products in the
United States opens to competition a significant share of the market through
workwear retailers in the American heartland who favor "Made in the USA" labels.
The Company has begun to implement its new strategic focus by retaining
John Bagdasian as the new Vice President and General Manager of the Big Smith
Sportswear division as of April 1, 1997. Mr. Bagdasian has over 20 years of
experience in the apparel industry. Additionally, during the latter portion of
1996 and the beginning of 1997 the Company has established relationships with 15
new domestic independent sales representatives who will sell the Company's
branded workwear lines, raising the total number of such representatives to 21,
and has begun to plan the roll-out of a significant new line under the Big Smith
label in 1997. See "-Employees" and "-Products."
Workwear has been produced in the United States under the Big Smith
label since 1916. The Company was organized in 1980 as a Delaware corporation
and in 1985 acquired certain assets of Smith Brothers Manufacturing Company,
including the rights to Big Smith and related trade names. The Company's product
line is built around its flagship overalls, jeans and jackets, substantially all
of which are made in the United States. The Company's workwear products require
relatively few changes in design and styling from year to year and, with the
exception of insulated products sold for the fall and winter retail season, are
generally sold throughout the year. The Company's products are generally sold at
moderate prices through mass merchandisers, including Wal-Mart, Sears and J.C.
Penney, primarily in the American heartland. In all, the Company's products are
sold to approximately 850 customers who re-market the products through
approximately 4,200 retail stores.
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The Company experienced increased revenues in 1996, despite the
purported termination of the Caterpillar license, primarily as a result of its
development early in the year of the international market for Caterpillar
branded products and the liquidation late in the year of its Caterpillar branded
products inventory. The Company's export sales increased to $4.61 million in
1996 from $2.61 million in 1995. The Company's net royalty income, primarily
from its activities abroad, increased to $1.30 million in 1996 from $1.12
million in 1995. As of December 31, 1996 $1.76 million of the Company's
receivables in respect of its export sales and royalty income remained
uncollected. In order to fund its cash needs while such payments remain
delinquent, on April 2, 1997 the Company completed a Regulation S placement of
$1.7 million in principal amount of its 6% Convertible Debentures. See "Item 5.
Market for the Company's Common Equity and Related Stockholder Matters."
PRODUCTS
The Company's line of workwear currently includes overalls, coveralls,
quilted coats, industrial jeans, denim jeans and jackets, vests, aprons,
dungarees, shirts, tee shirts and caps, all for adults. The Company also
manufactures children's wear, including overalls, jeans, vests, jackets, tee
shirts and caps. Substantially all of the Company's branded products are
manufactured in the United States from American made fabrics typically employing
processes designed to produce sturdy, high-quality, long-lasting garments.
The production of workwear involves relatively few changes in design
and styling from year to year. The Company's fall and winter line differs from
its spring and summer line primarily in that the fall and winter products are
quilted and insulated while the spring and summer products are not. Items in
each line sell at retail in the $15 to $35 range except for coats and insulated
overalls, which sell at retail in the $50 to $75 range. The higher prices of the
insulated products in its fall and winter line have historically resulted in the
Company recognizing higher gross sales and higher margins during the second half
of its fiscal year.
During 1996 the Company discontinued its sales of private label
products to Kmart and as of December 31, 1996 the Company had no inventory on
hand or open orders for such products from Kmart. Additionally, the Company has
discontinued its sales of Caterpillar branded products. See "- General" and
"Item 3. Legal Proceedings." The Company has also begun to plan the roll-out of
a significant new line under the Big Smith label in 1997.
WAREHOUSING AND DISTRIBUTION
Virtually all of the Company's workwear, whether manufactured by the
Company or by a contractor, is stored in the Company's finished goods warehouses
located in Carthage, Missouri, and Miami, Oklahoma. All of the Company's
workwear is distributed from its finished goods warehouses.
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All of the Company's domestic products are distributed by truck from
its warehouses. Substantially all deliveries to customers are made by common
carriers with whom the Company has long-standing relationships. The Company
either has contracts with these carriers or ships collect per customer-supplied
routing guides.
COMPETITION
The apparel industry, including the workwear market, is fragmented and
highly competitive. The Company competes with a large number of domestic and
foreign manufacturers in all of its product markets. Some of the Company's
competitors have financial resources, sales organizations and manufacturing
capacity considerably larger than those of the Company. Among its largest
competitors are Carhartt Corp., Williamson-Dickie Manufacturing Company, Inc.,
Osh Kosh B'Gosh, Inc., and Walls Holding Corp. Competition is generally in terms
of quality, price, service and style. The Company's principal means of meeting
competition are high-quality workmanship and materials, a strong fundamental
product offered at a moderate price, maintaining what the Company believes is
its reputation as one of the most reliable suppliers in the market, a sales
organization trained to assist customers in merchandise planning and the
prominence of its labels. The Company has historically sought to adjust its
product mix and markets to the demands of its customers, rather than attempting
to establish consumer trends or to design in anticipation of short-term market
fads.
The Company believes that the recently announced decision of Osh Kosh
B'Gosh, Inc. that it intends to cease to manufacture its workwear products in
the United States opens to competition a significant share of the market through
workwear retailers in the American heartland who favor "Made in the USA" labels.
MANUFACTURING AND SOURCING
The Company purchases raw materials, consisting mainly of piece goods
made from cotton, synthetics and blends of cotton and synthetics, from a number
of textile mills and converters. Thread, zippers, brass snaps and buttons,
labels, boxes and trim are purchased from a number of suppliers. No single
supplier of raw materials is critical to the Company's production needs, and the
Company believes that an ample number of alternative suppliers exists should the
Company need to secure additional or replacement raw materials. The Company has
no long-term contracts with any of its suppliers. Approximately 88% of the
Company's fabric requirements were obtained from five suppliers in fiscal year
1996. The Company has experienced little difficulty in obtaining raw materials
and believes that the current and potential sources of fabric and trim supply
are sufficient to meet its needs for the foreseeable future.
The Company's manufacturing process consists of four principal
operations: the computer-aided design of cutting patterns to minimize fabric
waste, the cutting of the fabric, the sewing of cut fabric into complete
garments, and the affixing of brass snaps and fittings. After
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the Company receives bolts of fabric, it performs substantially all
pattern-cutting operations at its own facilities. After the patterns are cut,
the fabrics and piece goods are manufactured and assembled at the Company's
facilities or sent to one of its contractors for manufacture and assembly. If
permanent press or pre-washing is required, the heat treating of the finished
garment in a permanent press curing oven or laundering is done by an
unaffiliated contractor. Quality control personnel inspect work-in-progress and
finished goods during the production process and again upon receipt.
Substantially all of the Company's fabrics are inspected upon receipt in the
Company's warehouse. Because the Company's strategy is to build on its existing
products, all of the apparel manufactured or sourced by the Company is planned
and designed through the efforts of its in-house marketing personnel. The
Company does not maintain an in-house design team and contracts for more
extensive outside design services when necessary.
The Company from time to time will use outside contractors which
receive fabric from the Company and assemble garments to the Company's
specifications. Garments assembled by contractors accounted for approximately
15% of the Company's unit production in fiscal year 1996. The Company's design
and quality control personnel normally monitor the manufacturing processes at
the Company's contractors in order to ensure that they meet Company quality
standards. In addition, the Company's quality control program includes on-site
inspections of work-in-progress and finished goods during the production process
and inspection of finished goods upon receipt. Currently the Company experiences
a return rate for poor quality garments of less than 1%.
WHOLESALE OPERATIONS
DOMESTIC
Most of the Company's products are marketed through various mass
merchandisers, including its two largest customers during 1996 and 1995,
Wal-Mart and Kmart. Sales to Wal-Mart represented 30.9% and 27.5% and sales to
Kmart represented 7.3% and 37.9% of the Company's net trade sales for the years
ended December 31, 1996 and 1995, respectively. The Company's relationship with
these market leaders has given it wide access to the U.S. market and stable
sources of sales. The Company is not currently doing business with Kmart.
The Company is integrated into the program purchasing of certain mass
merchandisers, whereby it is informed at the beginning or just prior to the
beginning of each calendar year of the minimum purchases to be made by the
customer during that calendar year, and informed weekly of updated delivery
schedules and locations. This system permits the Company to anticipate a
significant portion of its annual sales and plan and schedule production
accordingly.
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The Company's products are also marketed through a large number of
independent department stores, farm and fleet stores, buying collectives and
army and air force exchanges. The Company estimates that its products were sold
in approximately 4,200 stores and 5,000 stores in fiscal year 1996 and fiscal
year 1995 respectively.
Receivables from Wal-mart are typically paid in full between 45 and 60
days from purchase. Receivables from the Company's remaining domestic customers
are generally on thirty day terms. The average age of receivables of the
Company's domestic customers, at December 31, 1996 was 49.0 days, as compared
with an average age of 49.3 days at December 31, 1995.
FOREIGN
During 1994, the Company established distributorships for its Big Smith
branded products in Germany and Japan. During 1996, the Company had
distributorships for its Caterpillar branded products in Australia, Austria,
Belgium, Canada, the Canary Islands, Cyprus, Denmark, Finland, France, Germany,
Greece, Hong Kong, Ireland, Israel, Italy, Japan, Korea, Liechtenstein, Macau,
the Netherlands, Norway, South Africa, Sweden, Switzerland, Turkey and the
United Kingdom. The distributorships for Caterpillar branded products were
terminated with the discontinuance by the Company of its sales of Caterpillar
branded products. See "- General" and "Item 3. Legal Proceedings." The
distributorship agreements generally grant the distributor the exclusive right
to market workwear items under the trademarks in the territory in consideration
of purchases or the payment of royalties or commissions on the sales of
distributed goods and may be terminated by the Company if the distributor fails
to meet any year's annual minimum net purchase.
Approximately two years ago the Company began to implement a corporate
strategy designed to convert the Company from a workwear manufacturing company
exclusively based and operated in the United States to a multi-brand, regionally
conceived, designed and sourced global producer and marketer of both workwear
and industrial designed fashion. In November 1995, the Company formed Big Smith
Global Limited, a wholly owned subsidiary under the laws of England and Wales.
During the remainder of 1995 and 1996, Big Smith Global Limited conducted most
of the Company's international licensing and sales activity, primarily for
Caterpillar branded products. The Company anticipates Big Smith Global Limited
continuing to supervise and administer the design, manufacture, sales and
marketing of all brands and labels owned or controlled by the Company outside of
the United States. The Company intends to license the foreign rights to Big
Smith and related trademarks to other manufacturers of workwear and industrially
inspired fashion of various designs.
RETAIL OPERATIONS
The Company maintains retail outlets at each of its manufacturing
locations. The retail outlets sell both first and second quality merchandise to
the local communities of which
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the Company is a part. The Company's four retail outlets had net sales of
approximately $772,000 for the year ended December 31, 1996 and the Company's
three retail outlets then open had net sales of approximately $562,000 for the
year ended December 31, 1995.
TRADEMARKS AND LICENSES
Branded products play a central role in the Company's strategy. In
addition to the Big Smith label, which has been used on workwear since 1916, the
Company has begun producing goods under Smith Mountain Classics and Big Smith
Vintage labels and has discontinued operations under labels of other
manufacturers, including Caterpillar, Wolverine and other related trademarks on
workwear. In December 1996 the Company terminated its Wolverine license by
agreement with Wolverine Worldwide.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 221 people
on a full-time basis, including 21 employees in administration and accounting, 4
employees in marketing and sales, and 196 employees in manufacturing. The
Company also employed 11 part-time employees and 18 independent sales
representatives. Approximately 85% of its employees are paid on a piecework
basis and the balance are hourly-paid or salaried.
The Company has never experienced a material work stoppage or slowdown
due to labor disagreements. The Company believes that its relations with all
employees are satisfactory. None of the employees are covered by a collective
bargaining agreement. The manufacturing employees are non-unionized pieceworkers
with an approximate average tenure of five years. The Company provides a
benefits package to all of its full-time employees, including health insurance,
paid holidays and vacations.
ITEM 2. DESCRIPTION OF PROPERTY.
FACILITIES
The Company owns or leases three clothing plants aggregating
approximately 244,000 square feet of floor space, including approximately
115,000 square feet of warehouse floor space. The Company's principal executive
offices are located in the principal plant in Carthage, Missouri and in Boca
Raton, Florida. The following table sets forth certain information concerning
each of the Company's facilities.
PROPERTIES OWNED
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LOCATION FLOOR SPACE PRINCIPAL USES
(SQUARE FEET)
Carthage, Missouri 153,500 Manufacturing,
warehousing, retail,
administrative offices
and distribution center
PROPERTIES LEASED
LOCATION FLOOR SPACE LEASE PRINCIPAL
(SQUARE FEET) EXPIRES USES
Carthage, Missouri 10,000 Monthly (a) Warehousing
Garnett, Kansas 1,000 9/15/97 (b) Retail
Monett, Missouri 60,000 7/31/97 (c) Manufacturing
(2 locations) 3,000 9/23/97 Retail
Miami, Oklahoma 30,000 8/31/97 (d) Manufacturing
(3 locations) 16,000 5/31/97 (e) Warehousing
3,000 1/31/98 Retail
Boca Raton, Florida 1,025 6/30/98 Office Space
(a) The Company currently leases this facility on a month-to-month basis.
(b) Renewable every six months at the Company's option.
(c) The Company terminated manufacturing at this location.
(d) The lease is renewable for four one year options at the Company's option.
(e) The lease is renewable for five one year options at the Company's option.
The Monett and Garnett plants were closed in November 1996 in
connection with the Company's ceasing to sell Caterpillar branded products. The
expenses associated with these plants were accrued as restructuring charges and
charged to operating expenses in 1996.
All of the Company's facilities are of brick or block construction,
have sprinklers throughout, and have been well-maintained and are adequate for
their present uses.
The Company uses outside contractors for portions of its current
production. See "Description of Business--Manufacturing and Sourcing."
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Depending on the demand for the Company's products, the Company may
acquire additional facilities or expand its existing facilities. However, the
nature, financing and timing of any acquisitions or expansions have not yet been
determined.
Substantially all of the machinery and equipment used by the Company in
its manufacturing operations is either owned or subject to lease purchase
arrangements. The Company's machinery and equipment are well-maintained and
adequate for its present uses.
ITEM 3. LEGAL PROCEEDINGS.
CATERPILLAR LITIGATION
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 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 sought
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
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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 August 26, 1996, Caterpillar filed responses to the Company's
counterclaims. On August 28, 1996, the District Court granted in part Mr.
Lebowitz's motion and dismissed him from the breach of contract and declaratory
judgment counts of the complaint.
On September 3, 1996, the Company moved for reconsideration or in the
alternative, certification to the United States Court of Appeals for the Seventh
Circuit of the August 19th Order granting Caterpillar summary judgment. 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 Count 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 (the "Court of
Appeals"), and on October 15, 1996, Caterpillar filed a response to such
petition. On December 6, 1996, the Court of Appeals denied the Petition for
Permission to Appeal.
The Company is currently awaiting a discovery scheduling conference on
April 17, 1997 and expects the case to move to discovery.
There can be no assurance that the outcome of this litigation will be
favorable to the Company, that the Company's defenses to the claims against it
will be vindicated or that any of its counterclaims will be found to be valid.
If the outcome of the litigation is not favorable, such outcome could have a
material adverse effect on the financial condition of the Company.
OTHER LITIGATION
The Company is involved in litigation with a number of its foreign
distributors in connection with their refusal to pay royalties the Company
believes to be due in respect of sales by such distributors of Caterpillar
branded products prior to the Company's ceasing to sell such products.
Additionally, certain distributors have made claims against the Company relating
to the effects of the purported termination of the Caterpillar license on their
arrangements with the Company. A summary of these actions follows.
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On December 11, 1996, BSG filed suit in the UK High Court against The
Big Yellow Corporation Limited ("Big Yellow") seeking to collect unpaid
royalties of approximately 500,000 British pounds together with interest. The
Company believes that following filing of the suit additional royalties in an
amount of approximately 180,000 British pounds have become due and owing. Big
Yellow has filed a counterclaim against BSG and the Company alleging
quantifiable damages of approximately 18.15 million British pounds and
unquantifiable damages for breach of contract, interest and indemnity in respect
of potential claims by Caterpillar. On April 3, 1997, BSG amended its Statement
of Claim to include allegations of damages for breach of contract against Big
Yellow.
On January 6, 1997, All American filed suit against BSG in the UK High
Count seeking damages for breach of contract and interference with contractual
relations and interest. All American has not yet specified its damages. On March
19, 1997, All American indicated through its attorneys that the suit will be
withdrawn.
On March 20, 1997, the Company and BSG filed suit against All American
in the Commercial Court of Paris, France seeking recovery of approximately
$133,000 of accounts receivable it believes are due and owing. A hearing on a
summary judgment motion is currently scheduled for May 22, 1997. The defendant
has indicated its interest in settling this action, and the Company is currently
engaged in settlement discussions with the defendant.
The Company has engaged in discussions with Selected Brands Shoe
Company in seeking recovery of at least $73,000 of accounts receivable it
believes are due and owing and with Fashion Fever CC seeking recovery of an as
yet undetermined amount of royalties it believes are due and owing. These
discussions are preliminary to filing collection actions if the amounts due from
these parties are not settled in such discussions.
Although the Company's international attorney's have advised the
Company that it has valid claims in these actions for royalties owing, there can
be no assurance that the outcome of these litigations or of any of them will be,
on net favorable to the Company. Additionally, the Company believes that the
outcome of these actions, and particularly with respect to any claims against it
in these actions, may depend, in part, on the outcome of the Caterpillar
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
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AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Warrants have been quoted on the Nasdaq
Stock Market's Small-Cap Market ("Nasdaq") under the symbols BSBI and BSBIW, and
the Pacific Stock Exchange under the symbols BSM TT and BSM WS TT, since April
19, 1995.
