SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
TO
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NO.: 01-13470
BIG SMITH BRANDS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 13-3005371
- ------------------------------- -------------------
(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) (ZIP CODE)
Issuer's telephone number: (561) 367-8283
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Classes on Which Registered
Common Stock, $.01 par value Pacific Stock Exchange
Common Stock Purchase Warrants Nasdaq SmallCap Market
Securities registered under Section 12(g) of the Exchange Act: NONE
<PAGE>
We are filing this Amendment No. 2 to correct typographical errors in
the original filing of the above-referenced Form 10KSB which resulted in
incorrect tabular positioning of some of the entries in tables on the financial
pages.
<PAGE>
BIG SMITH BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants..............................................................................1
Consolidated Balance Sheets as of December 31, 1996 and 1995...................................................2
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995................................................................................4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996 and 1995....................................................................5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995....................................................................6
Notes to Consolidated Financial Statements.....................................................................7
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Big Smith Brands, Inc.
Carthage, Missouri
We have audited the accompanying consolidated balance sheets of BIG SMITH
BRANDS, INC. AND SUBSIDIARY as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BIG SMITH
BRANDS, INC. AND SUBSIDIARY as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the two years ended December 31,
1996 and 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 15, the Company's
primary lending arrangement does not currently extend beyond June 30, 1997, and
the Company's liquidity needs prior to that date could exceed the amount of
borrowings available under the existing agreement. This raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 15. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Baird Kurtz & Dobson
- ------------------------
Baird Kurtz & Dobson
Joplin, Missouri
February 26, 1997, except for Note 14, as to which the date is April 2, 1997
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---- ----
CURRENT ASSETS
Cash $ 170,551 $ 4,207
Temporary investments 144,906 126,775
Accounts receivable, less allowance for
doubtful accounts;
1996 - $326,144, 1995 - $46,579 3,150,830 2,782,049
Royalties receivable 1,195,803 714,542
Inventories 4,144,764 11,507,966
Prepaid expenses 151,978 209,220
Deferred income taxes 319,873
----------- -----------
Total Current Assets 8,958,832 15,664,632
----------- -----------
PROPERTY AND EQUIPMENT, AT COST
Land 20,000 20,000
Buildings 471,109 460,139
Equipment 1,936,848 1,718,301
Vehicles 81,511 81,511
----------- -----------
2,509,468 2,279,951
Less accumulated depreciation 1,098,311 926,234
----------- -----------
1,411,157 1,353,717
----------- -----------
OTHER ASSETS
Trademarks, less accumulated amortization;
1996 - $48,720, 1995 - $14,329 467,140 501,531
Other 12,130 192,964
----------- -----------
479,270 694,495
----------- -----------
$10,849,259 $17,712,844
=========== ===========
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Current maturities of long-term debt $ 4,213,168 $ 2,031,809
Checks outstanding in excess of bank balance 284,552 177,344
Accounts payable 1,985,318 3,020,436
Accrued expenses 409,780 240,519
Accrued restructuring/litigation 651,302
Accrued royalties 665,674 313,807
Due to stockholder 50,028
------------ ------------
Total Current Liabilities 8,209,794 5,833,943
------------ -----------
LONG-TERM DEBT 587,221 5,782,542
------------ ------------
DEFERRED INCOME TAXES 99,305
------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
1996 and 1995 - 3,930,000 shares 39,300 39,300
Additional paid-in capital 6,315,818 6,315,818
Retained earnings (deficit) (4,302,874) (358,064)
------------ ------------
