U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from __________ to ___________.
Commission file number 01-13470
BIG SMITH BRANDS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3005371
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7100 West Camino Real, Suite 201, Boca Raton, Florida 33433
-----------------------------------------------------------
(Address of Principal Executive Offices)
(561) 367-8283
--------------
(Issuer's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding as of October 31, 1997: 3,995,987
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
INDEX
Pages
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet as of September 30, 1997.......................3
Statements of Operations for the three
months and nine month periods ended
September 30, 1997 and 1996..................................4
Statement of Stockholders' Equity for the
nine months ended September 30, 1997.........................5
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996............................6
Notes to Financial Statements................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................8
PART II OTHER INFORMATION....................................................15
SIGNATURE....................................................................18
EXHIBIT INDEX................................................................19
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1997
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 31,403
Temporary investments 80,313
Accounts receivable, less allowance
for doubtful accounts of $637,451 4,028,706
Commissions receivable 1,194,681
Inventories 4,305,497
Prepaid expenses 239,190
------------
Total Current Assets 9,879,790
------------
PROPERTY AND EQUIPMENT, At Cost
Land 20,000
Buildings 473,195
Equipment 1,953,493
Vehicles 83,085
------------
2,529,773
Less Accumulated depreciation 1,235,250
------------
1,294,523
------------
OTHER ASSETS
Security deposits 12,530
Loan Fees, net of amortization of $46,633 330,165
Trademark, net of amortization of $74,513 441,347
------------
$ 11,958,355
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 5,505,001
Checks outstanding in excess of bank balance 119,568
Accounts payable 2,104,153
Accrued Restructuring/Litigation 598,764
Accrued royalties 665,674
Accrued expenses 457,205
------------
Total Current Liabilities 9,450,365
LONG-TERM DEBT 1,809,381
------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000 shares:
issued and outstanding 3,995,987 shares 39,960
Additional paid-in capital 7,145,158
Retained earnings (6,486,509)
------------
698,609
------------
$ 11,958,355
============
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
NET SALES
<S> <C> <C> <C> <C>
Trade $ 4,232,476 $ 6,181,048 $ 8,342,082 $14,848,613
Royalties, net of related costs
of $303,492 0 360,767 0 1,134,015
and $794,986, respectively ----------- ----------- ----------- -----------
4,232,476 6,541,815 8,342,082 15,982,628
COST OF GOODS SOLD 3,512,065 6,161,939 6,943,802 13,798,052
----------- ----------- ----------- -----------
GROSS PROFIT 720,411 379,876 1,398,280 2,184,576
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling 360,028 504,576 1,022,514 1,396,289
General and administrative 605,444 649,148 1,601,640 1,853,827
Restructuring and Litigation Cost 358,000 1,397,481 358,000 1,397,481
----------- ----------- ----------- -----------
1,323,472 2,551,205 2,982,154 4,647,597
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS ( 603,061) (2,171,329) (1,583,874) (2,463,021)
------------ ----------- ---------- ----------
OTHER INCOME (EXPENSE)
Miscellaneous expense ( 35,477) ( 6,368) ( 110,411) ( 40,771)
Interest expense ( 182,315) ( 175,516) ( 489,350) ( 539,037)
------------ ------------ ------------ ------------
( 217,792) ( 181,884) ( 599,761) ( 579,808)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (820,853) ( 2,353,213) (2,183,635) ( 3,042,829)
PROVISION FOR INCOME TAXES 0 ( 504,087) 0 ( 235,136)
----------- ------------ ----------- ------------
NET INCOME (LOSS) $ (820,853) $(2,857,300) $(2,183,635) $(3,277,965)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE $( 0.21) $( 0.73) $( 0.55) $ ( 0.83)
============ ============== ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,995,987 3,930,000 3,959,000 3,930,000
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock,
$.01 par value
--------------
Additional Retained Total
paid-in earnings stockholders'
Shares Amount capital (deficit) equity
------ ------ ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 3,930,000 $39,300 $6,315,818 $(4,302,874) $ 2,052,244
Discount on Convertible Debentures 800,000 800,000
Conversion of Debentures 65,987 660 29,340 30,000
Net Income (loss) -- -- -- (2,183,635) (2,183,635)
--------- ------- ---------- ----------- -----------
Balances at September 30, 1997 3,995,987 $39,960 $7,145,158 $(6,486,509) $ 698,609
========= ======= ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,183,635) $(3,277,965)
Items not requiring cash:
Depreciation and amortization 211,608 373,381
Deferred income taxes 220,568
Amortization of Debenture discount 142,600
Changes in:
Accounts receivable (878,998) (1,350,691)
Inventories (160,733) 3,429,483
Prepaid expenses (87,212) (134,834)
Other assets (113,198) 181,858
Accounts payable and accrued expenses 113,723 712,463
----------- -----------
Net cash provided (used) in operating activities (2,955,845) 154,263
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (20,305) (413,959)
Sale (Purchase) of temporary investments 64,594 (65,677)
----------- -----------
Net cash provided (used) in investing activities 44,289 (479,636)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance (164,984) (16,941)
Net borrowings under line-of-credit agreement 1,774,718 260,559
Principal Payments on long-term debt (273,326) 141,390
Net Proceeds from Convertible Debenture 1,436,000
Principal payment on loan from stockholder (50,028)
----------- -----------
Net cash provided by financing activities 2,772,408 334,980
----------- -----------
INCREASE (DECREASE) IN CASH (139,148) 9,607
CASH, BEGINNING OF PERIOD 170,551 4,207
----------- -----------
CASH, END OF PERIOD $ 31,403 $ 13,814
=========== ===========
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
Big Smith Brands, Inc. (the "Company") manufactures and sells quality work
apparel under a variety of brand names, including Big Smith, Smith Mountain
Classics, Big Smith Sportswear and Big Smith Vintage. The Company markets its
products to national chains and local stores worldwide.
Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements included in its Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996.
NOTE 2: INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-QSB of the Securities and Exchange Commission and in
accordance with generally accepted accounting principles applicable to interim
financial statements, and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements should be read in conjunction with the
audited financial statements and accompanying notes of the Company for the year
ended December 31, 1996, which are included in its Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
In the opinion of management of the Company, the accompanying consolidated
financial statements reflect all adjustments necessary (consisting solely of
normal recurring adjustments) to present fairly the financial position of the
Company as of September 30, 1997 and the results of its operations,
stockholders' equity and its cash flows for the nine month period then ended.
The results of operations for the period ended September 30, 1997, are not
necessarily indicative of the results to be expected for the entire year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality."
NOTE 3: INCOME PER SHARE INFORMATION
Net earnings (loss) per share is computed using the weighted average number of
shares of common stock outstanding and common stock equivalent shares from stock
options and warrants unless the effect of common stock equivalents is
anti-dilutive.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The discussion and analysis set forth below is for the three month and
nine month periods ended September 30, 1997 and September 30, 1996. It should be
read in conjunction with the Unaudited Financial Statements of the Company and
the related Notes thereto appearing elsewhere in this Form 10-QSB. The Company
believes that its business is seasonal and has experienced and expects to
continue to experience lower revenues and net income in the first half of each
fiscal year as compared to the second half of each fiscal year. This seasonality
is due to increased sales in the apparel industry during the Christmas season
and the increase in sales of the Company's winter weight garments, which sell at
higher per unit prices than the Company's other products, and back-to-school
clothes, during the months of August through November. In addition, the
Company's quarterly results may fluctuate depending upon the timing of delivery
of large orders and the introduction of new product lines or additional labels,
among other things. The Company believes that sales of Big Smith Sportswear
branded products will be less seasonal than sales of its traditional product
lines and that as such sales increase as a proportion of the Company's total
sales the seasonality of the Company's business will decline. See
"--Seasonality."