The following table sets forth the high and low trading range prices
for the Common Stock and Warrants, as quoted on Nasdaq, for the periods
indicated. The quotes represent interdealer prices without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
The trading volume of the Company's securities fluctuates and may be limited
during certain periods. As a result, the liquidity of an investment in the
Company's securities may be adversely affected.
Common Stock Warrants(1)
Fiscal Year Ending December 31, 1995 (2)
Quarter ended June 30, 1995................ 5 3/4 4 1/2 2 1/8 1 3/8
Quarter ended September 30, 1995...... 5 1/2 4 1/4 2 1/8 1 1/8
Quarter ended December 31, 1995....... 5 3/8 4 1/4 1 5/8 1
Fiscal Year Ending December 31, 1996
Quarter ended March 31, 1996............. 4 19/32 2 1/8 1 3/64 5/16
Quarter ended June 30, 1996................ 3 1/8 2 9/16 1/8
Quarter ended September 30, 1996...... 3 1/4 1 1/4 7/16 3/32
Quarter ended December 31, 1996....... 3 1/8 2 1/8 9/32 1/8
(1) Each of the Warrants entitles the holder to purchase one share of
Common Stock, par value $.01 per share until February 8, 1998 at an
exercise price of $4.60 per share, subject to certain adjustments.
(2) The Company's Common Stock and Warrants were first traded on Nasdaq's
Small-Cap Market and the Pacific Stock Exchange on April 19, 1995.
On April 2, 1997, the Company closed an offshore placement (the
"Placement") of $1,700,000 of its 6% Convertible Preferred Debentures due March
31, 2000 ("Debentures") to a single accredited investor. Beginning 45 days after
such closing, the Debentures will be convertible into Common Stock of the
Company at a conversion ratio of one share for the lesser of (i) $2.80 or (ii)
70% (or 67.5% if converted more than 100 days from the closing of the offering)
of the Market Price (as defined in the Debentures) of the Common Stock on the
conversion date. The Company has agreed to redeem outstanding Debentures at 148%
of their initial principal amount if required to do so by any applicable law,
rule, or regulation of any regulatory body, securities exchange or trading
market.
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Goodbody International, Inc. served as introducing agent in connection
with such placement and received in consideration of it services $255,000 and
warrants to purchase 100,000 shares of Common Stock of the Company, exercisable
at $2.00 per share, subject to adjustment at any time prior to March 31, 2002,
subject to adjustment based upon the bid price of the Company's common stock for
the five trading days ending on each anniversary of the date of issuance of the
warrants.
The Placement was a private transaction not involving a public offering
and was exempt from the registration provisions of the Securities Act of 1933,
as amended (the "Act"), pursuant to Section 4(2) thereof, and pursuant to
Regulation S promulgated under the Act. The Company is a reporting issuer,
offering restrictions were implemented in connection with the Placement. The
purchaser represented that it was an accredited non-U.S. Person not acting for
the account or benefit of a U.S. person and that it had received adequate
information about the Company, and made other customary representations and
covenants under Regulation S.
DIVIDENDS
Prior to its IPO in February 1995, the Company declared and paid
dividend of $100,000 ($0.05 per share) to Peter Lebowitz, then the Company's
sole shareholder. The Company did not declare or pay any dividends in 1996. The
Company intends to retain any future earnings that may be generated from
operations to help finance the operations and expansion of the Company and
accordingly does not plan to pay cash dividends to holders of the Common Stock
during the reasonably foreseeable future. Any decisions as to the future payment
of dividends will depend on the earnings and financial position of the Company
and such other factors as the Company's Board of Directors deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The discussion and analysis set forth below is for the years ended
December 31, 1996 and December 31, 1995 and it should be read in conjunction
with the Financial Statements of the Company and the related Notes thereto
appearing elsewhere in this Form 10-KSB.
The Company's viability as a going concern is dependent upon the
successful refinancing of its principal line of credit, which expires on June
30, 1997 and its meeting its liquidity needs prior to such date, which needs
could exceed the amount of borrowings available under the existing agreement.
The Company is taking several steps to obtain additional sources of liquidity
and provide for longer-term lending arrangements. The Company has received
several proposals from lenders of national repute relating to lending
arrangements which would provide for term loans secured by property, equipment
and other long-lived assets; collateralized
- 14 -
<PAGE>
borrowings against accounts receivable and inventory; and additional working
capital lines of credit. The proposals are each subject to the lender's
successful completion of its due diligence following acceptance of the proposal
by the Company. Management anticipates the Company accepting one of the several
proposals during the week of April 14, 1997, although there can be no assurance
that an acceptance will occur during such period. The Company currently believes
that the new arrangements may be completed within thirty days after a lender's
successful completion of its due diligence.
The Company has also initiated proceedings to collect certain
significant delinquent accounts receivable from its foreign licensees and
distributors. See "Item 3. Legal Proceedings." Additionally, on April 2, 1997,
the Company closed a placement of $1.7 million of Debentures with an offshore
investor. See "-Liquidity and Capital Resource" and "Item 5. Market for the
Company's Common Equity and Related Stockholder Matters."
The Company believes that its business is seasonal and has historically
experienced and expects to continue to experience lower revenues and net income
in the first half of each fiscal year (primarily January through April) as
compared to the second half of its fiscal year. The seasonality is due in part
to the general decrease in sales in the apparel industry following the Christmas
season as well as the increase in sales of the Company's winter weight garments,
which sell at higher prices, and back-to-school clothes during the months of
August through November. In addition, the Company's quarterly results may
fluctuate depending upon, among other things, the timing of delivery of large
orders and the introduction of new product lines or additional labels. See
"--Seasonality." During 1995 the Company elected to be treated as an S
corporation for tax purposes under the Internal Revenue Code. 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 during this period in 1995.
The following discussion and analysis should be read in conjunction
with the Company's financial statements appearing elsewhere in this report.
RESULTS OF OPERATION
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net sales, excluding net royalties, for the year ended December 31,
1996 increased by $.31 million, or 1.4%, to $21.80 million from $21.49 million
for the year ended December 31, 1995. Net sales for fiscal year 1996 for
Caterpillar branded products, Big Smith and other branded products, and private
label products were $8.21 million, $11.26 million and $2.33 million,
respectively, as compared to $3.41 million, $10.10 million and $7.98 million,
respectively, for fiscal year 1995. The increase was due to a $4.80 million
increase in sales of Caterpillar branded goods, principally due to the
liquidation of $2.0 million inventory of
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<PAGE>
Caterpillar branded goods late in fiscal year 1996, increased sales to European
markets and an increase in the Company's Big Smith and other branded products
sales of $1.13 million, which were only partially offset by a decrease in
private label sales of $5.65 million which resulted primarily from the
discontinuance of private label sales to Kmart. Net royalties from distributors
for the manufacture and sale of goods under the Caterpillar labels abroad for
the year ended December 31, 1996 increased to $1.30 million as compared with net
royalties for the year ended December 31, 1995 of $1.12 million. The Company has
discontinued such manufacture and sales during 1997. See "Item 1. "Description
of Business - General."
Gross profit, excluding that from net royalties for the year ended
December 31, 1996 was $1.96 million, or 9% of net trade sales, compared to $3.18
million, or 14.8% of net trade sales, for the year ended December 31, 1995. This
decrease was primarily due to an $817,000 write-down of inventory in connection
with the anticipated discontinuance of sales of the Company's Caterpillar
branded products, an increase of approximately $451,000 in sales of close outs
and irregulars at approximately $403,000 below cost and unabsorbed overhead of
approximately $224,000 related to partial plant shutdowns to facilitate the
reduction of certain categories of the Company's inventory during the first
quarter of 1996.
Selling expenses increased by $.08 million to $1.97 million, or 9.0% of
net trade sales, for the year ended December 31, 1996, from $1.89 million, or
8.8% of net trade sales, for the year ended December 31, 1995. The increase in
selling expenses resulted principally from an increase of $273,000 in royalty
expense reflecting increased sales of Caterpillar branded products, an increase
of $34,000 in sample expense related to the development of new Caterpillar
branded product lines, which were only partially offset by a $196,000 decrease
in shipping expenses resulting primarily from the decreased production abroad of
private label products for sale to Kmart and a $30,000 decrease in travel and
entertainment expenses. General and administrative expenses were $2.55 million,
or 11.7% of net trade sales during the year ended December 31, 1996, compared
with $2.26 million, or 10.5% of net trade sales, for the year ended December 31,
1995. The increase in general and administrative expenses was primarily due to
an increase of $101,000 in professional fees, consulting fees, and other costs
associated with being a public company, an increase in bank charges of $41,000,
a loan fee related to an amendment to the loan agreement, and an increase in bad
debt expense of $90,000 primarily related to the foreign receivables.
During the twelve months ended December 31, 1996, the Company accrued
or incurred an aggregate of $1.71 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. See "Item 3. Legal Proceedings."
The Company's interest expense for the year ended December 31, 1996
decreased to $760,000, or 3.5% of net trade sales, from $791,000, or 3.7% of net
trade sales, for the year
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<PAGE>
ended December 31, 1995. This decrease resulted primarily from the decrease in
inventory which led to decreased borrowings during the year ended December 31,
1996.
As a result of the foregoing, the Company's net loss for the year ended
December 31, 1996 increased to $3,944,810 or 18.1% of net trade sales from
$425,305 or 2.0% of net trade sales for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's viability as a going concern is dependent upon the
successful refinancing of its principal line of credit, which expires on June
30, 1997 and its meeting its liquidity needs prior to such date, which needs
could exceed the amount of borrowings available under the existing agreement.
The Company is taking several steps to obtain additional sources of liquidity
and provide for longer-term lending arrangements. The Company has received
several proposals from lenders of national repute relating to lending
arrangements which would provide for term loans secured by property, equipment
and other long-lived assets; collateralized borrowings against accounts
receivable and inventory; and additional working capital lines of credit. The
proposals are each subject to the lender's successful completion of its due
diligence following acceptance of the proposal by the Company. Management
anticipates the Company accepting one of the several proposals during the week
of April 14, 1997, although there can be no assurance that an acceptance will
occur during such period. The Company currently believes that the new
arrangements may be completed within thirty days after a lender's successful
completion of its due diligence. The Company has also initiated proceedings to
collect certain significant delinquent accounts receivable from its foreign
licensees and distributors. See "Item 3. Legal Proceedings." Additionally, on
April 2, 1997, the Company closed a placement of $1.7 million of Debentures with
an offshore investor. See "-Liquidity and Capital Resource" and "Item 5. Market
for the Company's Common Equity and Related Stockholder Matters."
On April 2, 1997, the Company closed an offshore placement of
$1,700,000 of its 6% Convertible Preferred Debentures due March 31, 2000 to a
single accredited investor. Beginning 45 days after such closing, the Debentures
will be convertible into Common Stock of the Company at a conversion ratio of
one share for the lesser of (i) $2.80 or (ii) 70% (or 67.5% if converted more
than 100 days from the closing of the offering) of the Market Price (as defined
in the Debentures) of the Common Stock on the conversion date). The value of the
discount included in the conversion ratio of the Debentures as of the issuance
date will be credited to additional paid in capital and the resulting discount
on the Debenture will be charged to 1997 operations as imputed interest. The
Company has agreed to redeem outstanding Debentures at 148% of their initial
principal amount if required to do so by any applicable law, rule, regulation of
any regulatory body, securities exchange or trading market.
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<PAGE>
Goodbody International, Inc. served as introducing agent in connection
with such placement and received in consideration of it services $255,000 and
warrants to purchase 100,000 shares of Common Stock of the Company, exercisable
at $2.00 per share, subject to adjustment at any time prior to March 31, 2002,
subject to adjustment based upon the bid price of the Company's common stock for
the five trading days ending on each anniversary of the date of issuance of the
warrants.
The Placement was a private transaction not involving a public offering
and was exempt from the registration provisions of the Act, pursuant to Section
4(2) thereof, and pursuant to Regulation S promulgated under the Act. The
Company is a reporting issuer, offering restrictions were implemented in
connection with the Placement. The purchaser represented that it was an
accredited non-U.S. Person not acting for the account or benefit of a U.S.
person and that it had received adequate information about the Company, and made
other customary representations and covenants under Regulation S.
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 in operating activities totaled
$3.7 million for the twelve months ended December 31, 1996 as compared with cash
used in operating activities of $5.3 million for the twelve months ended
December 31, 1995. This change reflected primarily decreases in inventory levels
resulting from the liquidation of the Caterpillar inventory. The Company
typically experiences negative cash flow from operations during the first half
of each year due to the build-up of inventory in preparation for increased sales
volume in the second half of each year. See "--Seasonality."
At December 31, 1996 and 1995, working capital was approximately $1.0
million and $9.88 million, respectively. 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 December 31, 1996, the Company had a $9 million line of credit with
Mercantile Business Credit Inc. ("MBCI"), with borrowing levels based upon a
specified percentage of eligible accounts receivable and inventories. The amount
outstanding under the credit line as of December 31, 1996 and 1995 were $3.63
million, and $6.75 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.
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 percent. In addition, the Company must maintain
stockholder's equity of at least $6,000,000 at December 31, 1996. The line of
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<PAGE>
credit is secured by the Company's accounts receivable, inventory, property and
equipment and general intangibles and matures on June 30, 1997.
At December 31, 1996 the Company was not in compliance with certain of
the loan agreement's financial covenants. The Company is currently taking steps
to arrange to repay and replace its line of credit with MBCI. The Company has
received several proposals from lenders of national repute relating to lending
arrangements which would provide for term loans secured by property, equipment
and other long-lived assets; collateralized borrowings against accounts
receivable and inventory; and additional working capital lines of credit. The
proposals are each subject to the lender's successful completion of its due
diligence following acceptance of the proposal by the Company. Management
anticipates the Company accepting one of the several proposals during the week
of April 14, 1997, although there can be no assurance that an acceptance will
occur during such period. The Company currently believes that the new
arrangements may be completed within thirty days after a lender's successful
completion of its due diligence, and is currently in the process of attempting
to arrange a refinancing of its line of credit with MBCI as described above.
CAPITAL EXPENDITURES
Capital expenditures totaled $514,000 for the twelve months ending
December 31, 1996. These expenditures consisted primarily of the purchase of a
computer and related equipment.
INTANGIBLE ASSETS
In 1995, the Company purchased the "Big Smith" trademark in the seven
countries in Europe for 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
impacts the cash flow of the Company significantly since the Company's inventory
levels tend to increase during the summer months in preparation for anticipated
higher sales levels in September, October and November.
ITEM 7. FINANCIAL STATEMENTS.
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<PAGE>
See the financial statements and notes related thereto, beginning on
page F-1, included elsewhere in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
Year First Elected
Name Age Director Office
- - ---- --- -------- ------
S. Peter Lebowitz 65 1985 Chief Executive Officer,
President and Director
Raymond Peterson 56 N/A Senior Vice President,
Marketing and
Merchandising
Roger Trier 57 N/A Vice President, Sales-
Workwear
Victor C. Delpine 54 N/A Vice President Operations
Terry L. Dober 40 N/A Vice President for Finance
Glen Freeman 67 1994 Director
Theodore L. Listerman 73 1995 Director
Julian H. Shaps 71 1995 Director
Jack Schultz 60 1995 Director
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<PAGE>
Howard Kaplan 49 N/A Secretary
S. Peter Lebowitz has served as Chief Executive Officer and
President of the Company since 1980. Mr. Lebowitz has been employed full time in
the mens' apparel industry for 40 years beginning in 1954 when he joined
Hochschild, Kohn & Co., Baltimore, Maryland. Thereafter, he served as a salesman
in the Menswear Divisions at The Van Heusen Company and as Vice-President of Big
Yank Corporation and Anvil Brands, Inc. From 1971 to 1979, he was Chairman and
Chief Executive Officer of Smith Brothers Manufacturing Company, Carthage,
Missouri, then the corporate owner of the Big Smith label. In 1980, he founded
the Company, and in 1985, the Company acquired certain assets of Smith Brothers
Manufacturing Company, including the ownership of the Big Smith label.
Raymond Peterson joined the Company in 1990 and serves as Senior Vice
President for Marketing and Merchandising with responsibility for all sales
activities. In 1968, Mr. Peterson joined Smith Brothers Manufacturing Company
where he served in various management positions until 1983. From 1984 to 1990,
Mr. Peterson was employed in a variety of senior management positions with Osh
Kosh B'Gosh, Inc. and Liberty Trouser Company, including service from 1989 to
1990 as Vice President of Sales of Liberty Trouser Company.
Roger Trier joined the Company in 1994 and has served as Vice President
for Sales Operations since December 1996. Prior to joining the Company, Mr.
Trier, after a twenty year career in apparel sales which included senior
management responsibilities for five years at Williamson-Dickie Manufacturing
Company and the last fifteen years at Osh Kosh B'Gosh, Inc. Mr. Trier is the
Vice President, Sales-Workwear and is in charge of all domestic workwear sales
activities.
Victor C. Delpine joined the Company in November 1994 and in December
1996 was appointed Vice President of Operations responsible for all sewing
plants, scheduling, production control, customer service and the distribution
and warehousing center. Mr. Delpine began his career in the apparel industry in
1967 at the Levi Strauss Company and since that time has held a variety of
senior manufacturing management positions at the Levi Strauss Company, Walls
Industries, Magnetex Corporation, Caravelle Corporation and Jostens Custom
Sportswear.
Terry L. Dober joined the Company in January 1994 as Chief Financial
Officer. He was appointed Vice President for Finance in November of 1995. As
such, he is responsible for all financial reporting, accounting, internal
auditing and related administrative functions. Mr. Dober, a Certified Public
Accountant, received a Bachelor's Degree in Business Administration/Accounting
from Monmouth College of Monmouth, Illinois in 1979. Mr. Dober has held
increasingly responsible financial, administrative, accounting and management
positions
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<PAGE>
in a variety of business environments. From November 1989 until December 1993 he
served as Controller of Miracle Recreation Equipment Co.