2,052,244 5,997,054
------------ ------------
$ 10,849,259 $ 17,712,844
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
NET SALES
<S> <C> <C>
Trade $ 21,804,928 $ 21,486,773
Royalties, net of related costs of $937,546 and
$754,224 in 1996 and 1995, respectively 1,298,217 1,124,169
------------ ------------
23,103,145 22,610,942
COST OF GOODS SOLD 19,840,931 18,312,193
------------ ------------
GROSS PROFIT 3,262,214 4,298,749
------------ ------------
OPERATING EXPENSES
Selling 1,966,356 1,894,891
General and administrative 2,547,839 2,263,807
Restructuring and litigation charges 1,709,358
----------- -----------
6,223,553 4,158,698
----------- -----------
INCOME (LOSS) FROM OPERATIONS (2,961,339) 140,051
------------ -----------
OTHER INCOME (EXPENSE)
Miscellaneous income 9,093 5,026
Interest income 15,794 39,469
Interest expense (760,291) (791,282)
Foreign currency transaction gain (loss) (27,499) (39,137)
------------ ------------
(762,903) (785,924)
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (3,724,242) (645,873)
PROVISION (CREDIT) FOR INCOME TAXES 220,568 (220,568)
------------ ------------
NET LOSS ($ 3,944,810) ($ 425,305)
============ ============
NET INCOME (LOSS) PER SHARE (PRIMARY AND
FULLY DILUTED) ($ 1.00) ($ 0.12)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,930,000 3,687,575
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
------ ------- --------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 1 $ 434,241 $ 434,242
DIVIDENDS PAID - $.05 PER
SHARE (100,000) (100,000)
TRANSFER OF S
CORPORATION
EARNINGS INCLUDED
IN RETAINED EARNINGS
TO ADDITIONAL PAID-IN
CAPITAL UPON
CONVERSION TO
C CORPORATION $ 267,000 (267,000)
SALE OF COMMON STOCK
PURSUANT TO AN INITIAL
PUBLIC OFFERING, NET
OF OFFERING COSTS OF
$1,731,883 39,299 6,048,818 6,088,117
NET LOSS - 1995 (425,305) (425,305)
------- ----------- ------------ -----------
BALANCE (DEFICIT),
DECEMBER 31, 1995 39,300 6,315,818 (358,064) 5,997,054
NET LOSS - 1996 (3,944,810) (3,944,810)
------- ----------- ----------- -----------
BALANCE (DEFICIT),
DECEMBER 31, 1996 $39,300 $ 6,315,818 ($4,302,874) $ 2,052,244
======= =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss ($3,944,810) ($ 425,305)
Items not requiring cash:
Depreciation and amortization 240,146 201,940
Deferred income taxes 220,568 (220,568)
Loss on sale or impairment of property and equipment 193,409
Changes in:
Accounts receivable (368,781) 404,955
Royalties receivable (481,261) (456,064)
Inventories 7,363,202 (3,903,173)
Prepaid expenses 57,242 (157,691)
Other assets 165,835 (165,835)
Accounts payable and accrued expenses 267,078 (624,678)
----------- -----------
Net cash provided by (used in) operating activities 3,712,628 (5,346,419)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment 35,670
Purchase of property and equipment (230,437) (460,295)
Purchase of trademark (115,860)
Purchase of temporary investments (18,131) (126,775)
Refund of security deposits 14,999
----------- -----------
Net cash used in investing activities (197,899) (702,930)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance 107,208 (87,939)
Net borrowings (repayments)
under line-of-credit agreement (3,121,767) 330,381
Principal payments on long-term debt (283,798) (307,412)
Principal payments on loan from stockholder (50,028)
Initial public offering costs paid (1,620,468)
Dividends paid (100,000)
Proceeds from issuance of capital stock 7,820,000
------------ -----------
Net cash provided by (used in) financing activities (3,348,385) 6,034,562
----------- -----------
INCREASE (DECREASE) IN CASH 166,344 (14,787)
CASH, BEGINNING OF YEAR 4,207 18,994
----------- -----------
CASH, END OF YEAR $ 170,551 $ 4,207
=========== ===========
</TABLE>
-6-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's revenues are predominately earned from manufacture and sale
of quality work apparel under a variety of brand names, including Big Smith,
Smith Mountain Classics and Big Smith Vintage and the licensed brand,
Caterpillar. As discussed in Note 13, the Caterpillar license was purportedly
terminated in 1996. The Company extends unsecured credit principally to national
chains and local stores throughout the United States and certain manufacturers
and distributors in Europe. One unaffiliated customer (Wal-Mart Stores, Inc.)