Forward Looking-Statements. When used in this report, press releases
and elsewhere by the management of the Company from time to time, the words
"believes", "anticipates", and"expects" and similar expressions are intended to
identify forward-looking statements that involve certain risks and
uncertainties. Additionally, certain statements contained in this discussion may
be deemed forward-looking statements that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: the status of relations between the Company and
its primary customers and distributors, the availability of long-term credit,
unanticipated changes in the U.S. and international economies, business
conditions and growth in the workwear industry and the level of growth in retail
sales generally, the timely development and acceptance of new products, the
impact of competitive products and pricing, changes in the cost of raw
materials, changes in product mix, the outcome of litigation in which the
Company is involved, along with product delays and other risks detailed from
time to time in the Company's SEC reports, including but not limited to the
report on Form 10-KSB for the year ended December 31, 1996 (the "Form 10K").
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date thereof. The Company undertakes no
obligation to publicly release the results of any events or circumstances after
the date thereof or to reflect the occurrence of unanticipated events.
Financial Disclosure. The discussion and analysis set forth below is
for the fiscal quarters ended September 30, 1997 and September 30, 1996 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-QSB as well as the
Financial Statements of the Company for the fiscal years ended December 31, 1996
and December 31, 1995 and the related Notes thereto appearing in the Form 10-K.
Going Concern. The Company's viability as a going concern is dependent
upon the successful refinancing of its principal line of credit, which expired
on June 30, 1997 and its meeting its liquidity needs subsequent to such date,
which needs could exceed the amount of borrowings available under the existing
agreement. Currently, the Company is operating under a standstill agreement,
dated August 22, 1997, with Mercantile Business Credit, Inc., (the "Standstill
Agreement") providing financing in the interim period following the maturation
of the Company's principle line of credit. The Standstill Agreement will expire
by its terms on December 5, 1997. See -- "Liquidity and Capital Resources."
On June 10, 1997, the Company entered into a letter of intent with the
CIT Group/Credit Finance ("CIT") providing for a three year working capital
line. The letter of intent provides for a working capital line of credit of $7
million secured by property, equipment, and other long-lived assets;
collateralized
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<PAGE>
borrowings against accounts receivable and inventory. The Company has also since
entered into negotiations with NationsCredit Commercial Funding, Inc., and
Foothill Capital Corporation as potential alternatives to CIT. All three lenders
have substantially completed their due diligence. The Company believes it will
reach an agreement with one of the three lending institutions and successfully
close financing arrangements to replace the MBCI principal line of credit prior
to the expiration of the Standstill Agreement. Additionally, on April 2, 1997,
the Company closed a placement of $1.7 million of Debentures (as hereinafter
defined) with an offshore investor. See "--Liquidity and Capital Resources."
The Company has initiated proceedings to collect certain significant
delinquent accounts receivable from its foreign licensees and distributors. See
"Part II. Item I. Legal Proceedings--Other Litigation." Additionally, the
Company has developed a new product line of branded young mens' sportswear, Big
Smith Sportswear, which was introduced at an industry-wide trade show during the
last week of August. The Company believes that this new line could provide
revenues to replace the high margin revenue stream previously provided by
Caterpillar branded products and began to receive and ship orders for such
products during this three month period. Finally, the Company has taken steps to
increase sales of its products during the last six months of 1997, including
developing relationships with substantial new customers and taking initial steps
towards establishing an international network for distribution of Big Smith
Sportswear and other branded products internationally, through meetings held in
September 1997 with candidates for international distributorships. Such meetings
resulted in initial orders representing distribution primarily of Big Smith
Sportswear and other branded products in five European countries. In addition,
the Company will participate in the Inter-Jeans Trade Show in Cologne, Germany,
in February 1998. The Company anticipates increased international distribution
of its product lines, primarily Big Smith Sportswear, as a result of its
participation in the Inter-Jeans Trade Show.
The following discussion and analysis should be read in conjunction
with the Company's financial statements appearing elsewhere in this report.
Results of Operations
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Net trade sales, for the three months ended September 30, 1997
decreased by $1.95 million, or 31.6%, to $4.23 million from $6.18 million for
the three months ended September 30, 1997. Net sales for the three months ended
September 30, 1997 of Caterpillar branded products, Big Smith and other branded
products, and private label products were $0, $3.82 million and $410,000,
respectively, as compared with $1.96 million, $3.51 million and $.71 million,
respectively, for the three months ended September 30, 1996. The decrease in
sales of Caterpillar branded products resulted from the decision of the Company
to cease sales of Caterpillar branded products and due to the purported
termination of the Company's license by Caterpillar, Inc. ("Caterpillar"). See
"Part II. Item 1. Legal Proceedings". The increase in sales of Big Smith and
other branded products resulted from the addition of new customers and
additional products being purchased by existing customers reflecting the
increased marketing by the Company of such products. The decrease in private
label sales reflects the Company's strategic decision in 1996 to phase out
certain low margin private label programs for Kmart Corporation.
The Company's strategy following its cessation of sales of Caterpillar
branded products is to focus its marketing efforts on increasing sales of Big
Smith and other branded products, and, beginning in the three month period ended
September 30, 1997, the Company's new line of young mens' sportswear, rather
than on sales under licensed labels or low margin private label programs. For
the three months ended September 30, 1997, Sales of Caterpillar branded
products, Big Smith and other branded products, and private label products
accounted for 0%, and 90.3% and 9.7% of net trade sales, respectively, as
compared with 31.7%, 56.8% and 11.5% of net trade sales, respectively, for the
three months ended September 30, 1996.
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<PAGE>
Net royalties from distributors for the manufacture and sale of goods
under the Caterpillar labels abroad net of related costs for the three months
ended September 30, 1997 were $0 as compared with $360,767 for the three months
ended September 30, 1996, reflecting the cessation of sales of Caterpillar
branded products. The Company has taken initial steps towards establishing an
international network for distribution of Big Smith and other branded products,
through meetings held in September 1997 with candidates for international
distributorships. Such meetings resulted in initial orders primarily for Big
Smith Sportswear in five European countries. In addition, the Company will
participate in the Inter-Jeans Trade Show in Cologne, Germany, in February 1998.
The Company anticipates increased international distribution of its product
lines, primarily Big Smith Sportswear, as a result of its participation in the
Inter-Jeans Trade Show.
Gross profit, excluding that from net royalties, for the three months
ended September 30, 1997 was $720,000, or 17% of net trade sales, compared to
$19,000, or 0.3% of net trade sales, for the three months ended September 30,
1996. The increase in gross profit percentage was primarily due to the non
recurrence of $ 817,000 of writedowns related primarily to the Caterpillar
branded inventory during the three month period ended September 30, 1996. The
writedown of Caterpillar inventory in the three month period ended September 30,
1996 was due to the necessity of liquidating such inventory in anticipation of
the effectiveness of the cancellation of the Company's license to sell
Caterpillar branded inventory.