Glen Freeman was elected a director of the Company in September 1994.
Mr. Freeman served as General Manager of the Company since it acquired certain
assets of Smith Brothers Manufacturing Company in 1985. Mr. Freeman served as
Vice President of Merchandising of Smith Brothers Manufacturing Company from
1969, when it acquired Continental Manufacturing Company, to 1985. From 1945 to
1969, Mr. Freeman was employed by Continental Manufacturing Company. Mr. Freeman
has been employed in the workwear industry for 49 years.
Theodore L. Listerman was elected a director of the Company in January
1995. Mr. Listerman was involved in various aspects of the apparel business for
approximately thirty years. Mr. Listerman served in numerous senior management
positions at a number of major manufacturers and marketers of men's apparel
products. At present Mr. Listerman is a Doctoral candidate at the University of
Missouri.
Julian H. Shaps was elected a director of the Company in January 1995.
On November 1, 1980, Mr. Shaps retired from full time business activity after a
career that spanned forty years in the sales and merchandising segment of the
apparel industry which included approximately twenty five years in various
senior management positions at Salant, Inc. and approximately fifteen years as
Vice President of Sales and Merchandising at M. Fine & Sons, Inc.
Jack Schultz was elected a director of the Company in January 1995. Mr.
Schultz is an active consultant to the retail industry dealing with assignments
that cover a broad range of issues and entities involving virtually all major
segments of the retail industry. Prior to his full time entry into the
consulting business in April 1993. Mr. Schultz served as President of the
National Retail Federation, the largest retail industry trade association in the
country.
Howard Kaplan was elected Secretary of the Company in August 1994.
Since 1991, Mr. Kaplan has served as President of Fabric Resources Corporation,
a denim jobber, and from 1988 to 1991, he served as Purchasing Agent for the
Company. Mr. Kaplan is not currently an employee of the Company.
All directors hold office until the next annual meeting of the
stockholders of the Company and until their successors have been duly elected
and qualified, or until their earlier death, resignation or removal. The
Company's outside directors devote such time as is necessary and customary to
attend meetings of the Board of Directors and committees of the Board of
Directors and otherwise to perform their duties as directors.
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<PAGE>
The Company's officers are elected annually by, and serve at the
pleasure of, the Board of Directors, subject to the terms of any employment
agreements. Mr. Lebowitz has entered into employment agreements with the
Company. See "Executive Compensation- Employment Arrangements." No familial
relationships exist between any directors or officers of the Company.
COMMITTEES
The Company's Board of Directors has an Audit Committee and an
Executive Compensation Committee. Messrs. Glen Freeman and Theodore Listerman
serve on the Audit Committee and Messrs. Theodore Listerman, Jack Schultz and
Julian Shaps serve on the Executive Compensation Committee. The principal
financial personnel to review the results of the annual audit, the Audit
Committee also reviews the scope of the annual audit and other services before
being undertaken by the Company's auditors and reviews the adequacy and
effectiveness of the Company's internal accounting controls. The Executive
Compensation Committee administers the Company's 1994 Stock Incentive Plan and
makes recommendations to the full Board concerning compensation, including
incentive arrangements, for the Company's officers and employees.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Reporting
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company, the following persons failed to file, on
a timely basis, reports required by Section 16(a) of the Exchange Act, for the
number of transactions indicated, during fiscal year 1996:
Mssrs. Freeman, Listerman, Schultz and Shap each failed to file a
report during fiscal 1996 in connection with the 10,000 options granted to each
of them during such fiscal year. See "Item 10. Executive Compensation -
Compensation of Directors."
ITEM 10. EXECUTIVE COMPENSATION.
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<PAGE>
Summary Compensation Table. The following table sets forth information
concerning the compensation for services in all capacities for the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994, of the Chief
Executive Officer of the Company. No other executive officer of the Company
earned over $100,000 during such fiscal years.
<TABLE>
<CAPTION>
================================================================================================================================
Annual Compensation Long Term Compensation
- - --------------------------------------------------------------------------------------------------------------------------------
Other Annual
Name and Fiscal Salary Bonus Compensation Awards Options All Other
Principal Position Year ($) ($) ($)(1) (#) Compensation ($)
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S. Peter Lebowitz-Chief 1996 $300,000 - $9,973 - -
Executive Officer 1995 $250,000 - $8,700 175,000 (2) -
1994 $300,000 - $6,600 50,000 (3) -
================================================================================================================================
</TABLE>
(1) Represents the valuation of certain club membership dues and
automobile lease payments of approximately $9,973, $8,700 and
$6,600 for 1996, 1995 and 1994, respectively.
(2) Represents a one-time grant of options in connection with the
Company's initial public offering, the vesting of which was
contingent upon the Company achieving a certain level of net
income during the fiscal year ended December 31, 1995, which
level was not achieved.
(3) Represents a one-time grant of options in connection with the
Company's initial public offering, the vesting of which is
contingent upon the Company achieving a certain level of net
income during the fiscal years ended December 31, 1995 and
1996, which levels were not achieved.
EMPLOYMENT ARRANGEMENTS
The Company has entered into a three year employment agreement
with S. Peter Lebowitz pursuant to which he has agreed to serve as the Company's
President and Chief Executive Officer through December 31, 1998, at an annual
compensation of $300,000 and an annual bonus of up to $200,000 if the Company
achieves a certain specified levels of net income. Such levels were not achieved
in 1996. In addition, in 1994, Mr. Lebowitz was granted (i) options to purchase
up to 50,000 shares of common stock that would have vested had the Company
achieved certain specified levels of net income for fiscal year 1995 and (ii)
options to purchase up to 50,000 shares of common stock that would have vested
had the Company achieved certain specified levels of net income for fiscal year
1996. Such levels of
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<PAGE>
income were not achieved. In 1995, Mr. Lebowitz was granted options to purchase
up to 125,000 shares of Common Stock that would have vested had the Company
achieved a certain specified level of net income for fiscal year 1996. Such
levels of income were not achieved. All of the options were exercisable at an
exercise price equal to 75% of the market price of the Company's common stock at
the time the options would have become exercisable.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company will receive one thousand dollars
plus expenses for each meeting of the board that they attend. On June 1, 1995,
each director was granted an option under the Company's 1994 Stock Incentive
Plan to purchase 15,000 shares of the Company's common stock at an exercise
price of $4.00 per share. The directors agreed to defer the award of 10,000
additional options previously promised to them in order to facilitate the grant
of the remaining authorized options to a broad group of employees of the
Company. During 1996, following the authorization of additional options each
director was granted an option to purchase an additional 10,000 shares at an
exercise price of $1.00 per share, which grant had an effective date of June 1,
1995. Each grant vests in four substantially equal parts on each of the first
four anniversaries of the date of the grant. To the extent the options are
unexercised, they expire on the fifth anniversary of the date of the grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 1996, the number of
shares of common stock beneficially owned (and the percentage of the Company's
common stock) by (i) each person known (based solely on Schedules 13D or 13G
filed) to the Company to be the beneficial owner of more than 5% of the common
stock, (ii) each director of the Company, (iii) the Named Executive and (iv) all
directors and executive officers of the Company as a group (based upon
information furnished by such persons). Under the rules of the Commission, a
person is deemed to be a beneficial owner of a security if such person has or
shares the power to vote or direct the voting of such security or the power to
dispose of or to direct the disposition of such security. In general, a person
is also deemed to be a beneficial owner of any securities of which that person
has the right to acquire beneficial ownership within 60 days. Accordingly, more
than one person may be deemed to be a beneficial owner of the same securities.
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<PAGE>
NUMBER OF SHARES PERCENTAGE (%)
NAME AND ADDRESS BENEFICIALLY OWNED OF COMMON STOCK
- - ---------------- ------------------ ---------------
S. Peter Lebowitz 1,501,000 38.2%
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 201
Boca Raton, Florida 33433
Theresa Lebowitz and Michael S. 474,000 12.1%
Nelson, Esq. Esq., as trustees (2)
c/o Kramer, Levin, Naftalis &
Frankel
919 Third Avenue
New York, New York 10022
Glen Freeman (1) 12,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 201
Boca Raton, Florida 33433
Theodore Listerman (1) 12,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 201
Boca Raton, Florida 33433
Jack Schultz (1)(3) 14,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 201
Boca Raton, Florida 33433
Julian Shaps (1) 12,500 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 201
Boca Raton, Florida 33433
All directors and executive officers
as a group (10 persons) (4) 1,560,000 39.2%
- - -----------------
* Indicates beneficial ownership of less than one percent (1%).
(1) Includes 12,500 shares issuable upon exercise of options
exercisable within 60 days.
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<PAGE>
(2) Represents shares held in trust for the benefit of Barbara Lynn Van
Achte, Karen Sue Hart and Wendy Ann Lebowitz, with respect to which
Mrs. Lebowitz and Mr. Nelson, a partner at the law firm of Kramer,
Levin, Naftalis & Frankel, serve as trustees. Under the Trust
Agreement, Mrs. Lebowitz and Mr. Nelson share voting and dispositive
power, subject only to the beneficiaries' right to withdraw the shares
under certain circumstances. Mrs. Lebowitz is the wife, and the three
trust beneficiaries are the daughters, of Mr. Lebowitz.
(3) Includes 2,000 shares issuable upon exercise of warrants exercisable
within 60 days.
(4) Includes options and warrants to purchase 52,000 shares exercisable
within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company purchases some of its raw materials from a corporation
whose President is the Secretary of the Company. Such purchases for the years
ended December 31, 1996 and 1995 were $90,847 and $1,053,540, respectively.
Accounts payable to this related party totaled $0 and $80,034 at December 31,
1996 and 1995, respectively. Accounts receivable from this related party totaled
$0 and $115,700 at December 31, 1996 and 1995, respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit No.
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
4(a) Form of Common Stock Purchase Warrant.*
(b) Form of Warrant Agreement.*
10(a) Form of Big Smith Brand, Inc.'s (the "Company") 1994 Stock Incentive
Plan.*
(b) Employment Agreement between the Company and S. Peter Lebowitz.*
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<PAGE>
(c) Loan and Security Agreement, dated June 25, 1992, between the Company
and Mercantile Business Credit Inc.*
Amendment No. 1, dated June 14, 1993*
Amendment No. 2, dated December 23, 1993*
Amendment No. 3, dated April 4, 1994*
Amendment No. 4, dated October 14, 1994*
Amendment No. 5, dated November 4, 1994*
Amendment No. 6, dated December 15, 1994*
Amendment No. 7, dated June 30, 1995***
(d) Authorization and Loan Agreement (Guaranty Loans), dated May 19, 1992,
between the Company and the U.S. Small Business Administration.*
(e) Loan and Security Agreement, dated September 15, 1992, between the
Company and Miami Area Economic Development Service, Inc.*
(f) Asset Purchase Agreement, dated August 16, 1994, between the Company
and Heartland USA Apparel Manufacturing, Inc.*
(g) Distribution Agreement, dated February 1, 1994, between the Company
and Betty Smith Co., Ltd.**
(h) Trademark Merchandise License Agreement, dated October 26, 1993,
between the Company and Caterpillar Inc.**
Letter from Caterpillar Inc. to counsel for the Company, dated
October 3, 1994.**
Amendment No. 1, dated July 1, 1994**
Amendment No. 4, dated August 8, 1994.**
Amendment No. 5, dated March 10, 1995.***
Amendment No. 6, dated September 28, 1995***
Amendment No. 7, dated November 7, 1995****
(i) License Agreement dated July 1994, between the Company and Wolverine
World Wide, Inc.**
(j) Use of Trademark and Distribution Agreement, dated May 1994, between
the Company and The Big Yellow Corporation Limited.**
(k) Distribution Agreement, dated October 1, 1994, between the Company and
Fashion Fever C.C.**
Letter Agreement between the Company and Fashion Fever C.C., dated
October 1, 1994.**
(l) Memorandum of Understandings and Agreements, dated May 1, 1994,
between the Company and Shuken Co. Ltd.**
- 28 -
<PAGE>
(m) Exclusive Distribution Agreement, dated June 1, 1994, between the
Company and All-American.**
(n) Distribution Agreement, dated June 1, 1994, between the Company and
Off-Shore Italia S.R.L.**
(o) Distribution Agreement, dated September 1, 1994, between the Company
and Double Impact GMBH.**
Letter Agreement, dated September 16, 1994.**
(p) Distribution Agreement, dated October 1, 1994, between the Company
and BS of Germany GMBH.**
(q) Stock Option Agreement between the Company and S. Peter Lebowitz.*
(r) Stock Option Agreement between the Company and S. Peter Lebowitz.*
(s) Underwriting Agreement between Barington Capital Group, L.P. (the
"Underwriter") and the Company.*
(t) Underwriter's Option Agreement.*
(u) Consulting Agreement between the Company and the Underwriter.*
(v) Distribution Agreement, dated April 1, 1995, between the Company
and Yesil Kuhdura A.S.****
(w) Distribution Agreement, dated March 1, 1995, between the Company
and Peter Schaer Handels AG.***
(x) Distribution Agreement, dated April 1, 1995, between the Company and
GAFA, S.A.****
(y) Employment Agreement between the Company and S. Peter Lebowitz***
(z) Offshore Securities Subscription Agreement, dated April 2, 1997,
between the Company and Willora Company Limited *****
(aa) Form of Big Smith Brands, Inc. 6% Convertible Debenture due March 31,
2000, dated April 2, 1997*****
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997*****
27 Financial Data Schedule*****
- - --------------------------
* 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").
** Previously filed with, and incorporated herein by reference to Form
SB-2, subject to a confidentiality request.
- 29 -
<PAGE>
*** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, filed on April 7, 1995.
**** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, filed on April 15, 1996.
***** Filed herewith
(b REPORTS ON FORM 8-K.
None.
- 30 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 14, 1997 BIG SMITH BRANDS, INC.
By: /s/ S. Peter Lebowitz
S. Peter Lebowitz
Chairman of the Board,
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ S. Peter Lebowitz Chairman of the Board, President April 14, 1997
- - --------------------------- and Chief Executive Officer
S. Peter Lebowitz (Principal Executive Officer)
/s/ Terry L. Dober Chief Financial Officer April 14, 1997
- - ---------------------------
Terry L. Dober (Principal Accounting Officer)
/s/ Glen Freeman Director April 14, 1997
- - ---------------------------
Glen Freeman
/s/ Julian H. Shaps Director April 14, 1997
- - ---------------------------
Julian H. Shaps
/s/ Theodore L. Listerman Director April 14, 1997
- - ---------------------------
Theodore L. Listerman
/s/ John J. Schultz Director April 14, 1997
- - ---------------------------
Jack Schultz
- 31 -
<PAGE>
BIG SMITH BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants..............................................................................1
Consolidated Balance Sheets as of December 31, 1996 and 1995...................................................2
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995................................................................................4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996 and 1995....................................................................5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995....................................................................6
Notes to Consolidated Financial Statements.....................................................................7
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Big Smith Brands, Inc.