accounted for 30.9% and 27.5% of the Company's operating revenues for the years
ended December 31, 1996 and 1995, respectively. Accounts receivable for this
customer totaled approximately $1,010,000 and $853,000 at December 31, 1996 and
1995, respectively. A second unaffiliated customer (Kmart Corp.) accounted for
7.3% and 37.9% of operating revenues for the years ended December 31, 1996 and
1995, respectively. Accounts receivable for this customer totaled approximately
$0 and $648,000 at December 31, 1996 and 1995, respectively. Sales to foreign
customers accounted for 22% and 12% of operating revenues for the years ended
December 31, 1996 and 1995, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Big Smith Global Limited. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY PRICING
All inventories are stated at the lower of cost, determined using the
first-in, first-out method, or market.
-7-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful life of
each asset. Annual depreciation is computed using the straight-line method.
TRADEMARKS
Trademark acquisition costs are being amortized using the straight-line
method over an estimated economic benefit period of fifteen years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
common shares outstanding during the year. Stock warrants and options
outstanding are common stock equivalents and are included in the calculation of
earnings per share to the extent they are dilutive using the treasury-stock
method. Primary and fully-diluted earnings per share are the same.
RECLASSIFICATION
Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 financial statement presentation. These reclassifications
had no effect on net earnings.
NOTE 2: INVENTORIES
Inventories at December 31, 1996 and 1995 consisted of the following:
1996 1995
---- ----
Raw materials $ 1,239,152 $ 1,848,870
Work-in-process 364,946 1,205,774
Finished goods 2,540,666 8,453,322
----------- -----------
$ 4,144,764 $11,507,966
=========== ===========
-8-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3: LONG-TERM DEBT
Long-term debt includes the following notes payable:
1996 1995
---- ----
Revolving line of credit (A) $3,633,177 $6,754,944
Equipment financing and working capital (B) 164,521 189,451
Equipment financing and working capital (C) 357,439 469,956
Trademark note (D) 300,000 400,000
Equipment financing (E) 269,769
Other 75,483
---------- ----------
4,800,389 7,814,351
Less current maturities 4,213,168 2,031,809
---------- ----------
$ 587,221 $5,782,542
========== ==========
Aggregate annual maturities of long-term debt at December 31, 1996 were:
1997 $4,213,168
1998 236,919
1999 233,111
2000 62,860
2001 30,464
Thereafter 23,867
-----------
Total $4,800,389
===========
(A) The line of credit as amended, which matures on June 30, 1997, allows for
borrowing up to $9,000,000 with borrowing levels based on a specified
percentage of eligible accounts receivable and inventories. The loan bears
interest at prime rate plus .75 percent (9.00% at December 31, 1996). The
agreement also provides for additional interest under certain
circumstances and a fixed commitment fee.
The loan is collateralized by accounts receivable, inventories, property
and equipment, general intangibles and insurance of $1,000,000 on the life
of the Company's chief executive officer. The loan agreement contains
various restrictions regarding additional borrowings, capital
expenditures, business acquisitions, sales of property, changes in
ownership, compensation of owners and payment of dividends and requires
the Company to maintain certain financial conditions. At December 31,
1996, the Company was not in compliance with certain of the financial
conditions covenants, including rolling average cost of goods sold to
average inventory and interest coverage ratios and levels of pre-tax
income and stockholders' equity. The Company is also in noncompliance with
the requirement to negotiate new financial conditions covenants for 1997
with the lender by January 15, 1997.
-9-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3: LONG-TERM DEBT (CONTINUED)
(B) The equipment and working capital loan bears interest at 4% and is payable
$2,673 per month including interest, due September 15, 2002 and secured by
certain equipment and general intangibles.
(C) The equipment and working capital loan bears interest at .5% over prime
(8.75% at December 31, 1996) and is payable $12,575 per month including
interest; due March 11, 1999; secured by property and equipment, a $50,000
certificate of deposit and insurance of $500,000 on the life of the
Company's chief executive officer and partially guaranteed by the U. S.