Selling expenses decreased by $150,000 to $360,000, or 8.5% of net
trade sales, for the three months ended September 30, 1997, from $510,000, or
8.3% of net trade sales, for the three months ended September 30, 1996. This
decrease in selling expenses resulted principally from a decrease of $118,000 in
royalty expense resulting from decreased sales by the Company of Caterpillar
branded products, a decrease of $18,000 in advertising and trade shows expense,
a decrease of $33,000 in travel and entertainment expense, a decrease in
shipping expense of $27,000 and a decrease of $74,000 in salesman commissions,
samples and expenses resulting from the decrease in trade sales, which were only
partially offset by an increase of $117,000 in selling expense related to the
new sportswear division. General and administrative expenses were $610,000, or
14.4% of net trade sales during the three months ended September 30, 1997,
compared with $650,000, or 10.5% of net trade sales, for the three months ended
September 30, 1996. The decrease in general and administrative expense was
primarily due to a decrease of payroll and related expense of $88,000, a
decrease in bad debt expense of $75,000 along with a decrease in other
administrative costs related to downsizing and restructuring, partially offset
by an increase in consulting fees of $114,000 primarily related to retention of
a consultant to analyze and advise the Company on ways to cut costs including
selling and general and administrative costs. The Company began to implement the
consultant's recommendations during the three month period ended september 30,
1997. Such implementation efforts have continued into the three month period
ending December 31, 1997.
The Company incurred certain restructuring and litigation costs of
approximately $358,000 for the three month period ended September 30, 1997 as a
result of the settlement of litigation over a major account receivable related
to the Caterpillar litigation, as compared with approximately $1,397,000 for the
three month period ended September 30, 1996 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 costs
which resulted from the Caterpillar termination. See "Part II. Item 1. Legal
Proceedings."
The Company's interest expense for the three months ended September 30,
1997 was $182,000, or 4.3% of net trade sales, as compared with $176,000, or
2.9% of net trade sales, for the three months ended September 30, 1996. Interest
expense attributable to the amortization of the discount on the Debentures was
only partially offset by a decrease in interest expenses attributable to bank
debt during the three month period ended September 30, 1997.
At December 31, 1995, the Company recorded a net deferred tax asset of
$220,568 relating to expected future utilization of its net operating loss
carryforwards and for the tax effects of certain timing
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<PAGE>
differences. The Company continued to recognize a credit income tax provision
relating to operating losses for the first two quarters of 1996. In the three
month period ended September 30, 1996, the Company concluded that it was unable
to determine that the future utilization of the loss carryforwards was more
likely than not and, therefore, established a valuation allowance equal to the
amount of the net deferred asset previously recorded.
No tax provisions have been recorded in 1997.
As a result of the foregoing, the Company's net loss for the three
months ended September 30, 1997 decreased to $820,853 from a net loss of
$2,857,300 for the three months ended September 30, 1996.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
30, 1996
Net trade sales, for the nine months ended September 30, 1997 decreased
by $6.51 million, or 43.8%, to $8.34 million from $14.85 million for the nine
months ended September 30, 1996. Net trade sales for the nine months ended
September 30, 1997 of Caterpillar branded products, Big Smith and other branded
products, and private label products were $80,000, $7.33 million and $930,000,
respectively, as compared with $5.26 million, $6.93 million and $2.66 million,
respectively, for the nine months ended September 30, 1996. The decrease in
sales of Caterpillar branded products resulted primarily from the decision of
the Company to cease sales of Caterpillar branded products due to the purported
termination of the Company's license by Caterpillar. See "Part II. Item 1. Legal
Proceedings". The increase in Big Smith and other branded products resulted from
the addition of new customers and additional products being purchased by
existing customers, reflecting the increased marketing by the Company of such
products. The decrease in private label sales reflects the Company's strategic
decision in 1996 to phase out certain low margin private label programs for
Kmart Corporation.
The Company's strategy following its cessation of sales of Caterpillar
branded products is to focus its marketing efforts on increasing sales of Big
Smith and other branded products, and, beginning in the three month period ended
September 30, 1997, the Company's new line of young mens' sportswear, rather
than on sales under licensed labels or low margin private label programs. For
the nine months ended September 30, 1997, sales of Caterpillar branded products,
Big Smith and other branded products, and private label products accounted for
0.9% and 87.9% and 11.2% of net trade sales, respectively, as compared with
35.4%, 46.7% and 17.9% of net trade sales, respectively, for the nine months
ended September 30, 1996.
Net royalties from distributors for the manufacture and sale of goods
under the Caterpillar labels abroad net of related costs for the nine months
ended September 30, 1997 were $0 as compared with $1,134,015 for the nine months
ended September 30, 1996 reflecting the cessation of sales of Caterpillar
branded products. The Company has taken initial steps towards establishing an
international network for distribution of Big Smith and other branded products,
through meetings held in September with candidates for international
distributorships. Such meetings resulted in initial orders representing
distribution of Big Smith and other branded products in five European countries.
In addition, the Company will attend the Inter-Jeans Trade Show in Cologne,
Germany, in February 1998. The Company anticipates increased international
distribution of its product lines as a result of its attendance at the
Inter-Jeans Trade Show.
Gross profit, excluding that from net royalties, for the nine months
ended September 30, 1997 was $1.40 million, or 16.8 % of net trade sales,
compared to $1.05 million, or 7.1% of net trade sales, for the nine months ended
September 30, 1996. The increase in the gross profit percentage was primarily
due to the non recurrence of $817,000 of writedowns during in the three month
period ended September 30, 1996, related primarily to the Caterpillar branded
inventory, decreased sales of low margin private label sales due to the
discontinued private label programs for the Kmart Corporation and the increase
in Big Smith and other branded products, which were only partially offset by the
loss of sales of Caterpillar branded products.
Selling expenses decreased by $380,000 to $1.02 million, or 12.2% of
net trade sales, for the nine months ended September 30, 1997, from $1.40
million, or 9.4% of net trade sales, for the nine months
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<PAGE>
ended September 30, 1996. The decrease in selling expenses resulted principally
from a decrease of $305,000 in royalty expense resulting from decreased domestic
sales by the Company of Caterpillar branded products, a decrease of $107,000 in
advertising and trade shows expense and a $48,000 decrease in sample expense,
and a decrease of $132,000 in shipping expense resulting from the decrease in
trade sales, which were only partially offset by the increase in selling
expenses of $226,000 related to the new Big Smith Sportswear line. General and
administrative expenses were $1.60 million, or 19.2% of net trade sales during
the nine months ended September 30, 1997, compared with $1.85 million, or 12.5%
of net trade sales, for the nine months ended September 30, 1996. The decrease
in general and administrative expense was primarily due to a decrease of payroll
and related expenses of $260,000, a decrease in bad debt expense of $83,000
along with a decrease in other administrative costs related to downsizing and
restructuring, partially offset by an increase in consulting fees of $164,000
primarily related to retention of a consultant to analyze and advise the Company
on ways to cut costs including selling and general and administrative costs. The
Company began to implement the consultant's recommendations during the three
months ended September 30, 1997. Such implementation efforts have continued into
three month period ending December 31, 1997.
The Company incurred certain restructuring and litigation costs of
approximately $358,000 for the nine month period ended September 30, 1997 as a
result of the settlement of litigation over a major account receivable related
to the Caterpillar litigation, as compared with approximately $1,397,000 for the
three month period ended September 30, 1996 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 costs
which resulted from the Caterpillar termination. See "Part II. Item 1. Legal
Proceedings".