Carthage, Missouri
We have audited the accompanying consolidated balance sheets of BIG SMITH
BRANDS, INC. AND SUBSIDIARY as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BIG SMITH
BRANDS, INC. AND SUBSIDIARY as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the two years ended December 31,
1996 and 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 15, the Company's
primary lending arrangement does not currently extend beyond June 30, 1997, and
the Company's liquidity needs prior to that date could exceed the amount of
borrowings available under the existing agreement. This raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 15. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Joplin, Missouri
February 26, 1997, except for Note 14, as to which the date is April 2, 1997
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---- ----
CURRENT ASSETS
Cash $ 170,551 $ 4,207
Temporary investments 144,906 126,775
Accounts receivable, less allowance for
doubtful accounts;
1996 - $326,144, 1995 - $46,579 3,150,830 2,782,049
Royalties receivable 1,195,803 714,542
Inventories 4,144,764 11,507,966
Prepaid expenses 151,978 209,220
Deferred income taxes 319,873
----------- -----------
Total Current Assets 8,958,832 15,664,632
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Land 20,000 20,000
Buildings 471,109 460,139
Equipment 1,936,848 1,718,301
Vehicles 81,511 81,511
----------- -----------
2,509,468 2,279,951
Less accumulated depreciation 1,098,311 926,234
----------- -----------
1,411,157 1,353,717
OTHER ASSETS
Trademarks, less accumulated amortization;
1996 - $48,720, 1995 - $14,329 467,140 501,531
Other 12,130 192,964
----------- -----------
479,270 694,495
----------- -----------
$10,849,259 $17,712,844
=========== ===========
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Current maturities of long-term debt $ 4,213,168 $ 2,031,809
Checks outstanding in excess of bank balance 284,552 177,344
Accounts payable 1,985,318 3,020,436
Accrued expenses 409,780 240,519
Accrued restructuring/litigation 651,302
Accrued royalties 665,674 313,807
Due to stockholder 50,028
------------ ------------
Total Current Liabilities 8,209,794 5,833,943
LONG-TERM DEBT 587,221 5,782,542
------------ ------------
DEFERRED INCOME TAXES 99,305
------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
1996 and 1995 - 3,930,000 shares 39,300 39,300
Additional paid-in capital 6,315,818 6,315,818
Retained earnings (deficit) (4,302,874) (358,064)
------------
2,052,244 5,997,054
$ 10,849,259 $ 17,712,844
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
NET SALES
<S> <C> <C>
Trade $ 21,804,928 $ 21,486,773
Royalties, net of related costs of $937,546 and
$754,224 in 1996 and 1995, respectively 1,298,217 1,124,169
------------ ------------
23,103,145 22,610,942
COST OF GOODS SOLD 19,840,931 18,312,193
------------ ------------
GROSS PROFIT 3,262,214 4,298,749
------------ ------------
OPERATING EXPENSES
Selling 1,966,356 1,894,891
General and administrative 2,547,839 2,263,807
Restructuring and litigation charges 1,709,358
--------- -----------
6,223,553 4,158,698
INCOME (LOSS) FROM OPERATIONS (2,961,339) 140,051
------------ -----------
OTHER INCOME (EXPENSE)
Miscellaneous income 9,093 5,026
Interest income 15,794 39,469
Interest expense (760,291) (791,282)
Foreign currency transaction gain (loss) (27,499) (39,137)
------------ ------------
(762,903) (785,924)
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (3,724,242) (645,873)
PROVISION (CREDIT) FOR INCOME TAXES 220,568 (220,568)
------------ ------------
NET LOSS ($ 3,944,810) ($ 425,305)
============ ============
NET INCOME (LOSS) PER SHARE (PRIMARY AND
FULLY DILUTED) ($ 1.00) ($ 0.12)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,930,000 3,687,575
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
----- ------- --------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 1 $ $ 434,241 $ 434,242
DIVIDENDS PAID - $.05 PER
SHARE (100,000) (100,000)
TRANSFER OF S
CORPORATION
EARNINGS INCLUDED
IN RETAINED EARNINGS
TO ADDITIONAL PAID-IN
CAPITAL UPON
CONVERSION TO
C CORPORATION 267,000 (267,000)
SALE OF COMMON STOCK
PURSUANT TO AN INITIAL
PUBLIC OFFERING, NET
OF OFFERING COSTS OF
$ 1,731,883 39,299 6,048,818 6,088,117
NET LOSS - 1995 (425,305) (425,305)
----------- ----------- ----------- -----------
BALANCE (DEFICIT),
DECEMBER 31, 1995 39,300 6,315,818 (358,064) 5,997,054
NET LOSS - 1996 (3,944,810) (3,944,810)
----------- ----------- ----------- -----------
BALANCE (DEFICIT),
DECEMBER 31, 1996 $ 39,300 $ 6,315,818 ($4,302,874) $ 2,052,244
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss ($3,944,810) ($ 425,305)
Items not requiring cash:
Depreciation and amortization 240,146 201,940
Deferred income taxes 220,568 (220,568)
Loss on sale or impairment of property and equipment 193,409
Changes in:
Accounts receivable (368,781) 404,955
Royalties receivable (481,261) (456,064)
Inventories 7,363,202 (3,903,173)
Prepaid expenses 57,242 (157,691)
Other assets 165,835 (165,835)
Accounts payable and accrued expenses 267,078 (624,678)
----------- -----------
Net cash provided by (used in) operating activities 3,712,628 (5,346,419)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment 35,670
Purchase of property and equipment (230,437) (460,295)
Purchase of trademark (115,860)
Purchase of temporary investments (18,131) (126,775)
Refund of security deposits 14,999
----------- -----------
Net cash used in investing activities (197,899) (702,930)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance 107,208 (87,939)
Net borrowings (repayments)
under line-of-credit agreement (3,121,767) 330,381
Principal payments on long-term debt (283,798) (307,412)
Principal payments on loan from stockholder (50,028)
Initial public offering costs paid (1,620,468)
Dividends paid (100,000)
Proceeds from issuance of capital stock 7,820,000
Net cash provided by (used in) financing activities (3,348,385) 6,034,562
----------- -----------
INCREASE (DECREASE) IN CASH 166,344 (14,787)
CASH, BEGINNING OF YEAR 4,207 18,994
----------- -----------
CASH, END OF YEAR $ 170,551 $ 4,207
=========== ===========
</TABLE>
-6-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's revenues are predominately earned from manufacture and sale
of quality work apparel under a variety of brand names, including Big Smith,
Smith Mountain Classics and Big Smith Vintage and the licensed brand,
Caterpillar. As discussed in Note 13, the Caterpillar license was purportedly
terminated in 1996. The Company extends unsecured credit principally to national
chains and local stores throughout the United States and certain manufacturers
and distributors in Europe. One unaffiliated customer (Wal-Mart Stores, Inc.)
accounted for 30.9% and 27.5% of the Company's operating revenues for the years
ended December 31, 1996 and 1995, respectively. Accounts receivable for this
customer totaled approximately $1,010,000 and $853,000 at December 31, 1996 and
1995, respectively. A second unaffiliated customer (Kmart Corp.) accounted for
7.3% and 37.9% of operating revenues for the years ended December 31, 1996 and
1995, respectively. Accounts receivable for this customer totaled approximately
$0 and $648,000 at December 31, 1996 and 1995, respectively. Sales to foreign
customers accounted for 22% and 12% of operating revenues for the years ended
December 31, 1996 and 1995, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Big Smith Global Limited. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY PRICING
All inventories are stated at the lower of cost, determined using the
first-in, first-out method, or market.
-7-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful life of
each asset. Annual depreciation is computed using the straight-line method.
TRADEMARKS
Trademark acquisition costs are being amortized using the straight-line
method over an estimated economic benefit period of fifteen years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
common shares outstanding during the year. Stock warrants and options
outstanding are common stock equivalents and are included in the calculation of
earnings per share to the extent they are dilutive using the treasury-stock
method. Primary and fully-diluted earnings per share are the same.
RECLASSIFICATION
Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 financial statement presentation. These reclassifications
had no effect on net earnings.
NOTE 2: INVENTORIES
Inventories at December 31, 1996 and 1995 consisted of the following:
1996 1995
---- ----
Raw materials $ 1,239,152 $ 1,848,870
Work-in-process 364,946 1,205,774
Finished goods 2,540,666 8,453,322
----------- -----------
$ 4,144,764 $11,507,966
=========== ===========
-8-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3: LONG-TERM DEBT
Long-term debt includes the following notes payable:
1996 1995
---- ----
Revolving line of credit (A) $3,633,177 $6,754,944
Equipment financing and working capital (B) 164,521 189,451
Equipment financing and working capital (C) 357,439 469,956
Trademark note (D) 300,000 400,000
Equipment financing (E) 269,769
Other 75,483
---------- ----------
4,800,389 7,814,351
Less current maturities 4,213,168 2,031,809
---------- ----------
$ 587,221 $5,782,542
========== ==========
Aggregate annual maturities of long-term debt at December 31, 1996 were:
1997 $4,213,168
1998 236,919
1999 233,111
2000 62,860
2001 30,464
Thereafter 23,867
-----------
Total $4,800,389
===========
(A) The line of credit as amended, which matures on June 30, 1997, allows for
borrowing up to $9,000,000 with borrowing levels based on a specified
percentage of eligible accounts receivable and inventories. The loan bears
interest at prime rate plus .75 percent (9.00% at December 31, 1996). The
agreement also provides for additional interest under certain
circumstances and a fixed commitment fee.
The loan is collateralized by accounts receivable, inventories, property
and equipment, general intangibles and insurance of $1,000,000 on the life
of the Company's chief executive officer. The loan agreement contains
various restrictions regarding additional borrowings, capital
expenditures, business acquisitions, sales of property, changes in
ownership, compensation of owners and payment of dividends and requires
the Company to maintain certain financial conditions. At December 31,
1996, the Company was not in compliance with certain of the financial
conditions covenants, including rolling average cost of goods sold to
average inventory and interest coverage ratios and levels of pre-tax
income and stockholders' equity. The Company is also in noncompliance with
the requirement to negotiate new financial conditions covenants for 1997
with the lender by January 15, 1997.
-9-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3: LONG-TERM DEBT (CONTINUED)
(B) The equipment and working capital loan bears interest at 4% and is payable
$2,673 per month including interest, due September 15, 2002 and secured by
certain equipment and general intangibles.
(C) The equipment and working capital loan bears interest at .5% over prime
(8.75% at December 31, 1996) and is payable $12,575 per month including
interest; due March 11, 1999; secured by property and equipment, a $50,000
certificate of deposit and insurance of $500,000 on the life of the
Company's chief executive officer and partially guaranteed by the U. S.
Small Business Administration. In connection with this note payable, the
Company is required, among other things, to maintain certain conditions,
including a limitation on officer's compensation and compliance with the
covenants for the line of credit [(A) above]. This loan is classified as a
current liability at December 31, 1996, because of the Company's
noncompliance with the covenants for the line of credit.
(D) The trademark note is non-interest bearing, payable in annual installments
of $100,000 and due April 18, 1999.
(E) The equipment loan bears interest at 9.7% and is payable $7,921 per month
including interest, due April 20, 2,000 and secured by equipment.
NOTE 4: OPERATING LEASES
The Company leases real property under noncancellable operating leases for
periods of 36 to 60 months. Rent expense for the years ended December 31, 1996
and 1995 was approximately $194,000 and $199,000, respectively.
Future minimum lease payments at December 31, 1996 were:
1997 $62,507
1998 5,525
--------
Total future minimum lease payments $68,032
=======
NOTE 5: INCOME TAXES
Prior to becoming a public company, the Company elected under both Federal
and State income tax laws to be taxed as an S Corporation. Under this election,
the Company's income was taxable to the stockholders on their individual income
tax returns. Upon issuance of common stock to the public (Note 10), the Company
changed its income tax status to a C Corporation.
-10-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5: INCOME TAXES (CONTINUED)
The provision (credit) for income taxes includes these components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Taxes currently payable $ 0 $ 0
Deferred income taxes:
Change in tax status from S Corporation to C Corporation 32,488
Benefits of operating loss carryforwards (262,501)
Other 9,445
Change in beginning of year valuation allowance 220,568
--------- ---------
$220,568 ($220,568)
======== ==========
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on the
balance sheets were:
<TABLE>
<CAPTION>
1996 1995
---- ----
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts $ 127,196 $ 18,166
Inventories 68,392
Provision for impairment losses on property and equipment 60,966
Accrued health insurance 55,544 15,600
Accrued compensated absences 4,866
Accrued stock option compensation 17,997 9,039
Accrued restructuring litigation 187,200
Net operating loss carryforwards 1,168,603 262,501
Foreign tax credit carryforward 14,567 14,567
----------- ---------
1,705,331 319,873
Deferred tax liabilities:
Accumulated depreciation (91,578) (99,305)
----------- ---------
Net deferred tax asset before valuation 1,613,753 220,568
----------- ---------
Valuation allowance:
Beginning balance 0 0
(Increase) decrease during the period 1,613,753
----------- ---------
Ending balance 1,613,753 0
Net deferred tax asset (liability) $ 0 $ 220,568
=========== =========
</TABLE>
-11-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5: INCOME TAXES (CONTINUED)
The above net deferred tax asset (liability) is presented on the balance
sheets as follows:
1996 1995
---- ----
Deferred tax asset - current $ 461,195 $319,873
Deferred tax asset - long-term 1,152,558
Deferred tax liability - long-term (99,305)
Valuation allowance (1,613,753) 0
------------ --------
Net deferred tax asset (liability) $ 0 $220,568
=========== ========
A reconciliation of income tax expense (credit) at the statutory rate to
the Company's actual income tax expense credit is shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed at the statutory rate (34%) ($1,266,242) ($219,597)
Net effect of S Corporation loss 22,862
Increase (decrease) resulting from:
Non-deductible expenses 25,117 17,144
State income taxes and other, net of federal tax benefit (152,060) (40,977)
Change in deferred tax asset valuation allowance 1,613,753
------------ ---------
Actual tax provision (credit) $ 220,568 ($220,568)
=========== =========
</TABLE>
The Company has unused operating loss and tax credit carryforwards of
approximately $2,996,000 and $14,500, respectively, at December 31, 1996 which
expire principally in 2010 and 2011.
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Included in accounts receivable at December 31, 1996, is approximately
$957,000 due from a domestic company in connection with a bulk sale of
Caterpillar inventories and approximately $565,000 due from certain foreign
entities. The Company is involved in pending or threatened litigation with each
of these entities as discussed in Note 13. The Company has recorded an
-12-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
allowance related to these receivables of $200,000 at December 31, 1996, which
management believes to be adequate based on information currently available.
However, the amounts and timing of collections depends, among other factors, on
the outcome of those proceedings and could differ materially in the near term.
ROYALTIES RECEIVABLE AND PAYABLE
At December 31, 1996, the Company has recorded royalties receivable of
$1,195,803 as a current asset and royalties payable of $665,674 as a current
liability. As discussed in Note 13, the Company is currently involved in various
litigation relating to the purported termination of the Caterpillar licensing
agreement, including amounts to be received from licensees for sale of
Caterpillar goods manufactured abroad and royalties to be paid to Caterpillar.
Based on available information and advice of legal counsel, management believes
the amounts of recorded royalties receivable and payable fairly reflect the
respective amounts due and payable under the agreements. Because the amounts are
involved in litigation, events could occur in the near term that would
materially affect the amounts and timing of collections and payments of these
accounts.
PROVISION FOR INVENTORY OBSOLESCENCE AND MARKETABILITY
At December 31, 1996, the Company had quantities of certain fabric, trim
and finished goods that exceeded the current year volume of sales or use.
Management reduced the carrying value of these items by approximately $169,000
through a charge included in 1996 cost of goods sold and has developed plans for
use or disposition of these goods. No estimate can be made of any additional
loss which might result should management's plans be unsuccessful.
REDUCTION IN VALUE OF LONG-LIVED ASSETS
In connection with the restructuring/litigation described in Note 13, the
Company recorded a charge of approximately $228,000 in 1996 to recognize
impairment in the carrying value of certain building improvements and equipment.
The amount of that estimate could vary materially in the near term.
SELF INSURANCE
The Company maintains a self-insured health program covering substantially
all of its employees. The Company retains the liability for claim amounts up to
$25,000 annually for each covered employee and has reinsured the liability for
annual claim amounts in excess thereof and $1,000,000 in aggregate with a
commercial insurer. Provisions for claims costs are recorded based upon
management's estimates of the Company's aggregate liability for claims incurred.
Claims payments based on actual claims ultimately filed could differ materially
from these estimates.
-13-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
LITIGATION-RELATED OBLIGATIONS
As discussed in Note 13, the Company is a defendant in several lawsuits.
The Company intends to defend against these lawsuits and pursue counterclaims,
if available. The financial statements include estimates of the costs of
defense; they include no accruals of any amounts receivable for counterclaims.
The amounts of ultimate costs related to these lawsuits and amounts which may be
recoverable through counterclaims could differ materially in the near term.
MAJOR CUSTOMERS
Current vulnerabilities due to concentrations of major customers are
discussed in Note 1.
REVENUES FROM MAJOR PRODUCTS
In 1996, approximately $8.3 million of the Company's sales revenues and
substantially all of its royalty revenues pertained to Caterpillar branded
merchandise. See Note 13.
CREDIT ARRANGEMENT WITH MAJOR LENDER
At December 31, 1996, the Company's current liabilities included
borrowings under a revolving line of credit agreement which matures on June 30,
1997. The Company has not obtained a renewal commitment from the lender as of
February 26, 1997.
NOTE 7: LICENSING AGREEMENTS
The Company has entered into licensing agreements with two companies,
Caterpillar, Inc. ("Caterpillar") and Wolverine, to market products under their
respective trademarks. The agreements provide for payments of royalties based on
net sales subject to minimum annual amounts. The Company also receives royalties
for the sale abroad of certain Caterpillar goods manufactured abroad. Royalty
expense, including royalties on both foreign and domestic manufactured goods,
for the years ended December 31, 1996 and 1995 was $1,425,327 and $968,733,
respectively. Net royalty income for the years ended December 31, 1996 and 1995
was $1,298,217 and $1,124,169, respectively.
As discussed in Note 13, the Company's license with Caterpillar
purportedly has been terminated. The royalty agreement with Wolverine has been
terminated by mutual agreement.
-14-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: STOCK OPTIONS
SPECIAL STOCK OPTIONS
The Company granted the chief executive officer options to purchase up to
175,000 and 50,000 shares of common stock for 1995 and 1996, respectively,
exercisable only if the Company achieved certain specified levels of net income
for those years. The 1995 and 1996 options were forfeited because the Company
did not achieve the specified net income levels.
STOCK OPTION PLAN
Under the Company's stock option plan, 500,000 shares of common stock were
reserved for issuance upon exercise of options granted to directors, officers
and employees of the Company. Options issued through December 31, 1996 carry
exercise prices ranging from 35% to 100% of the quoted market price on the date
of the grant. The options vest equally over a period of four years following the
date of grant and the unexercised portion of the option expires and ceases to be
exercisable on the earlier of the five years after the date of grant or a
specified date following termination of employment.
In 1996, the Company elected to continue measuring compensation cost using
the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees".
Compensation cost recognized for the stock option plan amounted to $22,919 and
$23,178 for 1996 and 1995, respectively. Disclosures about the fair value of
options and pro forma disclosures of the effect of measuring compensation based
on the fair value method of accounting have not been presented because
management believes such values do not have a material effect.
Information related to options, other than the special stock options
discussed above, is summarized below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Option
------- ----------
<S> <C> <C>
Outstanding at December 31, 1994 0
Granted 136,650 $ 3.18
Exercised 0
Forfeited 3,650 $ 3.18
-------
Outstanding at December 31, 1995 (0 exercisable) 133,000 $ 3.18
Granted 105,000 $ 2.77
Exercised 0
Forfeited 35,350 $ 3.18
--------
Outstanding at December 31, 1996 (24,413 exercisable) 202,650 $ 2.77
=======
</TABLE>
-15-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: STOCK OPTIONS (CONTINUED)
Information related to options outstanding at December 31, 1996:
Exercise price range $1.00 - $4.00
Number of options:
Outstanding 202,650
Exercisable 24,413
Weighted average exercise price:
Outstanding $ 2.97
Exercisable $ 3.18
Weighted average remaining contractual life 4.5 years
NOTE 9: ADDITIONAL CASH FLOW INFORMATION
1996 1995
---- ----
NONCASH INVESTING AND FINANCING ACTIVITIES
Accounts payable incurred for purchase of
property and equipment $129,766
Note payable incurred for purchase of trademark $400,000
Long-term debt incurred for purchase of equipment $391,603
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid $785,223 $796,647
NOTE 10: INITIAL PUBLIC OFFERING
On February 8, 1995, the Company made a public offering of 850,000 units,
at $8.00 per unit, each unit consisting of two shares of common stock, par value
$.01 per share, and two common stock purchase warrants. Each of the warrants
entitles the holder to purchase one share of common stock until February 8,
1998, at an exercise price of $4.60 per share. The units offered do not include
options issued to the underwriter to purchase 85,000 units, for a period of five
years from the date of the offering, at an exercise price per unit equal to 120%
of the initial public offering price. In conjunction with the offering, the
Company adopted a 19,750 for 1 stock split. On March 29, 1995, the underwriter
purchased an additional 127,500 units pursuant to the underwriter's
overallotment option.
