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 March 31, 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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7100 West Camino Real, Suite 201, Boca Raton, Florida 33433
-----------------------------------------------------------
(Address of Principal Executive Offices)
(407) 367-8283
--------------
(Issuer's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes__X__ No____
Number of shares of common stock outstanding as of May 15, 1997: 3,930,000
Transitional Small Business Disclosure Format (check one): Yes____ No__X__
<PAGE>
INDEX
Pages
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet as of March 31, 1997 3
Statements of Operations for the three
months ended March 31, 1997 and 1996 4
Statement of Stockholders' Equity for the
three months ended March 31, 1997 5
Statements of Cash Flows for the three months
ended March 31, 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 11
SIGNATURE 12
EXHIBIT INDEX 13
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BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash $ 35,792
Temporary investments 74,257
Accounts receivable, less allowance
for doubtful accounts of $334,394 2,481,056
Royalties Receivable 1,195,803
Inventories 4,561,025
Prepaid expenses 239,618
------------
Total Current Assets 8,587,551
------------
PROPERTY AND EQUIPMENT, AT COST
Land 20,000
Buildings 471,109
Equipment 1,943,478
Vehicles 81,511
------------
2,516,098
Less accumulated depreciation 1,148,898
------------
1,367,200
OTHER ASSETS
Security deposits 12,130
Trademark, net of amortization 455,676
------------
$ 10,422,557
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,847,647
Checks outstanding in excess of bank balance 557,894
Accounts payable 2,060,309
Accrued restructuring/litigation 626,835
Accrued expenses 432,760
Accrued royalties 665,674
------------
Total Current Liabilities 8,191,119
------------
LONG-TERM DEBT 805,286
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 1996 - 3,930,000 shares 39,300
Additional paid-in capital 6,315,818
Retained earnings (deficit) (4,928,966)
------------
1,426,152
------------
See Notes to Consolidated Financial Statements $ 10,422,557
============
</TABLE>
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BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
NET SALES
<S> <C> <C>
Trade $ 1,743,823 $ 4,157,993
Royalties, net of related costs of $190,603 in 1996 0 379,505
------------ --------------
1,743,823 4,537,498
COST OF GOODS SOLD 1,466,758 3,600,874
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GROSS PROFIT 277,065 936,624
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OPERATING EXPENSES
Selling 289,278 464,007
General and administrative 479,728 539,744
------------- --------------
769,006 1,003,751
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INCOME (LOSS) FROM
OPERATIONS (491,941) (67,127)
-------------- ---------------
OTHER INCOME (EXPENSE)
Miscellaneous (expense) (25,988) (15,138)
Interest expense (108,163) 184,861
-------------- --------------
(134,151) (199,999)
--------------- --------------
INCOME (LOSS) BEFORE
INCOME TAXES (626,092) (267,129)
CREDIT FOR INCOME TAXES 0 104,178
------------- --------------
NET INCOME (LOSS) $ (626,092) $ (162,948)
============= ===============
NET INCOME (LOSS) PER SHARE $ (.16) (0.04)
============== ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,930,000 3,930,000
============= ==============
</TABLE>
See Notes to Consolidated Financial Statements
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BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 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
Net Income (loss) - - - (626,092) (626,092)
---------- ---------- ------------ -------------- -----------
Balances at March 31, 1997 3,930,000 $ 39,300 $ 6,315,818 $ (4,928,966) $ 1,426,152
========= ========== ============ ============== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (626,092) $ (162,948)
Item not requiring cash:
Depreciation, amortization & impairment 62,051 52,185
Deferred income taxes (4,800)
Changes in:
Accounts receivable 669,774 455,533
Inventories (416,261) 204,783
Prepaid expenses 87,640 108,926
Other Assets (47,373)
Accounts payable and accrued expenses 73,504 (631,826)
Due to Stockholder (50,028)
---------- ----------
Net cash provided (used) in operating activities (324,664) (293,400)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (6,630) (31,202)
Reductions (purchase) of temporary investments 70,649 (93,782)
---------- ------------
Net cash provided (used) in investing activities 64,019 (124,984)
---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance 273,342 319,870
Net borrowings under line-of-credit agreement (132,622) 136,975
Principal borrowings (payments) on long-term debt (14,834) (32,427)
---------- ----------
Net cash provided by financing activities 125,886 424,418
---------- ----------
INCREASE (DECREASE ) IN CASH (134,759) 6,034
CASH, BEGINNING OF PERIOD 170,551 4,207
---------- -----------
CASH, END OF PERIOD $ 35,792 $ 10,241
=========== ===========
</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 March 31, 1997 and the results of its operations and its cash
flows for the three month periods ended March 31, 1997 and March 31, 1996.
The results of operations for the period ended March 31, 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.
NOTE 4: CONTINGENCIES
Certain contingencies relating to the Company's financial condition are
discussed in "Part II Item 1. Legal Proceedings" of this Form 10-QSB.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
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 the 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 hereof or to reflect the occurrence of
unanticipated events.
Financial Disclosure. The discussion and analysis set forth below is
for the three month periods ended March 31, 1997 and March 31, 1996. 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.
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."
Going Concern. The Company's viability as a going concern is dependent
upon the successful refinancing of its principal line of credit, which expires
on June 30, 1997 and its meeting its liquidity needs prior to such date, which
needs could exceed the amount of borrowings available under the existing
agreement. The Company has taken several steps to obtain additional sources of
liquidity and provide for longer-term lending arrangements including soliciting
several proposals from lenders of national repute relating to lending
arrangements which would provide for term loans secured by property, equipment
and other long-lived assets; collateralized borrowings against accounts
receivable and inventory; and additional working capital lines of credit.