The Company's interest expense for the nine months ended September 30,
1997 was $.49 million, or 5.9% of net trade sales, as compared with $.54
million, or 3.6% of net trade sales, for the nine months ended September 30,
1996. Interest expense attributable to the amortization of the discount on the
Debentures was only partially offset by a decrease in interest expenses
attributable to bank debt during the nine month period ended September 30, 1997.
At December 31, 1995, the Company recorded a net deferred tax asset of
$220,568 relating to expected future utilization of its net operating loss
carryforwards and for the tax effects of certain timing differences. The Company
continued to recognize a credit income tax provision relating to operating
losses for the first two quarters of 1996. In the three month period ended
September 30, 1996, the Company concluded that it was unable to determine that
the future utilization of the loss carryforwards was more likely than not and,
therefore, established a valuation allowance equal to the amount of the net
deferred asset previously recorded. No tax provisions have been recorded in
1997.
As a result of the foregoing, the Company's net loss for the nine
months ended September 30, 1996 decreased to $2,183,635 from a net loss of
$3,277,965 for the nine months ended September 30, 1996.
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 expired on June
30, 1997 and its meeting its liquidity needs subsequent to such date, which
needs could exceed the amount of borrowings available under the existing
agreement. Currently, the Company is operating under the Standstill Agreement.
On June 10, 1997, the Company entered into a letter of intent with the
CIT Group/Credit Finance ("CIT") providing for a three year working capital
line. The letter of intent provides for a working capital line of credit of $7
million secured by property, equipment, and other long-lived assets;
collateralized borrowings against accounts receivable and inventory. The Company
has also since entered into negotiations with NationsCredit Commercial Funding,
Inc., and Foothill Capital Corporation as potential alternatives to CIT. All
three lenders have substantially completed their due diligence. The Company
believes it will reach an
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agreement with one of the three lending institutions and successfully close
financing arrangements to replace the MBCI principal line of credit prior to the
expiration of the Standstill Agreement.
The Company has initiated proceedings to collect certain significant
delinquent accounts receivable from its foreign licensees and distributors. See
"Part II. Item I. Legal Proceedings--Other Litigation." Additionally, the
Company has taken steps to increase sales of its Big Smith and other branded
products during the last six months of 1997, including developing relationships
with substantial new customers. The Company also is taking initial steps towards
establishing an international network for distribution of Big Smith and other
branded products internationally, through meetings currently scheduled for
September with candidates for distributorships in three countries. Finally, the
Company has developed a new product line of branded young mens' sportswear,
which was introduced at an industry-wide trade show during the last week of
August. The Company believes that this new line could provide revenues to
replace the high margin revenue stream previously provided by Caterpillar
branded products and began to receive and ship orders for such products during
three month period ended September 30, 1997.
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.
Goodbody International, Inc. served as introducing agent in connection
with such placement and received in consideration of its 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 used in operating activities totaled $2.96
million and $0.15 million in the nine months ended September 30, 1997 and 1996,
respectively. During the first half of each year, the Company typically
experiences negative cash flow from operations due to the build-up of inventory
in preparation for increased sales volume in the second half of each year. See
"--Seasonality."
At September 30, 1997 and September 30, 1996, working capital was
approximately $400,000 and $1.9 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.
On June 30, 1997, the Company's $5.5 million line of credit with
Mercantile Business Credit Inc. ("MBCI") expired. This line of credit had
borrowing levels based upon a specified percentage of eligible
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accounts receivable and inventories. The amount outstanding under the credit
line as of September 30, 1997 and September 30, 1996 was $5.4 million, and $7.0
million respectively. The line of credit bears interest at the MBCI prime rate
plus a premium interest factor of 0.75 percent. The line of credit also
permitted overadvances for up to 120 days per year, peaking at $500,000. The
overadvance portion of the line of credit has an interest rate equal to the
prime rate as published by MBCI plus an interest premium factor of 1.75. The
line of credit was secured by the Company's accounts receivable, inventory,
property and equipment and general intangibles.
The Company entered into a Standstill Agreement with MBCI on August 22,
1997. The Standstill Agreement provides, among other things, for a line of
credit of $5.5 million, a reduction in overadvances on a scheduled basis such
that there will be no overadvances by the expiration of the Standstill Agreement
and an interest rate of 3% over the prime rate. The Standstill Agreement expires
by its terms on December 5, 1997.
Capital Expenditures
Capital expenditures totaled approximately $20,000 for the nine months
ended September 30, 1997.
Intangible Assets
In 1995, the Company purchased the Big Smith trademark for the seven
countries in Europe in which the Company did not previously have trademark
rights for an aggregate purchase price of $500,000 payable over four years.
Seasonality
The Company's sales are generally higher in the last six months of the
year as compared to the first six months of the year both in terms of revenues
generated and, to a lesser extent, total garments sold. This seasonality is due
to an increase in sales of winter weight garments, which sell at higher prices,
combined with continued sales of regular weight garments. This seasonality
impacts the cash flow of the Company significantly since the Company's inventory
levels typically tend to increase during the first half of the year in
preparation for anticipated higher sales levels in the second half of the year.
The Company believes that sales of Big Smith Sportswear branded products will be
less seasonal than sales of its traditional product lines and that as such sales
increase as a proportion of the Company's total sales the seasonality of the
Company's business will decline. See - "Liquidity and Capital Resources."
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<PAGE>
PART II
OTHER INFORMATION
Item 1. 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 defenses of failure to assert a
claim, waiver, amendment, promissory estoppel, equitable estoppel, laches,
failure to provide an opportunity to cure, unclean hands and misuse, and
counterclaims for breach of contract, tortious interference with contractual
relations, interference with prospective business relations, conspiracy,
commercial disparagement and breach of franchise agreement. S. Peter Lebowitz
also filed an additional motion to dismiss for failure to state a claim against
him in his individual capacity.
On July 29, 1996, the Company filed a motion for a preliminary
injunction against Caterpillar's purported termination of the Agreement. On
August 19, 1996, the District Court entered an order (the "August 19th Order")
denying the Company's motion for a preliminary injunction and granting
Caterpillar's motion for summary judgment on the grounds that the Company had
breached the Agreement by failing to obtain certain agreements from
manufacturers producing Caterpillar branded apparel as was required under the
Agreement, and that the Agreement permitted Caterpillar to terminate based upon
such breach regardless of whether or not it was material. On September 24, 1996,
the District Court denied the Defendant's request for reconsideration.
On 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
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<PAGE>
the definition of a franchise under Illinois law, but does not involve a
franchise located in the State of Illinois and stayed further action in the
pending litigation until the Court of Appeals rules on the certified question.
On October 4, 1996, the Defendants filed a Petition for Permission to Appeal
with the Seventh Circuit Court of Appeals (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.
At a discovery scheduling conference held on April 17, 1997, the
District Court set the Caterpillar litigation for discovery to be completed by
November 1997 and scheduled trial for December 1997.
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 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.
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
unqualifiable 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. The Company is currently negotiating a settlement with Big Yellow.
On January 6, 1997, All American filed suit against BSG in the UK High
Court seeking damages for breach of contract and interference with contractual
relations and interest. All American has not yet specified its damages. All
American has withdrawn this suit.
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. Since the suit
was commenced, All American has paid substantially all of the amount in
controversy.