-16-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments.
CASH AND CHECKS OUTSTANDING IN EXCESS OF CARRYING VALUE
The carrying amount is a reasonable estimate of fair value.
TEMPORARY INVESTMENTS
For these short-term instruments which consist of a certificate of deposit
and other interest-bearing accounts with banks, the carrying amount is a
reasonable estimate of fair value.
NOTES PAYABLE AND LONG-TERM DEBT
Fair value is estimated based on the borrowing rates currently available
to the Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash $170,551 $170,551 $4,207 $4,207
Temporary investments 144,906 144,906 126,775 126,775
Financial liabilities:
Checks outstanding in excess of bank balance 284,552 284,552 177,344 177,344
Long-term debt 4,800,189 4,883,629 7,814,351 7,785,488
Due to stockholder 50,028 45,792
NOTE 12: RELATED PARTY TRANSACTIONS
The Company purchases some of its raw materials from a corporation whose
President is the Secretary of the Company. Such purchases for the years ended
December 31, 1996 and 1995, were $90,847 and $1,053,540, respectively. Accounts
payable to this related party totaled $0 and $80,034 at December 31, 1996 and
1995, respectively. Accounts receivable from this related party totaled $0 and
$115,700 at December 31, 1996 and 1995, respectively.
-17-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13: LITIGATION AND RESTRUCTURING
CATERPILLAR LITIGATION AND OTHER RELATED MATTERS
The Company is currently engaged in litigation in the United States and in
Great Britain with Caterpillar, Inc. with respect to the Company's rights to
continue to manufacture and sell Caterpillar branded products. The Company
believes that its agreement with Caterpillar licensing it to manufacture and
sell such products has not been properly terminated and it remains licensed to
produce such goods through December 31, 1999, the expiration date of the
license. On August 19, 1996, the U. S. District Court ruled that the license had
been properly terminated, a ruling which the Company appealed. On December 6,
1996, the U. S. Court of Appeals denied the appeal.
The Company has filed a counterclaim against Caterpillar and other
parties. All aspects of the litigation are currently pending before the U.S.
District Court but have been stayed pending a scheduling conference which has
been set for mid-April, 1997. The Company expects the case to move to discovery.
There can be no assurance that the outcome of the litigation will be
favorable to the Company, that the Company's defenses to the claims against it
will be vindicated or that any of its counterclaims will be held to be valid. If
the outcome of the litigation is not favorable, such outcome could have a
material effect on the financial conditions of the Company.
The Company is involved in pending or threatened litigation in foreign
jurisdictions with a number of its foreign distributors in connection with their
refusal to pay royalties and accounts receivable for the sales of goods to such
distributors, which the Company believes to be due in respect of sales by such
distributors of Caterpillar branded products prior to the Company's ceasing to
sell such products. Additionally, certain of these distributors have made claims
against the Company relating to the effects of the purported termination of the
Caterpillar license on their arrangements with the Company.
Although the Company's international attorneys have advised the Company
that it has valid claims in these actions for royalties and accounts receivable
owing, there can be no assurance that the outcome of these litigations or of any
of them will be, on net, favorable to the Company. Additionally, the Company
believes that the outcome of these actions, and particularly with respect to any
claims against it in these actions, may depend, in part, on the outcome of the
Caterpillar litigation.
-18-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13: LITIGATION AND RESTRUCTURING (CONTINUED)
A domestic company which purchased substantially all of the Company's
remaining Caterpillar inventory in late 1996 has disputed and refused to pay the
remaining balance of its obligation. The Company is actively pursuing
collection, the ultimate timing and amount of which may be determined in part by
the outcome of the Caterpillar matters described above.
RESTRUCTURING
In the third quarter of 1996 because of the purported termination of the
Caterpillar licensing agreement and the resulting litigation discussed above,
management decided to cease to manufacture, sell or license Caterpillar branded
products and refocus efforts on development of the Company's own brands. On
August 25, 1996, management adopted a plan to downsize and restructure the
Company's operations. This plan includes liquidation of the remaining inventory
of Caterpillar goods, closure of two manufacturing facilities, sale or transfer
of equipment at those facilities, termination or relocation of certain employees
and reorganization of the remaining personnel and business structure. Completion
of the plan is expected to occur in 1997.
Provisions were accrued in 1996 for the costs associated with the
litigation arising from the Caterpillar agreement and the subsequent
restructuring of the Company. Provisions with respect to inventory writedowns
and closeouts were accrued in cost of goods sold. Operating expenses were
accrued for the costs of closing domestic and foreign facilities and impairment
of property and equipment and other long-lived assets; as well as the costs of
litigation and collection of disputed amounts receivable related to the
Caterpillar matters.
Activity in the accrued restructuring/litigation liability account during
1996 is summarized as follows:
Costs and losses originally recognized $ 1,397,481
Subsequent adjustments of costs and losses recognized 311,877
Cash paid and noncash amounts utilized (1,058,056)
-----------
Balance, December 31, 1996 $ 651,302
===========
-19-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 14: SUBSEQUENT EVENT - ADDITIONAL FINANCING
On April 2, 1997, the Company sold convertible debentures in the principal
amount of $1,700,000 to an offshore accredited investor in a private placement.
The debenture bears interest at 6%, matures on March 31, 2000 and is unsecured.
After May 15, 1997, the debenture is convertible into common stock of the
Company at the option of the holder. The conversion price specified is the
lesser of $2.80 or 70% of the stock's market price on the conversion date if
converted between May 16 and July 10, 1997, and the lesser of $2.80 or 67.5% of
the stock's market price on the conversion date if converted after July 10,
1997. The Company has agreed to redeem outstanding debentures at 148% of initial
principal amount if required to do so by any applicable law, rule or regulation
of any regulatory body, securities exchange or trading market. The Company paid
fees aggregating $255,000 and issued a warrant to purchase 100,000 shares of the
Company's common stock to the investment banker that arranged the transaction.
The warrant provides for a purchase price of $2.00 per share and expires on
March 31, 2002.
Because at the time of issuance the debenture holder's conversion rights
allowed a conversion into common stock with a market value in excess of the
debenture principal, this excess at the debenture issuance date will be credited
to additional paid-in capital. The resulting discount on the debentures will be
charged to 1997 operations as imputed interest.
NOTE 15: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As discussed in Notes 3 and 6, the Company's principal lending arrangement
does not currently extend beyond June 30, 1997, and the Company's liquidity
needs prior to that date could exceed the amount of borrowings available under
the existing agreement. The Company is taking several steps to obtain additional
sources of liquidity and provide for a longer-term lending arrangement,
including:
o Making new loan arrangements. The Company has received several
proposals relating to lending arrangements which would provide for
term loans on property, equipment and other long-lived assets;
collateralized borrowings against accounts receivable and inventory;
and additional working capital lines of credit. The proposals
received have been from entities of national repute in this segment
of the financial services industry. These proposals are all subject
to the lender's due diligence process after acceptance of a proposal
by the Company. Management anticipates the Company will accept one
of the several proposals some time during the week of April 14,
1997, although no assurances are made that an acceptance will occur
by that date. Management believes that the final approval process
will be completed within thirty days after the completion of the due
diligence.
o Pursuing the collection of disputed accounts receivables (see Note
6).
-20-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Management believes it will be successful in meeting the Company's
liquidity needs. Although not currently planned, realization of assets in other
than the ordinary course of business in order to meet liquidity needs could
incur losses not reflected in these financial statements.
-21-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED, NOT REVIEWED
BY INDEPENDENT ACCOUNTANTS)
Provision
Total Operating (Credit) For Earnings
Operating Income Other Income (Loss) Per
Calendar Quarter Revenues (Loss) Expenses Taxes Share
- - ---------------- -------- ------ -------- ----- -----
1996
<S> <C> <C> <C> <C> <C>
First $ 4,537,498 $ (67,127) $ 199,999 $(104,178) $ (0.04)
Second 4,903,314 (224,565) 197,923 (164,773) (0.07)
Third(1) 6,541,815 (2,171,329) 181,884 504,087 (0.73)
Fourth ( 7,120,518 (498,318) 183,097 (14,568) (0.16)
------------ ----------- --------- --------- --------
$ 23,103,145 ($2,961,339) $ 762,903(2) $ 220,568 $ (1.00)
============ =========== ========= ========= ========
1995
First $ 4,394,536 $ 71,510 $ 182,977 $ (14,248) $ (0.03)
Second 5,679,590 17,457 151,023 (48,087) (0.03)
Third 6,618,458 253,539 223,032 12,745 0.01
Fourth 5,918,358 (202,455) 228,892 (170,978) (0.07)
------------ ----------- --------- --------- --------
$ 22,610,942 $ 140,051 $ 785,924(2) ($220,568) $ (0.12)
============ =========== ========= ========= ========
</TABLE>
(1) Operating income (loss) reflects provisions of $311,877 and $1,397,481 for
the fourth and third quarters, respectively, for restructuring and
litigation costs. Also included in third quarter operating results are
$814,000 of inventory writedowns charged to cost of goods sold.
(2) Other expenses are comprised primarily of interest expense in the amounts
of $760,291 and $791,282 for 1996 and 1995, respectively.
-22-
<PAGE>
EXHIBITS INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
--- ----------- ----
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
4(a) Form of Common Stock Purchase Warrant.*
(b) Form of Warrant Agreement.*
10(a)Form of Big Smith Brand, Inc.'s (the "Company") 1994 Stock
Incentive Plan.*
(b) Employment Agreement between the Company and S. Peter
Lebowitz.*
(c) Loan and Security Agreement, dated June 25, 1992, between the
Company and Mercantile Business Credit Inc.*
Amendment No. 1, dated June 14, 1993*
Amendment No. 2, dated December 23, 1993*
Amendment No. 3, dated April 4, 1994*
Amendment No. 4, dated October 14, 1994*
Amendment No. 5, dated November 4, 1994*
Amendment No. 6, dated December 15, 1994*
Amendment No. 7, dated June 30, 1995***
(d) Authorization and Loan Agreement (Guaranty Loans), dated May 19,
1992, between the Company and the U.S. Small Business
Administration.*
(e) Loan and Security Agreement, dated September 15, 1992, between the
Company and Miami Area Economic Development Service, Inc.*
(f) Asset Purchase Agreement, dated August 16, 1994, between the
Company and Heartland USA Apparel Manufacturing, Inc.*
(g) Distribution Agreement, dated February 1, 1994, between the
Company and Betty Smith Co., Ltd.**
- 32 -
<PAGE>
(h) Trademark Merchandise License Agreement, dated October 26, 1993,
between the Company and Caterpillar Inc.**
Letter from Caterpillar Inc. to counsel for the Company, dated
October 3, 1994.**
Amendment No. 1, dated July 1, 1994**
Amendment No. 4, dated August 8, 1994.**
Amendment No. 5, dated March 10, 1995.***
Amendment No. 6, dated September 28, 1995***
Amendment No. 7, dated November 7, 1995****
(i) License Agreement dated July 1994, between the Company and
Wolverine World Wide, Inc.**
(j) Use of Trademark and Distribution Agreement, dated May 1994,
between the Company and The Big Yellow Corporation Limited.**
(k) Distribution Agreement, dated October 1, 1994, between the Company
and Fashion Fever C.C.**
Letter Agreement between the Company and Fashion Fever C.C.,
dated October 1, 1994.**
(l) Memorandum of Understandings and Agreements, dated May 1, 1994,
between the Company and Shuken Co. Ltd.**
(m) Exclusive Distribution Agreement, dated June 1, 1994, between the
Company and All-American.**
(n) Distribution Agreement, dated June 1, 1994, between the Company
and Off-Shore Italia S.R.L.**
(o) Distribution Agreement, dated September 1, 1994, between the
Company and Double Impact GMBH.**
Letter Agreement, dated September 16, 1994.**
(p) Distribution Agreement, dated October 1, 1994, between the Company
and BS of Germany GMBH.**
(q) Stock Option Agreement between the Company and S. Peter
Lebowitz.*
(r) Stock Option Agreement between the Company and S. Peter
Lebowitz.*
(s) Underwriting Agreement between Barington Capital Group, L.P. (the
"Underwriter") and the Company.*
- 33 -
<PAGE>
(t) Underwriter's Option Agreement.*
(u) Consulting Agreement between the Company and the Underwriter.*
(v) Distribution Agreement, dated April 1, 1995, between the Company
and Yesil Kuhdura A.S.***
(w) Distribution Agreement, dated March 1, 1995, between the Company
and Peter Schaer Handels AG.****
(x) Distribution Agreement, dated April 1, 1995, between the Company
and GAFA, S.A.****
(y) Employment Agreement between the Company and S. Peter
Lebowitz***
(z) Offshore Securities Subscription Agreement, dated April 2, 1997,
between the Company and Willora Company Limited.*****
(aa) Form of Big Smith Brands, Inc. 6% Convertible Debenture due March
31, 2000, dated April 2, 1997*****
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997*****
27 Financial Data Schedule*****
- - --------------------------
* 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").
** Previously filed with, and incorporated herein by reference to Form
SB-2, subject to a confidentiality request.
*** Filed with, and incorporated herein by reference to, the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1994, filed on April 7, 1995.
**** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, filed on April 15, 1996.
***** Filed herewith
- 34 -
OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT
This Offshore Securities Subscription Agreement ("Agreement") is
executed in reliance upon the transaction exemption afforded by Regulation S
("Regulation S") as promulgated by the Securities and Exchange Commission
("SEC"), under the Securities Act of 1933, as amended ("1933 Act").
This Agreement has been executed by the undersigned in connection with
the private placement of up to $1,700,000 6% Convertible Debentures (hereinafter
referred to as the "Debentures") of BIG SMITH BRANDS, INC., a corporation
organized and existing under the laws of the State of Delaware, U.S.A., NASDAQ
Symbol "BSBI" (hereinafter referred to as the "COMPANY"). The Debentures being
sold pursuant to this Agreement, and the Shares (as defined below), have not
been registered under the 1933 Act and may not be offered or sold in the United
States or to U.S. Persons (as such terms are defined in Regulation S), unless
the Debentures or the Shares, as the case may be, are registered under the 1933
Act, or an exemption from the registration provisions of the 1933 Act is
available. The terms on which the Debentures may be converted into common stock
(the "Shares") and the other terms of the Debentures are set forth in the pro
forma Debenture in ANNEX I annexed hereto. This subscription and, if accepted by
the COMPANY, the offer and sale of Debentures and the Shares issuable upon
conversion thereof (collectively the "Securities"), are being made in reliance
upon the provisions of Regulation S ("Regulation S") under the 1933 Act.
The undersigned
NAME: WILLORA COMPANY LIMITED
ADDRESS: Baarestrasse 73
Postfach 6302, 24G Switzerland
if applicable, a Corporation organized under the laws of the British Virgin
Island, a non USA jurisdiction (hereinafter referred to as the "PURCHASER")
hereby represents, covenants and warrants to, and agrees with, SUBSCRIPTION
AMOUNT. The undersigned hereby subscribes for $1,700,000 in principal
amount of 6% Debentures.
b. FORM OF PAYMENT. The PURCHASER shall pay the purchase
price for the Debentures by delivering immediately
available funds in United States Dollars to the escrow
agent identified in the Joint Escrow Instructions
1
<PAGE>
attached hereto as ANNEX II (the "Escrow Agent"). Delivery of
such funds to the COMPANY by the Escrow Agent shall be made
against delivery by the COMPANY of one or more Debentures in
accordance with this Agreement. By signing this Agreement, the
PURCHASER and the COMPANY each agrees to all of the terms and
conditions of, and becomes a party to, the Joint Escrow
Instructions attached hereto as ANNEX II, all of the
provisions of which are incorporated herein by this reference
as if set forth in full.
c. METHOD OF PAYMENT. Payment of the purchase price for the
Debentures shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
for credit to the account of Krieger & Prager,
Attorneys
Escrow Account No. 105-0036843
Not later than one (1) business day after acceptance and
execution of this Agreement by the COMPANY, the PURCHASER shall deposit with the
Escrow Agent the aggregate subscription price for the Debentures.
2. SUBSCRIBER REPRESENTATIONS AND COVENANTS; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
a. OFFSHORE TRANSACTION. PURCHASER represents,
warrants and covenants to COMPANY as follows:
(i) PURCHASER is not a "U.S. Person" as that term is defined under Regulation
S. PURCHASER is not an affiliate of the Company or of Goodbody
International, Inc.
(ii) PURCHASER is outside the United States as of
the date of the execution and delivery of
this Agreement, and no offer to purchase the
Debentures was made in the United States.
(iii) PURCHASER is purchasing the Debentures for
its own account and not on behalf of any U.S.
Person, and PURCHASER is the sole beneficial
owner of the Debentures, and has not
prearranged any resale with any purchaser or
purchasers in the United States.
2
<PAGE>
(iv) PURCHASER represents, warrants, covenants and
hereby agrees that all offers and sales of
the Debentures prior to the expiration of a
period commencing on the date of the receipt
of funds by the COMPANY and ending 40 days
thereafter (the "Restricted Period") shall
only be made in compliance with the safe
harbor contained in Regulation S, pursuant to
the registration provisions under the 1933
Act or pursuant to an exemption from
registration, and all offers and sales after
the expiration of the 40-day period shall be
made only pursuant to such registration or to
an exemption from registration.