Small Business Administration. In connection with this note payable, the
Company is required, among other things, to maintain certain conditions,
including a limitation on officer's compensation and compliance with the
covenants for the line of credit [(A) above]. This loan is classified as a
current liability at December 31, 1996, because of the Company's
noncompliance with the covenants for the line of credit.
(D) The trademark note is non-interest bearing, payable in annual installments
of $100,000 and due April 18, 1999.
(E) The equipment loan bears interest at 9.7% and is payable $7,921 per month
including interest, due April 20, 2000 and secured by equipment.
NOTE 4: OPERATING LEASES
The Company leases real property under noncancellable operating leases for
periods of 36 to 60 months. Rent expense for the years ended December 31, 1996
and 1995 was approximately $194,000 and $199,000, respectively.
Future minimum lease payments at December 31, 1996 were:
1997 $62,507
1998 5,525
--------
Total future minimum lease payments $68,032
=======
NOTE 5: INCOME TAXES
Prior to becoming a public company, the Company elected under both Federal
and State income tax laws to be taxed as an S Corporation. Under this election,
the Company's income was taxable to the stockholders on their individual income
tax returns. Upon issuance of common stock to the public (Note 10), the Company
changed its income tax status to a C Corporation.
-10-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5: INCOME TAXES (CONTINUED)
The provision (credit) for income taxes includes these components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Taxes currently payable $ 0 $ 0
Deferred income taxes:
Change in tax status from S Corporation to C Corporation 32,488
Benefits of operating loss carryforwards (262,501)
Other 9,445
Change in beginning of year valuation allowance 220,568
--------- ---------
$220,568 ($220,568)
======== ==========
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on the
balance sheets were:
<TABLE>
<CAPTION>
1996 1995
---- ----
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts $ 127,196 $ 18,166
Inventories 68,392
Provision for impairment losses on property and equipment 60,966
Accrued health insurance 55,544 15,600
Accrued compensated absences 4,866
Accrued stock option compensation 17,997 9,039
Accrued restructuring litigation 187,200
Net operating loss carryforwards 1,168,603 262,501
Foreign tax credit carryforward 14,567 14,567
----------- ---------
1,705,331 319,873
Deferred tax liabilities:
Accumulated depreciation (91,578) (99,305)
----------- ---------
Net deferred tax asset before valuation 1,613,753 220,568
----------- ---------
Valuation allowance:
Beginning balance 0 0
(Increase) decrease during the period 1,613,753
----------- ---------
Ending balance 1,613,753 0
----------- ---------
Net deferred tax asset (liability) $ 0 $ 220,568
=========== =========
</TABLE>
-11-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5: INCOME TAXES (CONTINUED)
The above net deferred tax asset (liability) is presented on the balance
sheets as follows:
1996 1995
---- ----
Deferred tax asset - current $ 461,195 $319,873
Deferred tax asset - long-term 1,152,558
Deferred tax liability - long-term (99,305)
Valuation allowance (1,613,753) 0
------------ --------
Net deferred tax asset (liability) $ 0 $220,568
=========== ========
A reconciliation of income tax expense (credit) at the statutory rate to
the Company's actual income tax expense (credit) is shown below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed at the statutory rate (34%) ($1,266,242) ($219,597)
Net effect of S Corporation loss 22,862
Increase (decrease) resulting from:
Non-deductible expenses 25,117 17,144
State income taxes and other, net of federal tax benefit (152,060) (40,977)
Change in deferred tax asset valuation allowance 1,613,753
------------ ---------
Actual tax provision (credit) $ 220,568 ($220,568)
=========== =========
</TABLE>
The Company has unused operating loss and tax credit carryforwards of
approximately $2,996,000 and $14,500, respectively, at December 31, 1996 which
expire principally in 2010 and 2011.
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Included in accounts receivable at December 31, 1996, is approximately
$957,000 due from a domestic company in connection with a bulk sale of
Caterpillar inventories and approximately $565,000 due from certain foreign
entities. The Company is involved in pending or threatened litigation with each
of these entities as discussed in Note 13. The Company has recorded an
-12-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
allowance related to these receivables of $200,000 at December 31, 1996, which
management believes to be adequate based on information currently available.