On March 21, 1997 the Company filed suit against KPR Sports
International, Inc. ("KPR") in United States District Court for the Eastern
District of Pennsylvania, in connection with KPR's breach of contract in its
failure to pay the full agreed upon price relating to its purchase from the
Company of certain Caterpillar branded inventory. In November 1997, the Company
and KPR entered into a settlement agreement providing for six monthly
installment payments of $100,000 each beginning November 1, 1997.
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
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<PAGE>
discussions are preliminary to filing collections actions if the amounts due
from these parties are not settled in such discussions.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a)
EXHIBIT TABLE
Exhibit
No. Description
3(a) Form of Restated Certificate of Incorporation.
(b) By-laws.
4(a) Form of Common Stock Purchase Warrant.
(b) Form of Warrant Agreement.
10(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
Modification of Loan Agreement, dated July 1, 1995
Standstill Agreement, dated August 22, 1997
10(z) Employment Agreement, dated January 1, 1996, 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, 1992.
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997.
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed for the quarter for which
report is being filed.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIG SMITH BRANDS, INC.
Registrant
Date: November 19, 1997
/s/ Terry L. Dober
------------------
Terry L. Dober
Vice President of Finance and
Authorized Registrant Signer
(Principal Accounting
and Financial Officer)
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<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- --------- -----------
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
4(a) Form of Common Stock Purchase Warrant.*
(b) Form of Warrant Agreement.*
10(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**
Modification of Loan Agreement, dated July 1, 1995**
Standstill Agreement, dated August 22, 1997*****
10(z) Employment Agreement, dated January 1, 1996, 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, 1992.****
(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, the
Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended
June 30, 1995, filed on August 17, 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 4, 1996.
**** 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, 1996, filed on April 15, 1997.
***** Filed Herewith.
EXHIBIT 10(c)
STANDSTILL AGREEMENT
THIS STANDSTILL AGREEMENT (the "Agreement") is made and
entered into as of the 22nd day of August, 1997, by and between BIG SMITH
BRANDS, INC. (formerly known as Gemini Marketing Associates, Inc.), a Delaware
corporation ("Borrower") and MERCANTILE BUSINESS CREDIT, INC., a Missouri
corporation ("Lender").
WITNESSETH:
WHEREAS, Borrower is presently in default under that certain
Loan and Security Agreement dated June 25, 1992, as amended by that certain
First Amendment to Loan and Security Agreement dated June 14, 1993, that certain
Second Amendment to Loan and Security Agreement dated December 23, 1993, that
certain Third Amendment to Loan and Security Agreement dated April 4, 1994, that
certain Fourth Amendment to Loan and Security Agreement dated as of October 14,
1994, that certain Fifth Amendment to Loan and Security Agreement dated as of
November 4, 1994, that certain Sixth Amendment to Loan and Security Agreement
dated as of December 15, 1994, which Sixth Amendment was modified by that
certain letter agreement dated February 3, 1995, that certain Seventh Amendment
to Loan and Security Agreement dated June 30, 1995, that certain Eighth
Amendment to Loan and Security Agreement dated May 28, 1996, that certain
default letter dated December 4, 1996, that certain default letter dated April
24, 1997 and that certain default letter dated July 18, 1997 (as so amended, the
"Loan Agreement"; and
WHEREAS, as of the close of business on August 21, 1997, the
total indebtedness owing by Borrower to Lender under the Loan Agreement is
$4,545,561.54; and
WHEREAS, pursuant to the terms of (1) the Loan Agreement, and
(ii) that certain Trademark Collateral Assignment and Security Agreement dated
as of January 24, 1995 and executed by Borrower in favor of Lender and filed
with the U.S. Patent and Trademark office on March 14, 1995 (the "Trademark
Assignment," Lender retains a first priority security interest in all of
Borrower's now owned and/or hereafter arising, created or acquired accounts
receivable, inventory and general intangibles (including, but not limited to,
trademarks and trademark rights) to secure Borrower's payment of the
indebtedness owing to Lender under the Loan Agreement (the "Indebtedness"); and
WHEREAS, pursuant to the terms of that certain Security
Agreement - Equipment executed by Borrower in favor of Lender (the "Equipment
Security Agreement"), Lender retains a security interest in all of Borrower's
now owned and/or hereafter arising, created or acquired equipment to secure
Borrower's payment of the Indebtedness; and
WHEREAS, pursuant to the terms of that certain Deed of Trust
dated as of April 30, 1997 and executed by Borrower in favor of Paul J.
Piechowski, as trustee for Lender and recorded in Jasper County, Missouri in
Book 1532, Page 0716 (the "Deed of Trust"), Lender
<PAGE>
has a lien on certain real estate and improvements thereon owned by Borrower and
located in Carthage, Missouri (the "Real Estate") to secure Borrower's payment
of the Indebtedness;
WHEREAS, as a result of Borrower's defaults under the Loan
Agreement, Borrower acknowledges that Lender may accelerate the Indebtedness and
exercise all of its remedies under the Loan Agreement, the Trademark Assignment,
the Equipment Security and the Deed of Trust (collectively, the "Loan
Documents"), and as otherwise provided by law; and
WHEREAS, Borrower has requested Lender to forebear from
enforcing its rights against Borrower or its assets for a certain period of time
and on certain conditions, as set forth herein; and
WHEREAS, Lender is willing to forebear in the enforcement of
its rights against Borrower and its assets, provided that such forbearance is on
the following terms and conditions and provided further that, except as
expressly provided below, such forbearance does not waive or otherwise prejudice
the rights of Lender;
NOW THEREFORE, in consideration of the premises and the
covenants and agreements contained herein, the parties hereto agree as follows:
1. Terms of Standstill. During the "Standstill Period" (as
defined in Paragraph 2 hereof), the parties agree to act in accordance with the
following provisions:
(a) Amendments to Loan Agreement
(i) The following definitions of "Eligible Outlet Store
Inventory" and "Eligible Cap and Tee Shirt Inventory" are hereby added to
Paragraph 1.1 of the Loan Agreement as Paragraphs (QQ) and (RR):
"QQ) `Eligible Outlet Store Inventory' shall have the
meaning assigned thereto in Paragraph 6.1 hereof.
(RR) `Eligible Cap and Tee Shirt Inventory' shall have the
meaning assigned thereto in Paragraph 6.1 hereof."
(ii) Paragraph 2.5 of the Loan Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof.
"2.5 Notwithstanding anything contained in this Agreement to
the contrary, (a) the principal portion of Borrower's Liabilities
outstanding at any one time prior to November 7, 1997 shall not
exceed $5,500,000; (b) the principal portion of Borrower's
Liabilities outstanding at any one time on and after November 7,
1997 shall not exceed $5,000,000; and (c) the principal portion
of Borrower's Liabilities outstanding at any one time and arising
solely under Paragraph 3.2 below with respect to advances against
Eligible Cap and Tee Shirt Inventory shall not exceed $100,000.
Lender in its sole and absolute discretion
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<PAGE>
may at any time and from time to time, suspend the restrictions
imposed in this Paragraph."