(v) PURCHASER acknowledges that the purchase of
the Debentures involves a high degree of
risk, is aware of the risks and further
acknowledges that it can bear the economic
risk of the purchase of the Debentures,
including the total loss of its investment.
(vi) PURCHASER understands that the Debentures are
being offered and sold to it in reliance on
specific exemptions from the registration
requirements of U.S. securities laws and that
the COMPANY is relying upon the truth and
accuracy of the representations, warranties,
agreements, acknowledgments and
understandings of PURCHASER set forth herein
in order to determine the applicability of
such exemptions and the suitability of
PURCHASER to acquire the Debentures, and the
Shares issuable upon conversion thereof.
PURCHASER represents and warrants that the
information contained herein is complete and
accurate. PURCHASER further represents and
warrants that it will notify the COMPANY
immediately upon the occurrence of any
material change therein occurring prior to
the issuance of Shares upon conversion of the
Debenture.
(vii) PURCHASER is sufficiently experienced in
financial and business matters to be capable
of evaluating the merits and risks of its
investments, and to make an informed decision
relating thereto.
(viii) In evaluating its investment, PURCHASER has
consulted its own investment and/or legal
and/or tax advisors. PURCHASER is not relying
3
<PAGE>
on the COMPANY respecting the legal, tax and
other economic considerations of an
investment in the Debentures.
(ix) PURCHASER understands that in the view of the
SEC the statutory basis for the exemption
claimed for this transaction would not be
present if the offering of Debentures, and
the Shares issuable upon conversion thereof,
although in technical compliance with
Regulation S, is part of a plan or scheme to
evade the registration provisions of the 1933
Act. PURCHASER is acquiring the Debentures
for investment purposes and has no present
intention to sell the Debentures, or the
Shares issuable upon conversion thereof, in
the United States or to a U.S. Person or for
the account or benefit of a U.S. Person
either now or after the expiration of the
Restricted Period. PURCHASER is not acquiring
the Securities as part of a plan or scheme to
evade the provisions of the 1933 Act.
(x) PURCHASER is not an underwriter or
distributor of, or dealer in (as such terms
are defined in Section 2(12) of the 1933 Act
and Rule 902 under the Act) the Securities,
and PURCHASER is not participating, pursuant
to a contractual agreement, in the
distribution of the Securities, or receiving
selling concession, fee, or other
remuneration in respect of the Debentures
sold.
(xi) PURCHASER represents, warrants and agrees,
that PURCHASER has not in the past forty-five
(45) days, and will not during the Restricted
Period, directly or indirectly, or through
one or more intermediaries, maintain any
short position in the Shares of the COMPANY.
(xii) During the period commencing on the Closing
Date (as defined herein) and ending on the
41st day following such date, PURCHASER will
not sell, commit or agree to sell or pledge,
or otherwise transfer or encumber, any shares
of Common Stock of the COMPANY or any other
securities convertible into or exercisable
for shares of Common Stock of the COMPANY.
(xiii) Except for Goodbody International Ltd.,
PURCHASER has taken no action which would
give
4
<PAGE>
rise to any claim by any person for brokerage
commission, finders' fees or the like
relating to this Agreement or the
transactions contemplated hereby.
(xiv) PURCHASER is (i) an "accredited investor" as
that term is defined in Rule 501 of the
General Rules and Regulations under the 1933
Act by reason of Rule 501(a)(3), and (ii)
experienced in making investments of the kind
described in this Agreement and the related
documents, (iii) able, by reason of the
business and financial experience of its
officers (if an entity) and professional
advisors (who are not affiliated with or
compensated in any way by the Company or any
of its affiliates or selling agents), to
evaluate an investment in the Securities to
protect its own interests in connection with
the transactions described in this Agreement,
and the related documents, and (iv) able to
afford the entire loss of its investment in
the Securities;
(xv) PURCHASER hereby covenants that it shall take
all necessary steps to ensure its compliance
with Regulation S and shall promptly send to
each purchaser (x) who acts as a distributor,
underwriter, dealer or other person
participating pursuant to a contractual
arrangement in the distribution of the
Securities or receiving a selling concession,
fee or other remuneration in respect of any
of the Securities, or (y) who purchases prior
to the expiration of the Restricted Period, a
confirmation or other notice to the PURCHASER
stating the PURCHASER is subject to the same
restrictions on offers and sales as the
Subscriber pursuant to Section 903(c)(2)(iv)
of Regulation S.
(xvi) None of the Purchasers, its affiliates or
persons acting on their behalf have conducted
or will conduct any "directed selling
efforts" as that term is defined in Rule
902(b) of Regulation S, nor have the
Purchasers, its affiliates or persons acting
on their behalf, conducted any general
solicitation relating to the offer and sale
of any of the Securities in the United States
or elsewhere.
5
<PAGE>
(xvii) PURCHASER is not a "10-percent Shareholder"
(as defined in Section 871(h)(3)(B) of the
Internal Revenue Code of 1986, as amended) of
the COMPANY.
b. CURRENT PUBLIC INFORMATION. PURCHASER acknowledges that
PURCHASER has been furnished with or has acquired
copies of the COMPANY'S Form 10KSB filed with the SEC,
and Forms 10-QSB and 8-K filed thereafter (collectively
the "SEC Filings"). PURCHASER is not relying upon any
representations or other information (whether oral or
written) other than as set forth in the SEC filings or
in Annex V.
c. INDEPENDENT INVESTIGATION; ACCESS. PURCHASER
acknowledges that PURCHASER, in making the decision to
purchase the Debentures subscribed for, has relied upon
independent investigations made by it and its
representatives, if any, and PURCHASER and such
representatives, if any, have, prior to any sale to it,
been given access and the opportunity to examine all
material publicly available, books and records of the
COMPANY, all material contracts and documents relating
to this offering and an opportunity to ask questions
of, and to receive answers from the COMPANY or any
person acting on its behalf concerning the terms and
conditions of this offering. PURCHASER and its
advisors, if any, have been furnished with access to
all publicly available materials relating to the
business, finances and operation of the COMPANY and
materials relating to the offer and sale of the
Debentures which have been requested. PURCHASER and its
advisors, if any, have received complete and
satisfactory answers to any such inquiries.
d. NO GOVERNMENT RECOMMENDATION OR APPROVAL. PURCHASER
understands that no federal or state agency has passed
on or made any recommendation or endorsement of the
Securities.
e. ENTITY PURCHASERS. If PURCHASER is a partnership,
limited liability company, limited liability
partnership, corporation, trust, or similar entity, the
person executing this Agreement on its behalf
represents and warrants that:
(i) He or she has made due inquiry to determine
the truthfulness of the representations and
warranties made pursuant to this Agreement.
6
<PAGE>
(ii) He or she is duly and validly authorized to
make this investment and to enter into and
execute this Agreement on behalf of such
entity.
f. INDIVIDUAL PURCHASERS. PURCHASER, if an individual,
represents that he or she has reached the age of 21 and
has adequate means for providing for his or her current
and anticipated financial needs and possible
contingencies for emergencies and has no need for
liquidity in the proposed investment.
g. BINDING COMMITMENT. This Agreement constitutes a legal,
valid and binding obligation of the PURCHASER. The
PURCHASER has full power, right and authority to enter
into and perform this Agreement, and is qualified to
purchase the Debentures under the laws of the
jurisdiction of its formation and the offer and sale of
the Debentures to the PURCHASER will not violate the
securities or other laws of such jurisdiction. The
execution and delivery and performance of this
Agreement will not violate or be in conflict with any
order, judgment, injunction, agreement or controlling
document to which the PURCHASER is a party or by which
it is bound. If the PURCHASER is an entity, it was not
formed, directly or indirectly by a U.S. Person, for
the specific purpose of acquiring the Debentures or
investing in Regulation S Securities. This Agreement
has been duly and validly executed and delivered by and
on behalf of the PURCHASER, and is a valid and binding
agreement of the PURCHASER, enforceable against it in
accordance with its terms, except as enforceability may
be limited by general equitable principles, bankruptcy,
insolvency, fraudulent conveyance, reorganization,
moratorium or other laws affecting creditor's rights
generally.
h. FOREIGN LAWS. PURCHASER hereby covenants that it will
comply with all laws and regulations in each foreign
jurisdiction in which it purchases, offers, sells or
deliver the Securities, or has in its possession or
distributes any offering material.
3. COMPANY REPRESENTATIONS.
a. REPORTING COMPANY STATUS. The COMPANY is a corporation
duly organized, validly existing and in good standing
under the laws of the State of
7
<PAGE>
Delaware and is duly qualified as a foreign corporation
in all jurisdictions in which the failure to so qualify
would have a material adverse effect on the COMPANY and
its subsidiaries taken as a whole. The COMPANY is a
"Reporting Issuer" as defined by Rule 902 of Regulation
S. The COMPANY has registered its Common Stock pursuant
to Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the Common Stock
trades on the NASDAQ/Small Cap Market, and has received
no notice, either oral or written, with respect to its
continued eligibility for such listing. The COMPANY has
filed all material required to be filed pursuant to all
reporting obligations under either Section 13(a) or
15(d) of the Exchange Act for a period of at least
twelve (12) months immediately preceding the offer or
sale of the Debentures, or such shorter period as may
be required by law.
b. OFFSHORE TRANSACTION. The COMPANY has not offered or
sold the Debentures to any person in the United States,
or, to the best of its knowledge, any identifiable
groups of U.S. citizens abroad, or any U.S. person as
that term is defined in Regulation S. At the time the
buy order for the Debentures was originated, the
COMPANY and/or its agents reasonably believed PURCHASER
was outside the United States and was not a U.S.
Person.
c. NO DIRECTED SELLING EFFORTS. In regard to this
transaction, the COMPANY has not conducted any "direct
selling efforts" as that term is defined in Rule 902 of
Regulation S nor has the COMPANY conducted any general
solicitation relating to the offer and sale of the
within securities to persons resident within the United
States or elsewhere.
d. TERMS OF DEBENTURES. The COMPANY will issue the
Debentures in accordance with the terms of ANNEX I
attached hereto.
e. LEGALITY. The COMPANY has the requisite corporate power
and authority to enter into this Agreement and to sell
and deliver the Debentures; this Agreement and the
issuance of the Debentures have been duly and validly
authorized by all necessary corporate action by the
COMPANY; this Agreement has been duly and validly
executed and delivered by and on behalf of the COMPANY,
and is a valid and binding agreement of the COMPANY,
enforceable
8
<PAGE>
against it in accordance with its terms, except as
enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other laws
affecting creditors rights generally.
f. NON-CONTRAVENTION. The execution and delivery of this
Agreement and the consummation of the issuance of the
Debentures, other than the conversion provision
thereof, and the transactions contemplated by this
Agreement and the Debentures do not and will not
conflict with or result in a breach by the COMPANY of
any of the terms or provisions of, or constitute a
default under, the articles of incorporation or by-laws
of the COMPANY, or any indenture, mortgage, deed of
trust, or other material agreement or instrument to
which the COMPANY is a party or by which it or any of
its properties or assets are bound, except for those
relating to the Company's line of credit agreements
with Merchantile Business Credit, Inc., or assuming the
truth of the representations and warranties of
PURCHASER herein, any existing applicable law, rule or
regulation of the United States of any State thereof or
any applicable decree, judgment or order of any Federal
or State court, Federal or State regulatory body,
administrative agency or other United States
governmental body having jurisdiction over the COMPANY
or any of its properties or assets.
g. FILINGS. The COMPANY undertakes and agrees to make all
necessary filings in connection with the sale of the
Debentures as required by United States laws and
regulations or any domestic securities exchange or
trading market.
h. ABSENCE OF CERTAIN CHANGES. Since December 31, 1995,
there has been no material adverse development in the
assets, liabilities, business, properties, operations,
financial condition or results of operations of the
COMPANY, except as disclosed in the SEC Filings or in
Annex V.
i. The COMPANY has legally available sufficient authorized
and unissued Shares as may be reasonably necessary to
effect the conversion of the Debentures.
j. LITIGATION. Except as set forth in ANNEX V, there is no
action, suit or proceeding before or by any
9
<PAGE>
court or governmental agency or body, domestic or
foreign, now pending or, to the knowledge of the
COMPANY, threatened, against or affecting the COMPANY,
or any of its properties, which might result in any
material adverse change in the condition (financial or
otherwise) or in the earnings, business affairs or
business prospects of the COMPANY, or which might
materially and adversely affect the properties or
assets thereof.
k. NO DEFAULT. Except as set forth in Annex V, the COMPANY
is not in default in the performance or observance of
any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of
trust or other material instrument or agreement to
which it is a party or by which it or its property may
be bound, and neither the execution, nor the delivery
by the COMPANY, nor the performance by the COMPANY of
its obligations under this Agreement or the Debentures,
other than the conversion provision thereof, will
conflict with or result in the breach or violation of
any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any
lien or charge on any assets or properties of the
COMPANY under, any material indenture, mortgage, deed
of trust or other material agreement or instrument to
which the COMPANY is a party or by which it is bound or
any statute or the Certificate of Incorporation or
By-Laws of the COMPANY, or any decree, judgment, order,
rule or regulation of any court or governmental agency
or body having jurisdiction over the COMPANY or its
properties.
l. SEC FILINGS. None of the SEC Filings with the
Securities and Exchange Commission since January 1,
1995 contained, at the time they were filed, any untrue
statement of a material fact or omit to state any
material fact required to be stated therein or
necessary to make the state therein in light of the
circumstances under which they were made, not
misleading. The COMPANY has since January 1, subject to
any available extension, 1995 timely filed all
requisite forms, reports and exhibits thereto with the
Securities and Exchange Commission.
m. FULL DISCLOSURE. There is no fact known to the COMPANY
(other than general economic conditions known to the
public generally) that has not been disclosed in
writing to the PURCHASER that (i)
10
<PAGE>
could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise) or in
the earnings, business affairs, business prospects,
properties or assets of the COMPANY or (ii) could
reasonably be expected to materially and adversely
affect the ability of the COMPANY to perform its
obligations pursuant to this Agreement.
n. PRIOR ISSUES. During the twelve (12) months preceding
the date hereof, the Company has not issued any
securities pursuant to Regulation S or Regulation D
under the 1933 Act.
4. TRANSFER AGENT INSTRUCTIONS.
a. DEBENTURES. Upon the conversion of the Debentures, the
PURCHASER thereof shall submit such Debenture and the
COMPANY's Transfer Agent shall, within five (5)
business days of receipt of such Debenture issue one or
more certificates representing that number of shares of
Common Stock into which the Debenture or Debentures are
converted in accordance with the provisions regarding
conversion set forth in ANNEX I hereto. The COMPANY
shall act as Debenture Registrar and shall maintain an
appropriate ledger containing the necessary information
with respect to each Debenture.
b. Subject to the completeness and accuracy of the
PURCHASER'S representations and warranties herein, upon
the conversion of any Debenture by PURCHASER, the
COMPANY, shall, at its expense, take all necessary
action (including the issuance of an opinion of
counsel) to assure that the COMPANY'S transfer agent
shall issue stock certificates without restrictive
legend or stop order in the name of PURCHASER , or such
non-U.S. Persons as may be designated by PURCHASER) and
in such denominations to be specified at conversion
representing the number of shares of Common Stock
issuable upon such conversion, as applicable. The
COMPANY warrants that no instructions other than these
instructions, and/or instructions to impose a "stop
transfer" instruction with respect to the Debenture
until the end of the Restricted Period have been or
will be given to the transfer agent and that the Shares
will not be subject to any transfer limitations other
than those imposed by applicable securities laws.
Nothing in this Section 4, however, shall affect in any
way
11
<PAGE>
PURCHASER'S or such nominee's obligations and agreement
to comply with all applicable securities laws upon
resale of the Securities.
c. It will permit the PURCHASER to exercise its right to
convert the Debentures by telecopying an executed and
completed Notice of Conversion to the COMPANY and
delivering within three business days thereafter, the
original Notice of Conversion and the Debenture
representing the Shares to the COMPANY by express
courier. Each date on which a Notice of Conversion is
telecopied to and received by the COMPANY in accordance
with the provisions hereof shall be deemed a Conversion
Date. The COMPANY will transmit the certificates
representing the Shares of Common Stock issuable upon
conversion of any Debenture (together with the
Debentures representing the Shares not so converted) to
the PURCHASER via express courier, by electronic
transfer or otherwise, within three business days after
receipt by the COMPANY of the original Notice of
Conversion and the Debenture representing the Shares to
be converted (the "Delivery Date").
d. The Company understands that a delay in the issuance of
the Shares of Common Stock beyond the Delivery Date
could result in economic loss to the Buyer. As
compensation to the Buyer for such loss, except if the
provisions of Section 9 hereof shall apply to such
Shares, the Company agrees to pay late payments to the
Buyer for late issuance of Shares upon Conversion in
accordance with the following schedule (where "No.
Business Days Late" is defined as the number of
business days beyond five (5) business days from
Delivery Date:
12
<PAGE>
Late Payment For Each
$10,000 of Debenture
Converted No. Business Days Late Principal Amount Being
- - --------- ---------------------- ----------------------
1 $50
2 $100
3 $150
4 $200
5 $250
6 $300
7 $350
8 $400
9 $450
10 $500
10+ $500 + $100 for each
Business Day Late
beyond 10 days
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. n.
(b) Notwithstanding the provisions hereof, in no event (except
upon the maturity of the Debenture) shall the holder be entitled to convert any
Debentures into a number of shares such that upon conversion the sum of (1) the
number of shares of Common Stock beneficially owned by the PURCHASER and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the Debenture), and
(2) the number of shares of Common Stock issuable upon the conversion of the
Debenture with respect to which the determination of this proviso is being made,
would result in beneficial ownership by the PURCHASER and its affiliates
exceeding 4.9% of the outstanding shares of Common Stock. For purposes of the
proviso to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (1) of such proviso.
