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 June 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 July 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 June 30, 1997 3
Statements of Operations for the three
month and six month periods ended
June 30, 1997 and 1996 4
Statement of Stockholders' Equity for the
six months ended June 30, 1997 5
Statements of Cash Flows for the six months
ended June 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 14
SIGNATURE 18
EXHIBIT INDEX 19
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 39,814
Temporary investments 72,233
Accounts receivable, less allowance
for doubtful accounts of $343,468 2,381,992
Royalties receivable 1,194,681
Inventories 5,167,836
Prepaid expenses 248,745
------------
Total Current Assets 9,111,214
PROPERTY AND EQUIPMENT, AT COST
Land 20,000
Buildings 471,109
Equipment 1,947,268
Vehicles 83,085
------------
2,521,462
Less Accumulated depreciation 1,188,470
1,332,992
OTHER ASSETS
Security deposits 18,042
Loan Fees, net of amortization of $15,544 348,482
Trademark, net of amortization of $65,915 449,945
------------
$ 11,254,762
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,952,122
Checks outstanding in excess of bank balance 364,846
Accounts payable 2,131,136
Accrued Restructuring/Litigation 603,939
Accrued royalties 665,674
Accrued expenses 353,287
------------
Total Current Liabilities 8,071,004
LONG-TERM DEBT 1,664,297
------------
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 (5,665,657)
-------------
1,519,461
------------
$ 11,254,762
============
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 Six Month Period
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES
<S> <C> <C> <C> <C>
Trade $ 2,365,784 $ 4,509,572 $ 4,109,607 $ 8,667,566
Royalties, net of related costs of $300,890
and $491,494 in the three months and six
months ended June 30, 1996, respectively 0 393,742 0 773,248
----------- ----------- ----------- -----------
2,365,784 4,903,314 4,109,607 9,440,814
COST OF GOODS SOLD 1,964,980 4,035,236 3,431,738 7,636,111
----------- ----------- ----------- -----------
GROSS PROFIT 400,804 868,078 677,869 1,804,703
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling 373,208 427,707 662,486 891,715
General and administrative 516,468 664,936 996,196 1,204,683
----------- ----------- ----------- -----------
889,676 1,092,643 1,658,682 2,096,398
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS (488,872) (224,565) (980,813) (291,695)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Miscellaneous income (48,946) (19,263) (74,934) (34,399)
Interest expense (198,872) (178,660) (307,035) (363,521)
----------- ----------- ----------- -----------
(247,818) (197,923) (381,969) (397,920)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (736,690) (422,488) (1,362,782) (689,615)
CREDIT FOR INCOME TAXES 0 164,773 0 268,951
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (736,690) $ (257,715) $(1,362,782) $ (420,664)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (.19) $ (.07) $ (0.35) $ (0.11)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,952,000 3,930,000 3,941,000 3,930,000
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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) -- -- -- (1,362,783) (1,362,783)
--------- ------- ---------- ----------- -----------
Balances at June 30, 1997 3,995,987 $39,960 $7,145,158 $(5,665,657) $ 1,519,461
========= ======= ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $(1,362,782) $(420,664)
Item not requiring cash:
Depreciation and amortization 122,898 121,705
Deferred income taxes (268,951)
Changes in:
Accounts receivable 769,960 160,188
Inventories (1,023,073) 469,139
Prepaid expenses (102,680) (131,862)
Other assets (5,978) (73,719)
Accounts payable and accrued expenses 41,962 106,133
----------- ---------
Net cash used in operating activities (1,559,693) (38,031)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (11,994) (82,533)
Sale (purchase) of temporary investments 72,673 (73,838)
----------- ---------
Net cash provided (used) in investing activities 60,679 (156,371)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance 80,294 217,754
Net borrowings (repayments) under line-of-credit agreement (32,791) 139,429
Principal payments on long-term debt (115,226) (108,640)
Net proceeds from convertible debenture 1,436,000
Principal payment on loan from stockholder (50,028)
Net cash provided by financing activities 1,368,277 198,515
----------- ---------
INCREASE (DECREASE) IN CASH (130,737) 4,113
CASH, BEGINNING OF PERIOD 170,551 4,207
----------- ---------
CASH, END OF PERIOD $ 39,814 $ 8,320
=========== =========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
Big Smith Brands, Inc. (the "Company") manufactures and sells quality work
apparel under a variety of brand names, including Big Smith, Smith Mountain
Classics 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 June 30, 1997 and the results of its operations, stockholders'
equity and its cash flows for the three month period then ended.