However, the amounts and timing of collections depends, among other factors, on
the outcome of those proceedings and could differ materially in the near term.
ROYALTIES RECEIVABLE AND PAYABLE
At December 31, 1996, the Company has recorded royalties receivable of
$1,195,803 as a current asset and royalties payable of $665,674 as a current
liability. As discussed in Note 13, the Company is currently involved in various
litigation relating to the purported termination of the Caterpillar licensing
agreement, including amounts to be received from licensees for sale of
Caterpillar goods manufactured abroad and royalties to be paid to Caterpillar.
Based on available information and advice of legal counsel, management believes
the amounts of recorded royalties receivable and payable fairly reflect the
respective amounts due and payable under the agreements. Because the amounts are
involved in litigation, events could occur in the near term that would
materially affect the amounts and timing of collections and payments of these
accounts.
PROVISION FOR INVENTORY OBSOLESCENCE AND MARKETABILITY
At December 31, 1996, the Company had quantities of certain fabric, trim
and finished goods that exceeded the current year volume of sales or use.
Management reduced the carrying value of these items by approximately $169,000
through a charge included in 1996 cost of goods sold and has developed plans for
use or disposition of these goods. No estimate can be made of any additional
loss which might result should management's plans be unsuccessful.
REDUCTION IN VALUE OF LONG-LIVED ASSETS
In connection with the restructuring/litigation described in Note 13, the
Company recorded a charge of approximately $228,000 in 1996 to recognize
impairment in the carrying value of certain building improvements and equipment.
The amount of that estimate could vary materially in the near term.
SELF INSURANCE
The Company maintains a self-insured health program covering substantially
all of its employees. The Company retains the liability for claim amounts up to
$25,000 annually for each covered employee and has reinsured the liability for
annual claim amounts in excess thereof and $1,000,000 in aggregate with a
commercial insurer. Provisions for claims costs are recorded based upon
management's estimates of the Company's aggregate liability for claims incurred.
Claims payments based on actual claims ultimately filed could differ materially
from these estimates.
-13-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
LITIGATION-RELATED OBLIGATIONS
As discussed in Note 13, the Company is a defendant in several lawsuits.
The Company intends to defend against these lawsuits and pursue counterclaims,
if available. The financial statements include estimates of the costs of
defense; they include no accruals of any amounts receivable for counterclaims.
The amounts of ultimate costs related to these lawsuits and amounts which may be
recoverable through counterclaims could differ materially in the near term.
MAJOR CUSTOMERS
Current vulnerabilities due to concentrations of major customers are
discussed in Note 1.
REVENUES FROM MAJOR PRODUCTS
In 1996, approximately $8.3 million of the Company's sales revenues and
substantially all of its royalty revenues pertained to Caterpillar branded
merchandise. See Note 13.
CREDIT ARRANGEMENT WITH MAJOR LENDER
At December 31, 1996, the Company's current liabilities included
borrowings under a revolving line of credit agreement which matures on June 30,
1997. The Company has not obtained a renewal commitment from the lender as of
February 26, 1997.
NOTE 7: LICENSING AGREEMENTS
The Company has entered into licensing agreements with two companies,
Caterpillar, Inc. ("Caterpillar") and Wolverine, to market products under their
respective trademarks. The agreements provide for payments of royalties based on
net sales subject to minimum annual amounts. The Company also receives royalties
for the sale abroad of certain Caterpillar goods manufactured abroad. Royalty
expense, including royalties on both foreign and domestic manufactured goods,
for the years ended December 31, 1996 and 1995 was $1,425,327 and $968,733,
respectively. Net royalty income for the years ended December 31, 1996 and 1995
was $1,298,217 and $1,124,169, respectively.
As discussed in Note 13, the Company's license with Caterpillar
purportedly has been terminated. The royalty agreement with Wolverine has been
terminated by mutual agreement.
-14-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: STOCK OPTIONS
SPECIAL STOCK OPTIONS
The Company granted the chief executive officer options to purchase up to
175,000 and 50,000 shares of common stock for 1995 and 1996, respectively,
exercisable only if the Company achieved certain specified levels of net income
for those years. The 1995 and 1996 options were forfeited because the Company
did not achieve the specified net income levels.