6. CLOSING DATE AND ESCROW AGENT. The date of the issuance of the
Debentures and the sale of the Debentures shall be the date of receipt by the
COMPANY from the Escrow Agent of PURCHASER'S purchase funds (the "Closing
Date"). PURCHASER shall, within one (1) business day after acceptance and
execution of this Agreement by the COMPANY, deliver the necessary funds as
indicated in Paragraph 1 to the Escrow Agent. Debentures will be delivered to
the Escrow Agent at the instructions of the COMPANY. PURCHASER agrees that the
Escrow Agent has no liability as a result of any fraudulent or unlawful conduct
of any other party, and agrees to hold the Escrow Agent harmless.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
13
<PAGE>
PURCHASER understands that COMPANY'S obligation to sell the Debentures is
conditioned upon:
a. Acceptance by PURCHASER of an Agreement for the sale of
Debentures;
b. Delivery to the Escrow Agent by each PURCHASER of
immediately available funds in United States Dollars as
payment in full for the purchase of the Debentures; and
c. The accuracy on the Closing Date of the representations
and warranties of PURCHASER contained in this Agreement
and the performance by PURCHASER on or before the
Closing Date of all covenants and agreements of
PURCHASER required to be performed on or before the
Closing Date; and
d. Delivery to COMPANY of originally signed Subscription
Agreement, a Manner of Offering Certificate, and
certain additional representations from Goodbody
International Ltd.
e. There shall not be in effect any law, rule or
regulation prohibiting or restricting the transactions
contemplated hereby, or requiring any consent or
approval which shall not have been obtained.
8. CONDITIONS TO PURCHASER'S OBLIGATION TO PURCHASE. The
COMPANY understands that PURCHASER'S obligation to purchase the
Debentures is conditioned upon:
a. The receipt and acceptance by the COMPANY of this
Agreement as evidenced by execution of this Agreement
by the President or any Vice President of the COMPANY.
The acceptance of funds by the COMPANY shall be deemed
to be constructive acceptance of this Agreement;
b. Delivery of Debentures to Escrow Agent as herein set
forth;
c. The accuracy on the Closing Date of the representations
and warranties of the COMPANY contained in this
Agreement and the performance by the COMPANY on or
before the Closing Date of all covenants and agreements
of the COMPANY required to be performed on or before
the Closing Date; and
d. Delivery to the Escrow Agent of an opinion of
14
<PAGE>
counsel for the COMPANY, dated the Closing Date and
addressed to PURCHASER, in the form attached hereto as
ANNEX III.
9. REGISTRATION OF THE SECURITIES. Following the delivery of a Notice
of Conversion, if the COMPANY fails to issue to the PURCHASER or the PURCHASER's
permitted transferees certificates for shares of Common Stock issuable upon
conversion of the Debentures bearing no restrictive legend and free of stop
transfer instructions for any reason other than the COMPANY's reasonable good
faith belief that the representations and warranties made by the PURCHASER in
this Agreement were untrue when made, or that such issuance would be in
violation of securities laws, then the COMPANY shall be required, at the request
of the PURCHASER and at the COMPANY's expense, to effect the registration of
such shares of Common stock under the act, and relevant Blue Sky laws as
promptly as is practicable. The COMPANY and the PURCHASER shall cooperate in
good faith in connection with the furnishing of information required for such
registration and the taking of such other actions as may be legally or
commercially necessary in order to effect such registration. The COMPANY shall
file a registration statement within forty-five (45) days of PURCHASER's written
demand therefor and shall use its best efforts to cause such registration
statement to become effective as soon as practicable thereafter, provided,
however, that if such forty-five (45) day period terminates at any time from
February 12 through March 30 of any calendar year, the COMPANY shall file the
required registration statement at the earliest to occur of (i) March 31 of such
calendar year or (ii) the fifth business day after audited financial statements
of the COMPANY are available. Such best efforts shall include, but not be
limited to, promptly responding to all comments received from the staff of the
Securities and Exchange Commission with respect to such registration statement
and promptly preparing and filing amendments to such registration statement
which are responsive to the comments received from the staff of the Securities
and Exchange Commission. Once declared effective by the Securities and Exchange
Commission, the COMPANY shall cause such registration statement to remain
effective until the earlier of (i) the sale by the PURCHASER of all shares of
Common Stock so registered or (ii) 120 days after the effective date of such
registration statement. In the event that the COMPANY has not effected the
registration of such shares of Common Stock under the Act and relevant Blue Sky
laws within one hundred forty-five (145) days after the date of the PURCHASER's
demand therefor, the COMPANY shall pay to the PURCHASER by wire transfer, as
liquidated damages for such failure and not as a penalty, an amount in cash
equal to $50,000. Such payment shall be made to the PURCHASER immediately upon
expiration of the 145-day period referenced in the preceding sentence if the
registration of such shares of Common Stock is not effected by such date;
provided, however, that the payment of such liquidated damages shall not relieve
the COMPANY from its obligations to register such shares of
15
<PAGE>
Common Stock pursuant to this Section 9. Notwithstanding the preceding sentence,
the 145 day period referred to therein shall be tolled during the period from
February 12 through March 30 of any calendar year.
10. CERTAIN AGREEMENTS. The Company covenants and agrees that it will
not (i) enter into any subsequent or further offer or sale of common stock or
securities convertible into common stock with any third party until the
expiration of one hundred eighty (180) days after the Closing Date, and (ii)
enter into any subsequent or further offer or sale of common stock or securities
convertible into common stock with any third party within a period of thirty
(30) days following the period set forth in clause (i) above, without first
offering the Buyer the opportunity (which shall remain open for a period of five
business days from the date the Buyer receives notice thereof) to purchase all
of such additional securities (in the discretion of the Buyer) on the terms and
provisions on which the Company proposes to offer such additional securities to
such third party. In the event that the Buyer declines to participate in any
such investment, the Company shall provide the Buyer with prompt written notice
of the consummation of any such transaction with a third party, specifying the
material terms thereof. However, clauses 10(i) and 10(ii) will not apply to (x)
the issuance of securities (other than for cash) in connection with a merger,
consolidation, sale of assets, disposition of a business, product or license by
the Company, strategic alliance, bank loan or agreement, public offering,
securities issued at the then current market price (as determined in good faith
by the Board of Directors), or the exercise of options, or (y) the exchange of
the capital stock of the Company for assets, stock or other joint venture
interests.
11. GOVERNING LAW. This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of New York, except for
matters arising under the Act, without reference to principles of conflicts of
law. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the State of New York or the state courts
of the State of New York in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each party hereby agrees
that if another party to this Agreement obtains a judgment against it in such a
proceeding, the party which obtained such judgment may enforce same by summary
judgment in the courts of any country having jurisdiction over the party against
whom such judgment was obtained, and each party hereby waives any defenses
available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Agreement irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
16
<PAGE>
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in an other
manner permitted by law.
12. NOTICES. Any notice required or permitted hereunder shall be given
in writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery or three business days after deposit in the United
States Postal Service, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days advance
ANY: Big Smith Brands, Inc.
7100 West Camino Real
Suite 201
Boca Raton, Florida 33433
ATT: Terry Dober or Teresa Moriondo
with a copy to:
Kramer, Levin, Naftalis & Frankel, Esqs.
919 Third Avenue
New York, New York 10022
ATT: Michael S. Nelson, Esq. and Michael Mayerfeld, Esq.
PURCHASER: At the address set forth on the first page of this
Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. PURCHASER'S
representations and warranties shall survive the execution and delivery hereof
of this Agreement and the delivery of the Debenture.
14. CONFIDENTIALITY. Each of the COMPANY and the PURCHASER agrees to
keep confidential and not to disclose to or use for the benefit of any third
party the terms of this Agreement or any other information which at any time is
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law.
15. INDEMNIFICATION. Each of the COMPANY and the PURCHASER agrees to
indemnify the other and to hold the other harmless from
17
<PAGE>
and against any and all losses, damages, liabilities, costs and expenses
(including reasonable attorneys' fees) which the other may sustain or incur in
connection with the breach by the indemnifying party of any representation,
warranty or covenant made by it in this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
18
<PAGE>
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Offshore Securities
Subscription Agreement to be duly executed on its behalf this 2nd day of April,
1997.
Willora Company Limited
-----------------------
Printed Name of Subscriber
By: /s/S. Salcmon
-----------------
(Signature of Authorized Person)
S. Salcmon, Vice President
Printed Name and Title
Accepted this 2nd day of the month of April, 1997.
BIG SMITH BRANDS, INC.
By: /s/S. Peter Lebowitz
- - ------------------------
Title: President
19
<PAGE>
All correspondence and delivery of certificates and confirmations
should be addressed to the above named person and sent by the COMPANY to his
_____ business _____ home address (check one).
Capacity of Subscriber (check one):
Individual __________
Corporation __________
Partnership __________
Other __________ (please specify)
Ownership of Debentures (check one):
Individual __________
Joint Tenants, with right of
survivorship __________*
Tenants in Common __________*
Tenants in Entirety __________*
Community Property ______ If you are purchasing
Debentures with only your
spouse as co-owner, both you
and your spouse must sign
the signature page. If any
co-owner is not your spouse,
all co-owners must sign the
signature page.
Name of PURCHASER Representative, if any:
- - -----------------------------------
Address:
- - -----------------------------------
- - -----------------------------------
Telephone:
- - -----------------------------------
20
<PAGE>
FULL NAME AND ADDRESS OF PURCHASER FOR REGISTRATION PURPOSES:
NAME:
- - ---------------------------------------------------------------
ADDRESS:
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
TEL. NO.
- - ---------------------------------------------------------------
FAX. NO.
- - ---------------------------------------------------------------
CONTACT NAME:
- - ---------------------------------------------------------------
DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME):
NAME:
- - ---------------------------------------------------------------
ADDRESS:
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
TEL. NO.
- - ---------------------------------------------------------------
FAX. NO.
- - ---------------------------------------------------------------
CONTACT NAME:
- - ---------------------------------------------------------------
21
<PAGE>
SPECIAL
INSTRUCTIONS:
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
22
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE
BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED
OR TRANSFERRED EXCEPT IN ACCORDANCE WITH REGULATION S UNDER THE ACT, OR AS
PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION OR SAFE HARBOR
THEREFROM.
No. 1 $50,000
----------- -------
BIG SMITH BRANDS, INC.
6% CONVERTIBLE DEBENTURE DUE MARCH 31, 2000
THIS DEBENTURE is one of a duly authorized issue of $1,700,000 in
Debentures of BIG SMITH BRANDS, Inc., a corporation duly organized and existing
under the laws of the State of Delaware (the "Company") designated as its 6%
Convertible Debenture Due March 31, 2000.
FOR VALUE RECEIVED, the Company promises to pay to WILLORA COMPANY
LIMITED the registered holder hereof (the "Holder"), the principal sum of One
Million Seven Hundred Thousand and 00/100 (US $1,700,000) Dollars on March 31,
2000 (the "Maturity Date") and to pay interest on the principal sum outstanding
from time to time in arrears on conversion or March 31, 2000 at the rate of 6%
per annum accruing from the date of initial issuance. Accrual of interest shall
commence on the first such business day to occur after the date hereof until
payment in full of the principal sum has been made or duly provided for. Subject
to the provisions of Section 4 below, the principal of, and interest on, this
Debenture are payable at the option of the Holder, in shares of Common Stock of
the Company or in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts, at
the address last appearing on the Debenture Register of the Company as
designated in writing by the Holder from time to time. The Company will pay the
principal of and interest upon this Debenture on the Maturity Date, less any
amounts required by law to be deducted, to the registered holder of this
Debenture as of the tenth day prior to the Maturity Date and addressed to such
holder as the last address appearing on the Debenture Register. The forwarding
of such check shall constitute a payment of principal and interest hereunder and
shall satisfy and discharge the liability for principal and interest on this
Debenture to the extent of the sum represented by such check plus any amounts so
deducted.
(see attached for continuation)
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer, thereunto duly authorized.
BIG SMITH BRANDS, INC.
April 2, 1997 By: /s/Peter S. Lebowitz
--------------------
Peter S. Lebowitz, President
<PAGE>
BIG SMITH BRANDS, INC.
6% CONVERTIBLE DEBENTURE DUE MARCH 31, 2000
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand Dollars
(US$ 10,000) and integral multiples thereof. The Debentures are exchangeable for
an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holders surrendering the same. No service
charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, or the shares issued or issuable upon Conversion,
the Company may require, prior to issuance of a new Debenture or such Shares in
the name of such other person, that it receive reasonable transfer documentation
including legal opinions of counsel reasonably acceptable to the Company, that
the issuance of the Debentures in such other name does not and will not cause a
violation of the Act or any applicable state or foreign securities laws. Prior
to due presentment for transfer of this Debenture, the Company and any agent of
the Company may treat the person in whose name this Debenture is duly registered
on the Company's Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
4. A. The Holder of this Debenture is entitled, at its option, to
convert at any time (a) commencing forty-five (45) days after the closing of
sale of the debenture (the "Closing"), the principal amount of this Debenture
and accrued interest, provided that the principal amount is at least US $10,000
(unless if at the time of such election to convert the aggregate principal
amount of all Debentures registered to the Holder is less that Ten Thousand
Dollars (US $10,000), then the whole amount thereof) into shares of Common Stock
of the Company at a conversion price for each share of Common Stock equal to the
lesser of (a) $2.80, or (b) 70% the Market Price on the Conversion Date if the
Conversion Date is less than one hundred (100) days from the date hereof and
67-1/2% of the Market Price on the Conversion Date thereafter. For purposes of
this Section 4, the Market Price shall be the average closing bid price of the
Common Stock on the five (5) trading days immediately preceding the Closing or
Conversion Date, as may be applicable, as reported by the National Association
of Securities Dealers, or the closing bid price on the over-the-counter market
on such date or, in the event the Common Stock is listed on a stock exchange,
the Market Price shall be the closing price on the exchange on such date, as
reported in the Wall Street Journal. Conversion shall be effectuated by
surrendering the Debentures to be converted to the Company with the form of
conversion notice attached hereto as Exhibit A, executed by the Holder of the
Debenture evidencing such Holder's intention to convert this Debenture or a
specified
<PAGE>
portion (as above provided) hereof, and accompanied, if required by the Company,
by proper assignment hereof in blank. Interest accrued or accruing and unpaid
from the date of issuance to the date of conversion shall, at the option of the
Company, be paid in cash or Common Stock upon conversion. No fraction of Shares
or scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded to the nearest whole share. The date
on which notice of conversion is given (the "Conversion Date") shall be deemed
to be the date on which the Holder has delivered this Debenture, with the
conversion notice duly executed, to the Company or, if earlier, the date set
forth in such notice of conversion if the Debenture is received by the Company
within three (3) business days therefrom. Facsimile delivery of the conversion
notice shall be accepted by the Company at facsimile number (417) 358-5583, with
a copy to Kramer, Levin, Naftalis & Frankel (212) 715-8000, ATT: Michael S.
Nelson, Esq. and Michael Mayerfeld, Esq. Certificates representing Common Stock
upon conversion will be delivered within five (5) business days from the date
the notice of conversion is delivered to the Company.
B. The Company agrees to redeem all of the outstanding
Debentures at 148% of the Purchase Price, if required by any law, rule or
regulation of any regulatory body, securities exchange or trading market,
applicable to the Company.
The Company shall give notice of redemption to the remaining
holders of the Debentures at the address and facsimile number of such Debenture
holders appearing in the Company's register for the Debentures. Such redemption
notice shall specify the applicable redemption price. The date of notice shall
be the redemption date. The mandatory redemption price shall be paid to the
holder of the Debentures redeemed within seven (7) business days of the
redemption date.
5. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein proscribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee shall amend this Debenture to provide that it
may thereafter be converted on the terms and subject to the conditions set forth
above into the kind and amount of stock, securities or property receivable upon
such merger, consolidation, sale or transfer by a holder of the number of shares
of Common Stock into which this Debenture might have been converted immediately
before such merger, consolidation, sale or transfer, subject to adjustments
which shall be as nearly equivalent as may be practicable. In the event of any
proposed merger, consolidation or sale or transfer of all or substantially all
of the assets of the Company (a "Sale"), the Holder hereof shall have the right
to convert by delivering
<PAGE>
a Notice of Conversion to the Company within fifteen (15) days of receipt of
notice of such Sale from the Company. In the event the Holder hereof shall elect
not to convert, the Company may prepay which tender of payment following such
notice, the right of conversion shall terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. This Agreement will be construed and enforced in accordance with and
governed by the laws of the State of New York, except for matters arising under
the Act, without reference to principles of conflicts of law. Each of the
parties consents to the jurisdiction of the federal courts whose districts
encompass any part of the State of New York or the state courts of the State of
New York in connection with any dispute arising under this Agreement and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions. Each party hereby agrees that if another party to this
Agreement obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
country having jurisdiction over the party against whom such judgment was
obtained, and each party hereby waives any defenses available to it under local
law and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to such party at its address set forth herein. Nothing herein shall
affect the right of any party to serve process in an other manner permitted by
law.
10. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal
or interest on this Debenture; or
b. Any of the representations or warranties made by the
Company herein, in the Subscription Agreement, or in
any certificate or financial or other written
statements heretofore or hereafter furnished by the
Company in connection with the execution and delivery
of this Debenture or the Subscription Agreement shall
be false or misleading in any material respect at the
time made; or
The Company fails to issue shares of Common Stock to
the Holder or to cause its Transfer Agent to issue
shares of Common Stock upon exercise by the Holder of
the conversion rights of the Holder in accordance with
the terms of this Debenture, fails to transfer or to
cause its Transfer Agent to transfer any certificate
for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this
Debenture, or fails to remove any restrictive legend or
to cause its Transfer Agent to transfer on any
certificate or any shares of Common Stock issued to the
Holder upon conversion of this Debenture as and when
required by this Debenture, and any such failure shall
continue uncured for five (5) business days, or
following written notice to the Company of such
failure; or
<PAGE>
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision,
condition, agreement or obligation of the Company under
this Debenture and such failure shall continue uncured
for a period of thirty (30) days after written notice
from the Holder of such failure; or
e. The Company shall (1) admit in writing its inability to
pay its debts generally as they mature; (2) make an
assignment for the benefit of creditors or commence
proceedings for its dissolution; or (3) apply for or
consent to the appointment of a trustee, liquidator or
receiver for its or for a substantial part of its
property or business; or
f. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall not
be discharged within sixty (60) days after such
appointment; or
g. Any governmental agency or any court of competent
jurisdiction at the request of any governmental agency
shall assume custody or control of the whole or any
substantial portion of the properties or assets of the
Company and shall not be dismissed within sixty (60)
days thereafter; or
h. Any money judgment, writ or warrant of attachment, or
similar process in excess of Two Hundred Thousand
($200,000) Dollars in the aggregate shall be entered or
filed against the Company or any of its properties or
other assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of sixty(60) days or
in any event later than five (5) days prior to the date
of any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed
within sixty (60) days after such institution or the
Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or
admit the material allegations of, or default in
answering a petition filed in any such proceeding; or
j. The Company shall have its Common Stock delisted from
the NASDAQ/Small Cap Market, shall not have such
suspension lifted or the Common Stock relisted within
two days, and shall not be listed for trading on any
other exchange.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
<PAGE>
11. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: April 2, 1997
BIG SMITH BRANDS, INC.
By: /s/S. Peter Lebowitz
------------------------
S. Peter Lebowitz
-----------------
(Print Name)
President
---------
(Title)
ATTEST:
- - ----------------------------------------
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ ________________
of the principal amount of the above Debenture No. ___ into Shares of Common
Stock of BIG SMITH BRANDS, INC. (the "Company") according to the conditions
hereof, as of the date written below.
The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933 and is not converting
the Debenture on behalf of any U.S. Person, or otherwise in violation of
Regulation S.
Date of Conversion* ____________________________________________________________
Applicable Conversion Price ___________________________________________________
Signature ______________________________________________________________________
[Name]
Address: _______________________________________________________________________
_______________________________________________________________________
* This original Debenture and Notice of Conversion must be received by the
Company by the fifth business date following the Date of Conversion.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (I) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS EFFECTIVE AND CURRENT
WITH REGARD THERETO, OR (II) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH
OFFER, SALE OR TRANSFER.
WARRANT TO PURCHASE
100,000 SHARES
WARRANT TO PURCHASE COMMON STOCK
of
THIS CERTIFIES that Goodbody International, Inc. or any subsequent
permitted transferee hereof (the "Holder"), has the right to purchase from BIG
SMITH BRANDS, INC., a Delaware corporation (the "Company"), not more than
100,000 fully paid and nonassessable shares of the Company's Common Stock, $0.01
par value per share ("Common Stock"), at a price of $2.00 (U.S) per share,
subject to adjustment as provided below (the "Exercise Price"), at any time on
or before 5:00 p.m., Atlanta, Georgia time, on 4/7/02.
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. DATE OF ISSUANCE.
This Warrant shall be deemed to be issued on 4/7/97.
2. EXERCISE.
(a) Manner of Exercise. This Warrant may be exercised as to all or any
lesser number of full shares of Common Stock covered hereby upon surrender of
this Warrant, with the Exercise Form attached hereto duly executed, together
with the full Exercise Price (as defined in Section 3) for each share of Common
Stock as to which this Warrant is exercised, at the office of the Company, Big
Smith Brands, Inc., 7100 West Camino Real, Suite 201, Boca Raton, FL 33433,
Attention: President, Telephone No. (407) 367-8283, Telecopy No. (407) 367-8986
or at such other office or agency as the Company may designate in writing, by
overnight mail, with an advance copy of the Exercise Form attached as Exhibit A
("Exercise Form") by facsimile (such surrender and payment of the Exercise Price
hereinafter called the "Exercise of this Warrant").
<PAGE>
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the Exercise Form is sent by
facsimile to the Company, provided that the original Warrant and Exercise Form
are received by the Company within five (5) business days thereafter. The
original Warrant and Exercise Form must be received within 5 business days of
the Date of Exercise, or the Exercise Form may, at the Company's option, be
considered void. Alternatively, the Date of Exercise shall be defined as the
date the original duly executed Exercise Form, Exercise Price and this warrant
are received by the Company, if Holder has not sent advance notice by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon its
Exercise, and, as soon as practical after the Date of Exercise, the Holder
hereof shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise, and if this Warrant is not exercised in full, the
Holder shall be entitled to receive a new Warrant or Warrants (containing terms
identical to this Warrant) representing any unexercised portion of this Warrant
in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any shares of Common
Stock are to be issued following an exercise of this Warrant shall, for all
purposes, be deemed to have become the Holder of record of such shares on the
Date of Exercise of this Warrant, irrespective of the date of delivery of such
shares. Nothing in this Warrant shall be construed as conferring upon the Holder
hereof any rights as a shareholder of the Company.
3. PAYMENT OF WARRANT EXERCISE PRICE.
The Exercise Price ("Exercise Price") shall equal $2.00 (U.S) ("Initial
Exercise Price") or, if the Date of Exercise is more than one (1) year after the
Date of Issuance, the lesser of (i) the Initial Exercise Price or (ii) the
"Lowest Reset Price", as that the term is defined below. The Company shall
calculate a "Reset Price" on each anniversary date of the Date of Issuance which
shall equal one hundred percent (100%) of the average Closing Bid Price of the
Company's Common Stock for the five (5) trading days ending on such anniversary
date of the Date of Issuance. The "Lowest Reset Price" shall equal the Lowest
Reset Price determined on an anniversary date of the Date of Issuance preceding
the Date of Exercise, taking into account, as appropriate, any adjustments made
pursuant to Section 5 hereof.
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price on the NASDAQ SmallCap Market, or if no longer traded on the
NASDAQ SmallCap Market, the closing bid price on the Principal National
Securities Exchange or, if not so traded the National Market System, on which
the Common Stock is so traded and if not available, the mean of the high and low
prices on the Principal National Securities Exchange or the National Market
System on which the Common Stock is so traded. NASDAQ will take precedence.
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
2
<PAGE>
(i) Cash Exercise: cash, certified check or cashiers check or wire
transfer; or
(ii) Cashless Exercise: surrender of this Warrant at the principal
office of the Company together with notice of cashless election, in which event
the Company shall issue Holder a number of shares of Common Stock computed using
the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
A = the Market Price of the one share of Common Stock (for purposes of
this Section 3(ii), the "Market Price" shall be defined as the average closing
bid price of the Common Stock for the five trading days prior to the Date of
Exercise of this Warrant (the "Average Closing Bid Price"), as reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or if the Common Stock is not traded on NASDAQ, the average of the
daily high and low sales prices in the over-the-counter market; provided,
however, that if the Common Stock is listed on a stock exchange, the Market
Price shall be the average of the daily high and low sales prices on such
exchange. If the Common Stock is/was not traded during the five trading days
prior to the Date of Exercise, then the closing bid price for the last publicly
traded day shall be deemed to be the closing bid price for any and all (if
applicable) days during such five trading day period, or the average of the
daily high and low sales prices (if no closing bid prices are reported).
B = the Exercise Price
It is intended that the Common Stock issuable upon exercise of this Warrant in a
cashless exercise transaction shall be deemed to have been acquired at the time
this Warrant was issued, for purposes of Rule 144(d)(3)(ii).
(iii) Warrants cannot be exercised at a price higher than the market
price at time of exercise.
4. TRANSFER AND REGISTRATION.
Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, wholly or
in part, in person or by attorney, upon surrender of this Warrant properly
endorsed. This Warrant shall be canceled upon such surrender and, as soon as
practicable thereafter, the person to whom such transfer is made shall be
entitled to receive a new Warrant or Warrants as to the portion of this Warrant
transferred, and the Holder of this Warrant shall be entitled to receive a new
Warrant or Warrants as to the portion hereof retained.
5. ANTI-DILUTION ADJUSTMENTS.
3
<PAGE>
(a) Stock Dividend. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then the Holder hereof, upon Exercise of this
Warrant after the record date for the determination of Holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is Exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been Exercised immediately prior to such
record date.
(b) Recapitalization or Reclassification. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which the Holder hereof shall
be entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case my be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionately decreased and, in
the case of a decrease in the number of shares, proportionally increased.
Company shall give the Warrant Holder 30 days prior notice of any transaction
described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned surplus
or net profits for the current or preceding year) then, in any such case, the
Holder of this Warrant shall be entitled to receive upon exercise of this
Warrant, with respect to each share of Common Stock issuable upon such Exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which such Holder would have been entitled to receive with respect to each such
share of Common Stock as a result of the happening of such event had this
Warrant been Exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date") or, in lieu
thereof, if the Board of Directors of the Company should so determine at the
time of such distribution, a reduced Exercise Price determined by multiplying
the Exercise Price on the Determination Date by a fraction, the numerator of
which is the result of such Exercise Price reduced by the value of such
distribution applicable to one share of Common Stock such value to be determined
by the Board in its discretion and the denominator of which is such Exercise
Price.
(d) Notice of Consolidation or Merger. If the Company shall at any time
consolidate or merge with any other corporation or transfer all or substantially
all of its assets, then the Company shall deliver written notice to the Holder
of such merger, consolidation or sale of assets at least thirty (30) days prior
to the closing of such merger, consolidation or sale of assets and this Warrant
shall terminate and expire immediately prior to the closing of such merger,
consolidation or sale of assets.
(e) Exercise Price Defined. No adjustment to the exercise price shall
be made unless such adjustment would change the Exercise Price at the time by
$.01 or more; provided, however, that all adjustments not so made shall be
deferred and made when the aggregate
4
<PAGE>
thereof would change the Exercise Price at the time by $.01 or more. No
adjustment made pursuant to any provision of this Section 5 shall have the
effect of increasing the total consideration payable upon Exercise of this
Warrant in respect of all the Common Stock as to which this Warrant may be
exercised.
(f) In the event that at any time, as a result of an adjustment made
pursuant to this Section 5, the Holder of this Warrant shall, upon Exercise of
this Warrant, become entitled to receive shares and/or other securities or
assets (other than Common Stock) then, wherever appropriate, all references
herein to shares of Common Stock shall be deemed to refer to and include such
shares and/or other securities or assets; and thereafter the number of such
shares and/or other securities or assets shall be subject to adjustment from
time to time in a manner and upon terms as nearly equivalent as practicable to
the provisions of this Section 5.
6. FRACTIONAL INTERESTS.
No fractional shares or scrip representing fractional shares shall be
issuable upon the Exercise of this Warrant, but on Exercise of this Warrant, the
Holder hereof may purchase only a whole number of shares of Common Stock. The
Company shall make a payment in cash in respect of any fractional shares which
might otherwise be issuable upon Exercise of this Warrant, calculated by
multiplying the fractional share amount by the closing bid price of the
Company's Common Stock on the Date of Exercise as reported by the NASDAQ Small
Cap or National Market or such other exchange as Company's Common Stock is
traded on.
7. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for Exercise of this
Warrant. The Company covenants and agrees that upon Exercise of this Warrant,
all shares of Common Stock issuable upon such Exercise shall be duly and validly
issued, fully paid, nonassessable, and not subject to preemptive rights, rights
of first refusal or similar rights of any person or entity.
8. RESTRICTIONS ON TRANSFER.
(a) This Warrant and the Common Stock issuable on Exercise hereof have
not been registered under the Securities Act of 1933, as amended, or any state
securities law and may not be offered, sold, transferred, pledged, hypothecated
or otherwise disposed of in the absence of registration or the availability of
an exemption from registration under the Act and applicable state securities
laws. All shares of Common Stock issued upon Exercise of this Warrant shall bear
an appropriate legend to such effect, if applicable.
(b) Assignment. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Holder may offer, sell,
transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in
part. Holder shall deliver to Company this
5
<PAGE>
Warrant and a written notice, substantially in the form of the Assignment
attached hereto as Exhibit B, indicating the person or persons to whom the
Warrant shall be assigned and the respective number of warrants to be assigned
to each assignee and an opinion of recognized securities counsel stating that
the requirements of the Securities Act, as amended, and applicable state
securities laws have been met with respect to such transfer or that such
transfer is exempt from the requirements of the Act, and applicable state
securities laws which counsel shall be reasonably acceptable to the Company .
The Company shall effect the assignment within ten days, and shall deliver to
the assignee(s) designated by Holder a Warrant or Warrants of like tenor and
terms for the appropriate number of shares assignee by accepting, agreed to be
bound by the terms thereof.
(c) The Warrant and Common Stock issuable upon conversion are intended
to be held for investment purposes and not with an intent to distribution, as
defined in the Act.
9. BENEFITS OF THIS WARRANT.
Nothing in this Warrant shall be construed to confer upon any person
other then the Company and the Holder of this Warrant any legal or equitable
right, remedy or claim under this Warrant and this Warrant shall be for the sole
and exclusive benefit of the Company and the Holder of this Warrant.
10. APPLICABLE LAW.
This Warrant is issued under and shall for all purposes be governed by
and construed in accordance with the laws of the state of New York, without
giving effect to conflict of law provisions thereof. Jurisdiction for any
dispute regarding this Warrant lies in the State of New York.
11. LOSS OF WARRANT.
Upon receipt by the Company of evidence of the loss, theft, destruction
or mutilation of this Warrant, and (in the case of loss, theft or destruction)
of indemnity and/or security reasonably satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
12. NOTICE OR DEMANDS.
Notices or demands pursuant to this Warrant to be given or made by the
Holder of this Warrant to or on the Company shall be sufficiently given or made
if sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, until another address is designated in writing by the
Company, Attn: Big Smith Brands, Inc., 7100 West Camino Real Suite 201, Boca
Raton, FL 33433, Attention: President, Telephone No. (407) 367-8283, Telecopy
No. (407) 367-8986 and shall be deemed given upon receipt. Notices or demands
pursuant to this Warrant to be given or made by the Company to or on the Holder
of this Warrant shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed,
Goodbody International, Inc., 4514
6
<PAGE>
Chamblee Dunwoody Rd., Suite 333, Atlanta, GA 30338 until another address is
designated in writing by Holder pursuant to this paragraph.
7
<PAGE>
IN WITNESS WHEREOF, this Warrant issued to Goodbody International, Inc.
is hereby executed and effective as of the date set forth below.
Dated as of
----------------------
By: /s/ S. Peter Lebowitz
-------------------------------------
Print Name:
-----------------------------------
Title:
---------------------------------
8
<PAGE>
EXHIBIT A
EXERCISE FORM
TO:
The undersigned hereby irrevocably exercises the right to purchase
__________________ of the shares of Common Stock of ___________________,
evidenced by the attached Warrant, and herewith makes payment of the Exercise
Price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any of such Common Stock, except in accordance with the provisions of
Section 8 of the Warrant, and consents that the following legend may be affixed
to the certificates for the Common Stock hereby subscribed for, if such legend
is applicable:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law, and may not be
offered, sold, transferred, pledged, hypothecated or otherwise
disposed of until either (i) a registration statement under
the Securities Act and applicable state securities laws is
effective and current with regard thereto, or (ii) an
exemption from registration under the Securities Act and
applicable state securities laws is available in connection
with such offer, sale or transfer."
The Common Stock being acquired hereunder is intended by the acquirer
to be held for investment purposes and not with an intent to distribution, as
defined in the Act. The undersigned requests that such shares be issued, and a
warrant representing any unexercised portion thereof be issued, pursuant to the
Warrant in the name of the Registered Holder and delivered to the undersigned at
the address set forth below:
Dated:
- - -----------------------------------------------------------------
Signature of Registered Holder
- - -----------------------------------------------------------------
Name of Registered Holder (print)
- - -----------------------------------------------------------------
Address
- - -----------------------------------------------------------------
- - -----------------------------------------------------------------
<PAGE>
EXHIBIT B
ASSIGNMENT
(To be executed by the registered Holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells,
assigns and transfers unto the person or persons below named the right to
purchase ________ shares of the Common Stock of Big Smith Brands, Inc. evidenced
by the attached Warrant and does hereby irrevocably constitute and appoint
__________________________ attorney to transfer the said Warrant on the books of
the Company, with full power of substitution in the premises. By accepting the
warrant, based upon this assignment, the assignee will be deemed to have agreed
to the terms of this Warrant as if such assignee were the original holder of the
Warrant.
Dated: ------------------------------
Signature
Fill in for new Registration of Warrant:
- - -----------------------------------------
Name
- - -----------------------------------------
Address
- - -----------------------------------------
Please print name and address of assignee
including zip code number)
- - ------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form or Assignment must correspond to
the name as written upon the face of the attached Warrant in every particular,
without, without alteration or enlargement or any change whatsoever.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 315,457
<SECURITIES> 0
<RECEIVABLES> 3,150,850
<ALLOWANCES> 326,144
<INVENTORY> 4,144,764
<CURRENT-ASSETS> 8,958,832
<PP&E> 2,509,468
<DEPRECIATION> 1,098,311
<TOTAL-ASSETS> 10,849,259
<CURRENT-LIABILITIES> 8,209,794
<BONDS> 0
0
0
<COMMON> 39,300
<OTHER-SE> 2,012,944
<TOTAL-LIABILITY-AND-EQUITY> 2,052,244
<SALES> 21,804,928
<TOTAL-REVENUES> 23,103,145
<CGS> 19,840,931
<TOTAL-COSTS> 19,840,931
<OTHER-EXPENSES> 6,223,533
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (760,291)
<INCOME-PRETAX> (3,724,242)
<INCOME-TAX> 220,568
<INCOME-CONTINUING> (2,961,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,944,810)
<EPS-PRIMARY> ($1.00)
<EPS-DILUTED> ($1.00)
</TABLE>