The results of operations for the period ended June 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
six month periods ended June 30, 1997 and June 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. 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, 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 June 30, 1997 and June 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. 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. CIT has
substantially completed its due diligence. Closing is pending subject to
completion of negotiations with MBCI as to the precise amount of its remaining
second lien so the Company can comply with the excess availability provisions of
the letter of intent with CIT. 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".
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<PAGE>
The Company has also initiated proceedings to collect certain
significant delinquent accounts receivable from its foreign licensees and
distributors. See "Part II. Other Information 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, to be formally 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.
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 JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
Net trade sales, for the three months ended June 30, 1997 decreased by
$2.14 million, or 47.5%, to $2.37 million from $4.51 million for the three
months ended June 30, 1996. Net sales for the three months ended June 30, 1997
of Caterpillar branded products, Big Smith and other branded products, and
private label products were $0, $2.0 million and $370,000, respectively, as
compared with $1.89 million, $1.77 million and $850,000, respectively, for the
three months ended June 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 a license dispute and purported termination by
Caterpillar, Inc. ("Caterpillar"). See "Part II. Other Information 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 reflected 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 third quarter of fiscal 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 June 30, 1997, sales of
Caterpillar branded products, Big Smith and other branded products, and private
label products accounted for 0.0%, and 84.8% and 15.2% of net trade sales,
respectively, as compared with 41.9%, 39.2% and 18.9% of net trade sales,
respectively, for the three months ended June 30, 1996. 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 June 30, 1997 decreased
to $0 from $393,742 for the three months ended June 30, 1996 reflecting the
cessation of sales of Caterpillar branded products. The Company also is taking
initial steps towards establishing an international network for distribution of
Big Smith and other branded products, through meetings currently scheduled for
September with candidates for distributorships in three countries.
Gross profit, excluding that from net royalties, for the three months
ended June 30, 1997 was $401,000, or 16.9% of net trade sales, compared to
$470,000, or 10.4% of net trade sales, for the three months ended June 30, 1996.
The increase in gross profit percentage was primarily due to the decrease in low
margin private label sales resulting from the discontinued private label
programs for the Kmart Corporation, a reduction in sales of closeouts and
irregulars over the same period last year, and the increase in sales of Big
Smith and other branded products which were only partially offset by the loss of
sales of Caterpillar branded products.
-9-
<PAGE>
Selling expenses decreased by $60,000 to $370,000, or 15.6% of net
trade sales, for the three months ended June 30, 1997, from $430,000, or 9.5% of
net trade sales, for the three months ended, June 30, 1996. This decrease in
selling expenses resulted principally from a decrease of $102,000 in royalty
expense resulting from decreased sales by the Company of Caterpillar branded
products, a decrease of $39,000 in advertising and trade shows expense and a
decrease in shipping expense of $51,000 resulting from the decrease in trade
sales partially offset by an increase of $115,000 in selling expense relating to
design, personnel and sampling of the new sportswear division. General and
administrative expenses were $520,000, or 21.9% of net trade sales during the
three months ended June 30, 1997, compared with $660,000, or 14.6% of net trade
sales, for the three months ended June 30, 1996. The decrease in general and
administrative expense was primarily due to a decrease of payroll and related
expense of $95,000 along with a decrease in other administrative costs related
to the downsizing and restructuring. The Company has retained a consultant to
analyze, among other things, its selling and general and administrative
expenses, and report to the Company during the third quarter of 1997. The
Company believes that it will begin to implement such consultant's
recommendations immediately.
The Company's interest expense for the three months ended June 30, 1997
was $199,000, or 8.4% of net trade sales, as compared with $179,000, or 4.0% of
net trade sales, for the three months ended June 30, 1996. The increase in
interest expense is primarily related to the amortization of the discount on the
Debentures. The credit for income taxes for the three month period ended June
30, 1997 declined to $0 compared to $165,000 for the three month period ended
June 30, 1996.