STOCK OPTION PLAN
Under the Company's stock option plan, 500,000 shares of common stock were
reserved for issuance upon exercise of options granted to directors, officers
and employees of the Company. Options issued through December 31, 1996 carry
exercise prices ranging from 35% to 100% of the quoted market price on the date
of the grant. The options vest equally over a period of four years following the
date of grant and the unexercised portion of the option expires and ceases to be
exercisable on the earlier of the five years after the date of grant or a
specified date following termination of employment.
In 1996, the Company elected to continue measuring compensation cost using
the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees".
Compensation cost recognized for the stock option plan amounted to $22,919 and
$23,178 for 1996 and 1995, respectively. Disclosures about the fair value of
options and pro forma disclosures of the effect of measuring compensation based
on the fair value method of accounting have not been presented because
management believes such values do not have a material effect.
Information related to options, other than the special stock options
discussed above, is summarized below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Option
------- ----------
<S> <C> <C>
Outstanding at December 31, 1994 0
Granted 136,650 $ 3.18
Exercised 0
Forfeited (3,650) $ 3.18
-------
Outstanding at December 31, 1995 (0 exercisable) 133,000 $ 3.18
Granted 105,000 $ 2.77
Exercised 0
Forfeited (35,350) $ 3.18
-------
Outstanding at December 31, 1996 (24,413 exercisable) 202,650 $ 2.77
=======
</TABLE>
-15-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8: STOCK OPTIONS (CONTINUED)
Information related to options outstanding at December 31, 1996:
Exercise price range $1.00 - $4.00
Number of options:
Outstanding 202,650
Exercisable 24,413
Weighted average exercise price:
Outstanding $ 2.97
Exercisable $ 3.18
Weighted average remaining contractual life 4.5 years
NOTE 9: ADDITIONAL CASH FLOW INFORMATION
1996 1995
---- ----
NONCASH INVESTING AND FINANCING ACTIVITIES
Accounts payable incurred for purchase of
property and equipment $129,766
Note payable incurred for purchase of trademark $400,000
Long-term debt incurred for purchase of equipment $391,603
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid $785,223 $796,647
NOTE 10: INITIAL PUBLIC OFFERING
On February 8, 1995, the Company made a public offering of 850,000 units,
at $8.00 per unit, each unit consisting of two shares of common stock, par value
$.01 per share, and two common stock purchase warrants. Each of the warrants
entitles the holder to purchase one share of common stock until February 8,
1998, at an exercise price of $4.60 per share. The units offered do not include
options issued to the underwriter to purchase 85,000 units, for a period of five
years from the date of the offering, at an exercise price per unit equal to 120%
of the initial public offering price. In conjunction with the offering, the
Company adopted a 19,750 for 1 stock split. On March 29, 1995, the underwriter
purchased an additional 127,500 units pursuant to the underwriter's
overallotment option.
-16-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments.
CASH AND CHECKS OUTSTANDING IN EXCESS OF CARRYING VALUE
The carrying amount is a reasonable estimate of fair value.
TEMPORARY INVESTMENTS
For these short-term instruments which consist of a certificate of deposit
and other interest-bearing accounts with banks, the carrying amount is a
reasonable estimate of fair value.
NOTES PAYABLE AND LONG-TERM DEBT
Fair value is estimated based on the borrowing rates currently available
to the Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash $170,551 $170,551 $4,207 $4,207
Temporary investments 144,906 144,906 126,775 126,775
Financial liabilities:
Checks outstanding in excess of bank balance 284,552 284,552 177,344 177,344
Long-term debt 4,800,189 4,883,629 7,814,351 7,785,488
Due to stockholder 50,028 45,792
NOTE 12: RELATED PARTY TRANSACTIONS
The Company purchases some of its raw materials from a corporation whose
President is the Secretary of the Company. Such purchases for the years ended
December 31, 1996 and 1995, were $90,847 and $1,053,540, respectively. Accounts
payable to this related party totaled $0 and $80,034 at December 31, 1996 and
1995, respectively. Accounts receivable from this related party totaled $0 and
$115,700 at December 31, 1996 and 1995, respectively.