(iii) Paragraph 3.2 of the Loan Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
"Provided no Event of Default or Unmatured Event of Default shall
then exist or be created thereby, Lender shall loan to Borrower,
upon Borrower's execution and delivery to Lender of an initial
Designation of Inventory, the sum of up to (i) Thirty-Five
Percent (35%) of the "value" (hereinafter defined) therein
described of then existing and owned Eligible Raw Materials
Inventory, plus (ii) Sixty-Five Percent (65%) of the value
therein described of then existing and owned Eligible Finished
Goods Inventory, plus (iii) Thirty Percent (30%) of the value
therein described of then existing and owned Eligible Outlet
Store Inventory, plus (iv) Fifty Percent (50%) of the value
therein described of then existing and owned Eligible Cap and Tee
Shirt Inventory and upon Borrower's execution and delivery to
Lender of each subsequent Designation of Inventory, the sum of up
to (i) Thirty-Five Percent (35%) of the value therein described
of then existing and owned Eligible Raw Materials Inventory, (ii)
Sixty-Five Percent (65%) of the value therein described of then
existing and owned Eligible Finished Goods Inventory, (iii)
Thirty Percent (30%) of the value therein described of then
existing and owned Eligible Outlet Store Inventory and (iv) Fifty
Percent (50%) of the value therein described of then existing and
owned Eligible Cap and Tee Shirt Inventory, less a sum of money
equal to the portion of Borrower's Liabilities consisting of
principal then owed by Borrower to Lender on account of loans
theretofore made pursuant to this paragraph 3.2. The "value" of
Inventory shall mean the lesser of (a) Borrower's cost therefor,
determined on a first-in, first-out basis, or (b) the wholesale
market value thereof; less, in either case, any portion o
Borrower's corporate overhead which is attributed thereto. Lender
reserves the right, at any time or times hereafter during which
any Event of Default shall exist, in its sole and absolute
discretion, to reduce the percentage advance rates specified in
this Paragraph 3.2. Notwithstanding anything in this Paragraph
3.2 to the contrary, Lender may at any time and from time to
time, in Lender's solo and absolute discretion, loan to Borrower
more than the above stated percentages of the value of Eligible
Raw Materials Inventory, Eligible Finished Goods Inventory,
Eligible Outlet Store Inventory and/or Eligible Cap and Tee Shirt
Inventory, without notice to Borrower or any other Obligor;
provided, however, that no such over-advance shall establish a
custom or course of dealing or entitle Borrower to any subsequent
over-advance under the same or different circumstances."
On account of Borrower's use and/or consumption of inventory in
the ordinary course of its business and in generating and/or
creating Accounts, Borrower hereby irrevocably authorizes and
directs Lender in its sole and absolute discretion, to deduct
from each of the loans made by Lender pursuant to Paragraph 3.1
above, an amount of monies equal to the loans previously made
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<PAGE>
against such Inventory used to create the Accounts and to apply
the same to that portion of Borrower's Liabilities consisting of
principal owed by Borrower to Lender on account of loans made by
Lender to Borrower pursuant to this Paragraph 3.2.
(iv) Paragraph 3.3 of the Agreement is hereby deleted
in its entirety.
(v) Paragraph 3.1(o) of the Agreement is hereby deleted
in its entirety.
(vi) Paragraphs 6.1, 6.2 and 6.3 of the Loan Agreement
are hereby deleted in their entirety and the following substituted in lieu
thereof:
"6.1 `Eligible Raw Materials Inventory' shall mean that
portion of Inventory which: (a) consists of raw materials, except
the following: boxes, buttons, rivets, cuffs, eyelets, hangers,
hangtags, jean labels, pocket flashers, size labels, sew in
labels and thread; (b) does not violate the negative covenants
and provisions of this Article and does satisfy the positive
covenants and provisions of this Article; (c) is not obsolete;
and (d) Lender has in good faith determined, in accordance with
Lender's customary business practices, is not unacceptable due to
age, type, category and/or quantity. `Eligible Finished Goods
Inventory' shall mean that portion of Inventory which: (a)
consists of finished goods except the following: (i) irregulars
and seconds; (ii) aprons; (iii) caps; (iv) outlet store
inventory; and (v) tee shirts; (b) does not violate the negative
covenants and provisions of this Article and does satisfy the
positive covenants and provisions of this Article; (c) is not
obsolete; and (d) Lender has in good faith determined, in
accordance with Lender's customary business practices, is not
unacceptable due to age, type, category and/or quantity.
`Eligible Outlet Store Inventory' shall mean that portion of
Inventory which is held for sale at Borrower's retail outlet
stores except the following: (a) irregulars and seconds; (b) does
not violate the negative covenants and provisions of this Article
and does satisfy the positive covenants and provisions of this
article; (c) is not obsolete; and (d) Lender has in good faith
determined, in accordance with Lender's customary business
practices is not unacceptable due to age, type, category and/or
quantity. `Eligible Cap and Tee Shirt Inventory' shall mean caps
and tee shirts except the following: (a) those held for sale at
Borrower's retail outlet stores; (b) irregulars and seconds; (c)
does not violate the negative covenants and provisions of this
Article and does satisfy the positive covenants and provisions of
this Article; (d) is not obsolete; and (e) Lender has in good
faith determined, in accordance with Lender's customary business
practices is not unacceptable due to age, type, category and/or
quantity. `Eligible Inventory' shall mean that portion of
Inventory which consists of Eligible Finished Goods Inventory,
Eligible Outlet Store Inventory and Eligible Cap and Tee Shirt
Inventory. Borrower represents and warrants to, and covenants and
agrees with, Lender that (i) the value of Eligible Raw Materials
Inventory is now and shall at all times hereafter be at least
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<PAGE>
Two Hundred Eighty-Six Percent (286%) of the then principal
portion of Borrower's Liabilities represented by loans made by
Lender to Borrower against Eligible Raw Materials Inventory
pursuant to Paragraph 3.2 hereof, (ii) the value of Eligible
Finished Goods Inventory is now and shall at all times hereafter
be at least One Hundred Fifty-Four Percent (154%) of the then
principal portion of Borrower's Liabilities represented by loans
made by Lender to Borrower against Eligible Finished Goods
Inventory pursuant to Paragraph 3.2 hereof, (iii) the value of
Eligible Outlet Store Inventory is now and shall at all times
hereafter be at least Three Hundred Thirty-Three Percent (333%)
of the then principal portion of Borrower's Liabilities
represented by loans made by Lender to Borrower against Eligible
Outlet Store Inventory pursuant to Paragraph 3.2 hereof, and (iv)
the value of Eligible Cap and Tee Shirt Inventory is now and
shall at all times hereafter be at least Two Hundred Percent
(200%) of the then principal portion of Borrower's Liabilities
represented by loans made by Lender to Borrower against Eligible
Cap and Tee Shirt Inventory pursuant to Paragraph 3.2 hereof.