As a result of the foregoing, the Company's net loss for the three
months ended June 30, 1997 increased to $736,690 from a net loss of $257,715 for
the three months ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30,1996
Net trade sales, for the six months ended June 30, 1997 decreased by
$4.56 million, or 52.6%, to $4.11 million from $8.67 million for the six months
ended June 30, 1996. Net trade sales for the six months ended June 30, 1997 of
Caterpillar branded products, Big Smith and other branded products, and private
label products were $80,000, $3.55 million and $489,000, respectively, as
compared with $3.31 million, $3.41 million and $1.95 million, respectively, for
the six months ended June 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 a license dispute and purported termination
by Caterpillar. See "Part II. Other Information 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 reflected 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 third
quarter of fiscal 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 six months ended June 30, 1997, sales of Caterpillar branded products, Big
Smith and other branded products, and private label products accounted for 1.9%
and 86.4% and 11.7% of net trade sales, respectively, as compared with 38.1%,
39.4% and 22.5% of net trade sales, respectively, for the six months ended June
30, 1996. Net royalties from distributors for the manufacture and sale of goods
under the Caterpillar labels abroad net of related costs for the six months
ended June 30, 1997 decreased to $0 from $773,248 for the six months ended June
30, 1996 reflecting the cessation of sales of Caterpillar branded products. The
Company also is taking initial steps towards establishing an international
network for distribution of Big Smith and other branded products, through
meetings currently scheduled for September with candidates for distributorships
in three countries.
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<PAGE>
Gross profit, excluding that from net royalties, for the six months
ended June 30, 1997 was $680,000, or 16.5% of net trade sales, compared to $1.03
million, or 11.9% of net trade sales, for the six months ended June 30, 1996.
The increase in gross profit percentage was primarily due to the decrease in low
margin private label sales resulting from the discontinued private label
programs for the Kmart Corporation, a reduction in sales of closeouts and
irregulars over the same period last year, 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 $230,000 to $660,000, or 16.1% of net
trade sales, for the six months ended June 30, 1997, from $890,000, or 10.3% of
net trade sales, for the six months ended June 30, 1996. The decrease in selling
expenses resulted principally from a decrease of $187,000 in royalty expense
resulting from decreased domestic sales by the Company of Caterpillar branded
products, a decrease of $71,000 in advertising and trade shows expense and a
$44,000 decrease in sample expense, and a decrease of $78,000 in shipping
expense resulting from the decrease in trade sales partially offset by an
increase of $115,000 in selling expense relating to design, personnel and
sampling of the new sportswear division. General and administrative expenses
were $1.0 million, or 24.3% of net trade sales during the six months ended June
30, 1997, compared with $1.2 million, or 13.8% of net trade sales, for the six
months ended June 30, 1996. The decrease in general and administrative expense
was primarily due to a decrease of $159,000 in payroll and related expenses due
to the Company's downsizing and restructuring following its discontinuance of
the Caterpillar branded goods program.
The Company's interest expense for the six months ended June 30, 1997
was $307,000, or 7.5% of net trade sales, as compared with $364,000, or 4.2% of
net trade sales, for the six months ended June 30, 1996. The increase in
interest expense is primarily related to the amortization of the discount on the
Debentures. The credit for income taxes for the six month period ended June 30,
1997 declined to $0 compared to $269,000 for the six month period ended June 30,
1996.
As a result of the foregoing, the Company's net loss for the six months
ended June 30, 1996 increased to $1,362,782 from a net loss of $420,664 for the
six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
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. On June 10, 1997, the Company entered into a letter of intent with
the 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. CIT has substantially completed its due
diligence. Closing is pending subject to completion of negotiations with MBCI as
to the precise amount of its remaining second lien so the Company can comply
with the excess availability provisions of the letter of intent with CIT. The
Company has also initiated proceedings to collect certain significant delinquent
accounts receivable from its foreign licensees and distributors. See "Part II.
Other Information Item 1. Legal Proceedings--Other Litigation."
On April 2, 1997, the Company closed an offshore placement of $1.7
million of its 6% Convertible Preferred Debentures due March 31, 2000 (the
"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 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.
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<PAGE>
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 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, through meetings currently scheduled for
September with candidates for distributorships in three countries. Additionally,
the Company has developed a new product line of branded young mens' sportswear,
to be formally 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 represented by Caterpillar
branded products.