-17-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13: LITIGATION AND RESTRUCTURING
CATERPILLAR LITIGATION AND OTHER RELATED MATTERS
The Company is currently engaged in litigation in the United States and in
Great Britain with Caterpillar, Inc. with respect to the Company's rights to
continue to manufacture and sell Caterpillar branded products. The Company
believes that its agreement with Caterpillar licensing it to manufacture and
sell such products has not been properly terminated and it remains licensed to
produce such goods through December 31, 1999, the expiration date of the
license. On August 19, 1996, the U. S. District Court ruled that the license had
been properly terminated, a ruling which the Company appealed. On December 6,
1996, the U. S. Court of Appeals denied the appeal.
The Company has filed a counterclaim against Caterpillar and other
parties. All aspects of the litigation are currently pending before the U.S.
District Court but have been stayed pending a scheduling conference which has
been set for mid-April, 1997. The Company expects the case to move to discovery.
There can be no assurance that the outcome of the litigation will be
favorable to the Company, that the Company's defenses to the claims against it
will be vindicated or that any of its counterclaims will be held to be valid. If
the outcome of the litigation is not favorable, such outcome could have a
material effect on the financial conditions of the Company.
The Company is involved in pending or threatened litigation in foreign
jurisdictions with a number of its foreign distributors in connection with their
refusal to pay royalties and accounts receivable for the sales of goods to such
distributors, which the Company believes to be due in respect of sales by such
distributors of Caterpillar branded products prior to the Company's ceasing to
sell such products. Additionally, certain of these distributors have made claims
against the Company relating to the effects of the purported termination of the
Caterpillar license on their arrangements with the Company.
Although the Company's international attorneys have advised the Company
that it has valid claims in these actions for royalties and accounts receivable
owing, there can be no assurance that the outcome of these litigations or of any
of them will be, on net, favorable to the Company. Additionally, the Company
believes that the outcome of these actions, and particularly with respect to any
claims against it in these actions, may depend, in part, on the outcome of the
Caterpillar litigation.
-18-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13: LITIGATION AND RESTRUCTURING (CONTINUED)
A domestic company which purchased substantially all of the Company's
remaining Caterpillar inventory in late 1996 has disputed and refused to pay the
remaining balance of its obligation. The Company is actively pursuing
collection, the ultimate timing and amount of which may be determined in part by
the outcome of the Caterpillar matters described above.
RESTRUCTURING
In the third quarter of 1996 because of the purported termination of the
Caterpillar licensing agreement and the resulting litigation discussed above,
management decided to cease to manufacture, sell or license Caterpillar branded
products and refocus efforts on development of the Company's own brands. On
August 25, 1996, management adopted a plan to downsize and restructure the
Company's operations. This plan includes liquidation of the remaining inventory
of Caterpillar goods, closure of two manufacturing facilities, sale or transfer
of equipment at those facilities, termination or relocation of certain employees
and reorganization of the remaining personnel and business structure. Completion
of the plan is expected to occur in 1997.
Provisions were accrued in 1996 for the costs associated with the
litigation arising from the Caterpillar agreement and the subsequent
restructuring of the Company. Provisions with respect to inventory writedowns
and closeouts were accrued in cost of goods sold. Operating expenses were
accrued for the costs of closing domestic and foreign facilities and impairment
of property and equipment and other long-lived assets; as well as the costs of
litigation and collection of disputed amounts receivable related to the
Caterpillar matters.
Activity in the accrued restructuring/litigation liability account during
1996 is summarized as follows:
Costs and losses originally recognized $ 1,397,481
Subsequent adjustments of costs and losses recognized 311,877
Cash paid and noncash amounts utilized (1,058,056)
-----------
Balance, December 31, 1996 $ 651,302
===========
-19-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 14: SUBSEQUENT EVENT - ADDITIONAL FINANCING
On April 2, 1997, the Company sold convertible debentures in the principal
amount of $1,700,000 to an offshore accredited investor in a private placement.