6.2 Borrower warrants and represents to and covenants with
Lender that (a) Inventory shall only be kept at the locations
specified on Exhibit "C" hereto; (b) Borrower, immediately upon
demand by Lender therefor, now and from time to time hereafter,
shall execute and deliver to Lender Designations of Inventory
specifying Borrower's costs of Inventory, Eligible Inventory,
Eligible Raw Materials Inventory, Eligible Finished Goods
Inventory, Eligible Outlet Store Inventory and Eligible Cap and
Tee Shirt Inventory and such other matters and information
relating to Inventory and Eligible Inventory as Lender may
request; (c) Borrower does now keep and hereafter at all times
shall keep correct and accurate records itemizing and describing
the kind, type, quality and quantity of Inventory therefor and
selling price thereof and the daily withdrawals therefrom and
additions available (during Borrower's usual business hours),
upon demand, to any of Lender's officers, employees or agents or
inspection and copying thereof; (d) all Inventory is now and
hereafter at all times shall be good and merchantable quality,
free from defects; (c) Inventory is not now and shall not at any
time or times hereafter be stored with a bailee, warehouseman or
similar party without Lender's prior written consent, and, in
such event Borrower will concurrently therewith cause any such
bailee, warehouseman or similar party to issue and deliver to
Lender, in form and substance acceptable to Lender, warehouse
receipts therefor in Lender's name; (f) any of Lender's officers,
employees or agents shall have the right, upon demand, now and at
any time or times hereafter during Borrower's usual business
hours, to inspect and examine Inventory and any other Collateral
and to check and test the same as to quality, quantity, value and
condition and Borrower agrees to use its best efforts to cause
its employees and agents to cooperate with Lender in this regard,
and after an Event of Default, to pay to Lender, on demand, all
of Lender's costs, fees and expenses in so doing; and (g) all
Inventory is now and shall at all times hereafter be subject to a
first priority perfected security interest in favor of Lender.
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<PAGE>
6.3 In the event of a breach of any representation, warranty
or covenant with respect to the value of Eligible Raw Material
Inventory, Eligible Finished Goods Inventory, Eligible Outlet
Store Inventory and/or Eligible Cap and Tee Shirt Inventory
contained in Paragraph 6.1 above, Borrower shall immediately pay
to Lender an amount of monies sufficient to cure the same and/or
Lender, in its sole and absolute discretion, may pay to itself,
for the account of Borrower, from (i) future loans to be made by
Lender to Borrower and/or (ii) monies, reserves and proceeds
received or collected by Lender pursuant to Paragraphs 4.5 and/or
4.9 above, an amount necessary to satisfy (in whole or in part)
the foregoing requirement. Notwithstanding Paragraph 9.1 hereof,
if Borrower does not timely make such payment or if the monies
referred to in clauses (i) and (ii) above are not sufficient
therefor, the same shall be deemed an Event of Default by
Borrower under this Agreement. Notwithstanding anything in
Paragraph 6.1 or this Paragraph 6.3 to the contrary, Lender may,
at any time and from time to time in its sole and absolute
discretion, suspend or waive Borrower's compliance with the
representations, warranties and covenants with respect to the
value o Eligible Raw Materials Inventory, Eligible Finished Goods
Inventory, Eligible Outlet Store Inventory and/or Eligible Cap
and Tee Shirt Inventory contained in Paragraph 6.1 above, without
notice to Borrower or any other Obligor; provided, however that
no such suspension or waiver shall establish a custom or course
of dealing or entitle Borrower to any subsequent suspension or
waiver under the same or different circumstances."
(a) Lender. Lender covenants and agrees that it will:
(vii) Not file or join in the filing of any involuntary
Petition of Bankruptcy with respect to Borrower or otherwise initiate or
participate in any similar proceedings for the benefit of creditors, including
any proceeding for the appointment of a trustee, receiver, conservator, or
liquidator of Borrower or any portion of its assets;
(viii) Not seek to collect or enforce against Borrower
by litigation or otherwise payment of the Indebtedness, except as provided for
herein;
(ix) Except as provided for herein, not exercise or
enforce any right or remedy against borrower to which Lender would be entitled
under the terms of the Loan Documents by reason of any event of default or
termination occurring thereunder (which furtherance of exercise of enforcement
shall not, however, act as a waiver of Lender's right to enforce any such right
or remedy after termination of the Standstill Period);
(x) Not seek to attach, sequester or otherwise proceed
under the Loan Documents against any assets or property of Borrower;
(xi) Continue to make loan advances to Borrower on the
terms and conditions provided in the Loan Agreement up to the maximum amount for
Borrower's Liabilities provided for in Section 3 of the Loan Agreement, as
amended pursuant to the terms of this Standstill Agreement; and
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<PAGE>
(c) Borrower. In consideration for Lender's agreement to forebear
in exercising its rights and remedies under the Loan Documents during the
Standstill Period, Borrower covenants and agrees:
(xii) Borrower shall retain a consultant and shall
continue to employ a consultant throughout the term of the Standstill Period and
shall permit Lender and its representatives free access to the consultant to
discuss the financial condition and business of Borrower;
(xiii) Borrower shall not sell, transfer or otherwise
dispose of any of its property or assets, other than sales of Inventory for cash
or on ordinary account in the ordinary course of Borrower's business, without
the prior written consent of Lender.
(xiv) Borrower shall devote its best efforts in an
honest and good faith attempt to refinance or recapitalize its business.
(xv) Borrower shall permit Lender and its
representatives to visit and/or inspect any of the properties, corporate books
and financial records of Borrower to audit the accounts receivable and inventory
of Borrower and to discuss the affairs, finances and accounts of Borrower with
any employees of Borrower and representatives of the consultant retained by
Borrower, all at such reasonable times and as often as Lender may reasonably
request;
(xvi) Borrower shall continue to provide to Lender with
all financial statements, reports and documents as required under the Loan
Documents; and
(xvii) Borrower shall comply with and fulfill all of
the additional covenants and other terms and conditions set forth in this
Agreement.
(xviii) Borrower covenants and agrees that (a) by
September 10, 1997, it will cause Big Smith Global Limited ("BSGL") to fully
guaranty Borrower's payment of the Indebtedness and to grant to Lender a first
priority security interest in and to all of BSGL's right, title and interest in
and to those certain royalty payments due and owing to BSGL by Big Yellow
Corporation Limited ("Big Yellow") and the proceeds of the lawsuit filed by BSGL
to recover such royalty payments, and (b) it will cause BSGL to pay to Lender
any sums received from Big Yellow on account of such royalty payments.
2. Standstill Period.
(a) The Standstill Period shall commence upon the execution
of this Agreement and shall terminate at 5:00 p.m. (St. Louis time) on December
5, 1997.
(b) Notwithstanding the foregoing, the Standstill Period
shall terminate earlier upon the occurrence of any of the following events of
termination:
(i) The filing against Borrower of an involuntary
petition for relief under Title 11 of the United States Code, as now constituted
or hereafter amended, or any
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<PAGE>
other applicable federal, state or foreign bankruptcy law or other similar law,
or the appointment of a receiver, liquidator, assignee, trustee, custodian,
sequestrator, conservator or other similar official of Borrower, or of any
substantial part of the property of Borrower, or a petition requesting the
winding up of or liquidation of the affairs of Borrower;
(ii) The filing by Borrower of a petition or answer or
consent seeking relief under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal, state or
foreign bankruptcy law or other similar law, or the consent by Borrower to the
institution of proceedings thereunder or to the filing of any such petition or
the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator, conservator or other similar official of
Borrower, or of any substantial portion of the property of Borrower;
(iii) The breach or violation by Borrower of any
covenant or provision of this Agreement;
(iv) If, at any time during the Standstill Agreement,
there are additional amounts outstanding under the Loan Agreement in excess of
the amounts available under Sections 3.1 and 3.2 of the Loan Agreement and
Paragraph 3 of this Agreement.
(v) Any further deterioration of Borrower's financial
condition, which, as determined by Lender, has a material adverse affect on
Borrower's financial position or operations, the collateral or Borrower's
ability to repay all of the Indebtedness to Lender; or
(vi) The payment by Borrower of all of the
Indebtedness, including, without limitation, all principal borrowers from Lender
under the Loan Agreement, this Agreement or otherwise, all interest accrued
thereon and any and all costs of liquidation and attorney's fees incurred by or
advanced by Lender.