The Company has financed its operations primarily with borrowings under
its line of credit and the proceeds from its initial public offering and
Regulation S private placement since the consummation of its initial public
offering. The Company has reduced inventories substantially from the prior year
levels, primarily in connection with cessation of sales of Caterpillar branded
products. The Company also has certain significant delinquent accounts
receivable from its foreign licensees and distributors and the purchaser of
certain Caterpillar inventory which have a significant impact on the amount
available to the Company under its working capital lines of credit. The Company
has instituted proceedings to collect these accounts receivable. See "Part II.
Other Information Item 1. Legal Proceedings--Other Litigation." Cash used in
operating activities totaled $1.6 million and $38,000 in the three months ended
June 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 June 30, 1997 and June 30, 1996, working capital was $1.0 million
and $4.4 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 June 30, 1997, 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 June 30, 1997 and June 30, 1996 was $3.6
million, and $6.9 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 permits 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 is secured by the Company's accounts receivable,
inventory, property and equipment and general intangibles and matured on June
30, 1997. The Company is currently negotiating with MBCI a stand-still
forbearance agreement pursuant to which MBCI would continue to provide funding
availability under line of credit until the closing of the contemplated new line
of credit.
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CAPITAL EXPENDITURES
Capital expenditures totaled approximately $12,000 for the six months
ended June 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.
See "--Liquidity and Capital Resources."
FORWARD LOOKING STATEMENTS
Certain statements contained in this discussion may be deemed forward
looking statements that involve a number of risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
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 status of relations between the Company
and its primary customers, licensees, and distributors, 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-K for the year ended December
31, 1996.
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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 pleadings. On July 26, 1996,
the defendants filed an answer to the summons and complaint stating affirmative
defenses of failure to assert a claim, waiver, amendment, promissory estoppel,
equitable estoppel, laches, failure to provide an opportunity to cure, unclean
hands and misuse, and counterclaims for breach of contract, tortious
interference with contractual relations, interference with prospective business
relations, conspiracy, commercial disparagement and breach of franchise
agreement. S. Peter Lebowitz also filed an additional motion to dismiss for
failure to state a claim against him in his individual capacity.
On July 29, 1996, the Company filed a motion for a preliminary
injunction against Caterpillar's purported termination of the Agreement. On
August 19, 1996, the District Court entered an order (the "August 19th Order")
denying the Company's motion for a preliminary injunction and granting
Caterpillar's motion for summary judgment on the grounds that the Company had
breached the Agreement by failing to obtain certain agreements from
manufacturers producing Caterpillar branded apparel as was required under the
Agreement, and that the Agreement permitted Caterpillar to terminate based upon
such breach regardless of whether or not it was material. On September 24, 1996,
the District Court denied the Defendant's request for reconsideration.
On 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
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<PAGE>
whether Illinois common law has a "good cause" requirement for terminating a
franchise agreement that meets the definition of a franchise under Illinois law,
but does not involve a franchise located in the State of Illinois and stayed
further action in the pending litigation until the Court of Appeals rules on the
certified question. On October 4, 1996, the Defendants filed a Petition for
Permission to Appeal with the Seventh Circuit Court of Appeals (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 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 and a
purchaser in 1996 of certain of the Company's remaining Caterpillar branded
inventory. 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
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. The parties are completing the discovery process and are waiting for the
court to determine an available trial date.
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. This
suit has been 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 paid $118,000 of the total amount claimed by the Company. The remaining
$15,000 is still the subject of litigation.
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 inventory. KPR has filed an answer and
affirmative defenses and the parties are currently engaged in discovery.
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<PAGE>
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.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Stockholders held on June 12, 1997, 3,913,000
of the 3,930,000 shares eligible to vote at the meeting were cast in favor of
the election of each of the following persons to serve on the Board of Directors
of the Company: S. Peter Lebowitz, Julian Shaps, Glen Freeman, Theodore
Listerman and Jack Schultz, constituting the entire Board of Directors. 17,000
shares eligible to vote at the meeting were cast against the election of the
above named persons as directors, and 0 shares eligible to vote at the meeting
were withheld. 3,914,000 of the 3,930,000 shares eligible to vote at the meeting
were cast for, 16,000 votes were cast against and 0 votes were withheld,
approving the appointment of the firm of Baird, Kurtz & Dobson as the Company's
Independent Auditors for the fiscal year ending December 31, 1997.
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(y) 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.***
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<PAGE>
(b) No reports on Form 8-K have been filed for the quarter for which
report is being filed.
- --------------------------
* 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 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.
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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: AUGUST 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(y) 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.***
- --------------------------
* 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 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.
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