The debenture bears interest at 6%, matures on March 31, 2000 and is unsecured.
After May 15, 1997, the debenture is convertible into common stock of the
Company at the option of the holder. The conversion price specified is the
lesser of $2.80 or 70% of the stock's market price on the conversion date if
converted between May 16 and July 10, 1997, and the lesser of $2.80 or 67.5% of
the stock's market price on the conversion date if converted after July 10,
1997. The Company has agreed to redeem outstanding debentures at 148% of initial
principal amount if required to do so by any applicable law, rule or regulation
of any regulatory body, securities exchange or trading market. The Company paid
fees aggregating $255,000 and issued a warrant to purchase 100,000 shares of the
Company's common stock to the investment banker that arranged the transaction.
The warrant provides for a purchase price of $2.00 per share and expires on
March 31, 2002.
Because at the time of issuance the debenture holder's conversion rights
allowed a conversion into common stock with a market value in excess of the
debenture principal, this excess at the debenture issuance date will be credited
to additional paid-in capital. The resulting discount on the debentures will be
charged to 1997 operations as imputed interest.
NOTE 15: MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As discussed in Notes 3 and 6, the Company's principal lending arrangement
does not currently extend beyond June 30, 1997, and the Company's liquidity
needs prior to that date could exceed the amount of borrowings available under
the existing agreement. The Company is taking several steps to obtain additional
sources of liquidity and provide for a longer-term lending arrangement,
including:
o Making new loan arrangements. The Company has received several
proposals relating to lending arrangements which would provide for
term loans on property, equipment and other long-lived assets;
collateralized borrowings against accounts receivable and inventory;
and additional working capital lines of credit. The proposals
received have been from entities of national repute in this segment
of the financial services industry. These proposals are all subject
to the lender's due diligence process after acceptance of a proposal
by the Company. Management anticipates the Company will accept one
of the several proposals some time during the week of April 14,
1997, although no assurances are made that an acceptance will occur
by that date. Management believes that the final approval process
will be completed within thirty days after the completion of the due
diligence.
o Pursuing the collection of disputed accounts receivables (see Note
6).
-20-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Management believes it will be successful in meeting the Company's
liquidity needs. Although not currently planned, realization of assets in other
than the ordinary course of business in order to meet liquidity needs could
incur losses not reflected in these financial statements.
-21-
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED, NOT REVIEWED
BY INDEPENDENT ACCOUNTANTS)
Provision
Total Operating (Credit) For Earnings
Operating Income Other Income (Loss) Per
Calendar Quarter Revenues (Loss) Expenses Taxes Share
- ---------------- -------- ------ -------- ----- -----
1996
<S> <C> <C> <C> <C> <C>
First $ 4,537,498 $ (67,127) $ 199,999 $(104,178) $ (0.04)
Second 4,903,314 (224,565) 197,923 (164,773) (0.07)
Third(1) 6,541,815 (2,171,329) 181,884 504,087 (0.73)
Fourth(1) 7,120,518 (498,318) 183,097 (14,568) (0.16)
------------ ----------- --------- --------- --------
$ 23,103,145 ($2,961,339) $ 762,903(2) $ 220,568 $ (1.00)
============ =========== ========= ========= ========
1995
First $ 4,394,536 $ 71,510 $ 182,977 $ (14,248) $ (0.03)
Second 5,679,590 17,457 151,023 (48,087) (0.03)
Third 6,618,458 253,539 223,032 12,745 0.01
Fourth 5,918,358 (202,455) 228,892 (170,978) (0.07)
------------ ----------- --------- --------- --------
$ 22,610,942 $ 140,051 $ 785,924(2) ($220,568) $ (0.12)
============ =========== ========= ========= ========
</TABLE>
(1) Operating income (loss) reflects provisions of $311,877 and $1,397,481 for
the fourth and third quarters, respectively, for restructuring and
litigation costs. Also included in third quarter operating results are
$814,000 of inventory writedowns charged to cost of goods sold.
(2) Other expenses are comprised primarily of interest expense in the amounts
of $760,291 and $791,282 for 1996 and 1995, respectively.
-22-