3. Overadvance Reduction.
(a) Borrower and Lender agree that as of the close of
business on August 21, 1997, there was $1,230,728.11 outstanding under the Loan
Agreement in excess of the amounts available under Sections 3.1 and 3.2 of the
Loan Agreement (i.e. a $1,230,728.11 overadvance) (the "Overadvance").
Notwithstanding any prior course of dealing or anything contained in the Loan
Agreement or this Agreement to the contrary, the Overadvance shall not exceed
the following amounts during the following periods:
Week Beginning Maximum Amount of Overadvance
-------------- -----------------------------
August 25, 1997 $1,400,000
September 1, 1997 $1,500,000
September 8, 1997 $1,400,000
September 15, 1997 $1,400,000
September 22, 1997 $1,300,000
September 29, 1997 $1,200,000
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<PAGE>
October 6, 1997 $1,100,000
October 13, 1997 $1,000,000
October 20, 1997 $ 900,000
October 27, 1997 $ 900,000
November 3, 1997 $ 900,000
November 10, 1997 $ 500,000
November 17, 1997 $ 500,000
November 24, 1997 $ 500,000
December 1, 1997 and thereafter $ 0
(b) In addition to the Overadvance reductions set forth in
subparagraph (a), the Overadvance shall be permanently reduced by the amount of
(i) any payments received by Borrower from KPR International, or (ii) any
payments received by BSGL from Big Yellow, which payments shall be immediately
paid to Lender.
(c) If, at any time, additional amounts are outstanding
under the Loan Agreement in excess of the amounts allowed under this Paragraph
and Sections 3.1 and 3.2 of the Loan Agreement, Borrower shall be considered to
be in default of the Loan Agreement and this Agreement.
4. Default Interest. From July 1, 1997 through the Standstill
Period, Borrower's Liabilities under the Loan Agreement and the Term Note shall
bear interest at a "default rate" of three percent (3%) over and above the Prime
Rate.
5. Release. Borrower hereby agrees to release, waive and acquit
Lender and any participant with Lender in the loans outstanding hereunder and
under the Loan Documents, together with their subsidiaries and affiliates, their
officers, directors, agents, employees, and servants, their successors and
assigns, and the insurers and underwriters of any of them from any and all
claims which Borrower has or may have asserted against Lender or any participant
with Lender under any of the Loan Documents or otherwise, whether such claims
resulted from alleged defaults, nonperformance, negligent performance or
otherwise.
6. Fees. Borrower shall pay to Lender an overadvance fee of
$150.00 per day for each and every day that there are amounts outstanding under
the Loan Agreement in excess of the amounts available under Sections 3.1 and 3.2
of the Loan Agreement (i.e. an "Overadvance").
7. Additional Covenants.
(a) Except as expressly provided for herein to the contrary
and except for Borrower's existing defaults which are acknowledged herein and
preserved hereby, Borrower covenants and agrees to continue to perform in
accordance with all of the terms, conditions, provisions, covenants, agreements,
representations and warranties made in the Loan Documents, and Borrower hereby
expressly ratifies and confirms the same.
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<PAGE>
(b) Borrower shall notify Lender in writing of any default
hereunder or any other event causing the Standstill Period to terminate, such
notice to be delivered to Lender within twenty-four hours of Borrower or any
employee, officer, agent or affiliate of Borrower, having received such
knowledge or notice.
8. Representations and Warranties.
(a) Borrower hereby represents and warrants to Lender that
it has the legal power and ability to enter into and perform this Agreement,
that all corporate actions required of Borrower in connection with the
authorization, execution, delivery and performance of this Agreement have been
duly taken, and that when executed and delivered by Borrower, this Agreement
shall constitute the valid and binding obligation of Borrower.
(b) Borrower hereby expressly acknowledges its failure to
comply with various of the covenants contained in the Loan Agreement, and that
such failure was and continues to be an Event of Default as defined in the Loan
Agreement; and Borrower further hereby expressly acknowledges Lender's right to
take any and all actions and other remedies set forth in the Loan Documents and
as otherwise provided for by law immediately upon the termination of the
Standstill Period.
9. Miscellaneous.
(a) Notwithstanding any other provisions hereof, all of the
Indebtedness is presently due and will continue to be due and payable in full
until paid.
(b) Notwithstanding anything herein to the contrary, nothing
herein shall be construed as requiring Lender to extend the term of this
Agreement beyond the period set forth in Section 2 hereof.
(c) Any payments or repayments shall be applied by Lender to
the loans outstanding hereunder and/or under the Loan Agreement in such order
and in such amounts as Lender shall determine in its sole and absolute
discretion.
(d) Borrower hereby agrees to pay all reasonable fees and
expenses, including without limitation, reasonable attorneys fees incurred by
Lender or any participant with Lender in the negotiation, preparation, execution
and enforcement of this Agreement.
(e) This Agreement may not be modified in any manner except
by written agreement signed by all parties hereto.
(f) No course of dealings heretofore or hereafter between
Borrower and Lender or any failure or delay on the part of Lender in exercising
any rights or remedies under the Loan Agreement or this Agreement or existing by
law shall operate as a waiver of any right or remedy of Lender with respect to
Borrower's obligations under the Loan Documents, and no single or partial
exercise of any right or remedy hereunder shall operate as a waiver or
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<PAGE>
preclusion to the exercise of any other rights or remedies Lender may have under
the Loan Documents.
(g) Notwithstanding anything herein to the contrary, nothing
herein shall be construed as a limitation or restriction against Lender's
enforcement of its rights in any proceeding described in Subsection 2(b) of this
Agreement.
(h) Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision and the remaining provisions of this Agreement.
(i) Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to such terms in the Loan Agreement.
(j) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri applicable to contracts made
and to be wholly performed within such State.
(k) Notices required hereunder may be sent Certified Mail,
Return Receipt Requested, or hand delivered to the addresses shown below and
shall be effective upon delivery:
If to Borrower:
Big Smith Brands, Inc.
7300 West Camino Real
Suite 109
Boca Raton, Florida 33433
Attention: Peter Lebowitz
If to Lender:
Mercantile Business Credit, Inc.
100 S. Brentwood, Suite 500
St. Louis, Missouri 63105
Attention: Paul J. Piechowski
10. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT
OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND
OR RENEW SUCH DEBT, ARE NOT ENFORCEABLE. TO PROTECT BORROWER AND LENDER FROM ANY
MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS REACHED BY BORROWER AND
LENDER COVERING SUCH MATTERS ARE CONTAINED IN THIS AGREEMENT AND THE LOAN
DOCUMENTS, WHICH TOGETHER CONSTITUTE A
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<PAGE>
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENTS BETWEEN BORROWER AND LENDER
EXCEPT AS BORROWER AND LENDER MAY LATER AGREE IN WRITING TO MODIFY. THIS
AGREEMENT AND THE LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING
BETWEEN THE PARTIES HERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS
(ORAL OR WRITTEN) RELATING TO THE SUBJECT MATTER HEREOF.
IN WITNESS WHEREOF, the Parties hereto have caused this
Agreement to be duly executed as of August 22, 1997.
MERCANTILE BUSINESS CREDIT, INC.
By:
----------------------------
Title:
-------------------------
BIG SMITH BRANDS, INC.
By:
----------------------------
Title:
-------------------------
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