Following the receipt and evaluation of several such proposals, the
Company determined to accept the proposal proffered by The CIT Group/Credit
Finance ("CIT"). CIT's proposal was subject to successful completion of its due
diligence, and the Company believes that CIT has nearly completed its due
diligence. Management currently expects to receive a firm commitment to provide
such financing arrangements from CIT. The Company currently believes that the
new arrangements may be completed within thirty days after its receipt of a firm
commitment from CIT.
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<PAGE>
The Company has also initiated proceedings to collect certain
significant delinquent accounts receivable from its foreign distributors. See
"Item 1. Legal Proceedings". Additionally, on April 2, 1997, the Company closed
a placement of $1.7 million of Debentures with an offshore investor. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources".
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 MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Net trade sales, for the three months ended March 31, 1997 decreased by
$2.42 million, or 58.2%, to $1.74 million from $4.16 million for the three
months ended March 31, 1996. Net sales for the three months ended March 31, 1997
of Caterpillar branded products, Big Smith and other branded products, and
private label products were $.08 million, $1.55 million and $.11 million,
respectively, as compared with $1.41 million, $1.65 million and $1.10 million,
respectively, for the three months ended March 31, 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, Inc. ("Caterpillar"). See "Item 1.
Legal Proceedings". The decrease in sales of Big Smith and other branded
products resulted from two one-time sales of those products during the three
months ended March 31, 1996, which were not repeated during the three months
ended March 31, 1997. The decrease in private label sales resulted from the
discontinued private label programs for the Kmart Corporation. 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 March 31, 1997
were $0 as compared with $379,505 for the three months ended March 31, 1996.
Gross profit, excluding that from net royalties, for the three months
ended March 31, 1997 was $.28 million, or 16.1% of net trade sales, compared to
$.56 million, or 13.5% of net trade sales, for the three months ended March 31,
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. For the three months ended March 31, 1997,
sales of Caterpillar branded products, Big Smith and other branded products, and
private label products accounted for 4.6%, and 89.1% and 6.3% of net trade
sales, respectively, as compared with 33.9%, 39.7% and 26.4% of net trade sales,
respectively, for the three months ended March 31, 1996.
Selling expenses decreased by $.17 million to $.29 million, or 16.7% of
net trade sales, for the three months ended March 31, 1997, from $.46 million,
or 11.1% of net trade sales, for the three months ended March 31, 1996. This
decrease in selling expenses resulted principally from a decrease of $86,000 in
royalty expense a decrease of $49,000 in advertising and trade shows expense and
a $40,000 decrease in sample expense, each related to the discontinuance by the
Company of its Caterpillar branded goods program and a decrease in shipping
expense of $35,000 resulting from the decrease in trade sales, which were only
partially offset by a change in classification to include in selling expenses
rather than general and administrative expenses certain personnel and related
expenses of approximately $40,000. General and administrative expenses were $.48
million, or 27.6% of net trade sales during the three months ended March 31,
1997, compared with $.54 million, or 13.0% of net trade sales, for the three
months ended March 31, 1996. The decrease in general and administrative expense
was primarily due to a decrease of payroll of $61,000 along with a decrease in
other administrative costs related to the Company's downsizing and restructuring
following its discontinuance of the Caterpillar branded goods program which were
only partially offset by an increase of $30,000 in professional fees, consulting
fees, and costs associated with being a public Company.
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<PAGE>
The Company's interest expense for the three months ended March 31,
1997 was $.11 million, or 6.3% of net trade sales, as compared with $.18
million, or 4.3% of net trade sales, for the three months ended March 31, 1996.
This decrease resulted primarily from a decrease in inventory which resulted in
reduced borrowings for the three months ended March 31, 1997 as compared with
those during the three months ended March 31, 1996.
As a result of the foregoing, the Company's net loss for the three
months ended March 31, 1997 increased to $626,092 from a net loss of $162,948
for the three months ended March 31, 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 expires on June
30, 1997 and its meeting its liquidity needs prior to such date, which needs
could exceed the amount of borrowings available under the existing agreement.
The Company is taking several steps to obtain additional sources of liquidity
and provide for longer-term lending arrangements. The Company has received
several proposals from lenders of national repute relating to lending
arrangements which would provide for term loans secured by property, equipment
and other long-lived assets; collateralized borrowings against accounts
receivable and inventory; and additional working capital lines of credit.
Following the receipt and evaluation of several such proposals, the Company
determined to accept the proposal proffered by CIT. CIT's proposal was subject
to successful completion of its due diligence, and the Company believes that CIT
has nearly completed its due diligence. Management currently expects to receive
a firm commitment to provide such financing arrangements from CIT. The Company
currently believes that the new arrangements may be completed within thirty days
after its receipt of a firm commitment from CIT. The Company has also initiated
proceedings to collect certain significant delinquent accounts receivable from
its foreign licensees and distributors. See "Item 1. Legal Proceedings."
Additionally, 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 it services $255,000 and
warrants to purchase 100,000 shares of Common Stock of the Company at any time
prior to March 31, 2002, exercisable at $2.00 per share, 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 investor 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.
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<PAGE>
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 totalled
approximately $32 million and $.29 million in the three months ended March 31,
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 however, in accordance with managements plans to reduce inventory certain
plants were partially shutdown during the first quarter resulting in the
decrease of cash used in operating activities. See "--Seasonality."
At March 31, 1997 and March 31, 1996, working capital was approximately
$.40 million and $9.7 million, respectively. This decrease resulted primarily
from the reclassification as current liabilities of amounts due under the
Company's line of credit on June 30, 1997 and a reduction in inventory. 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 March 31, 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 March 31, 1997 and March 31, 1996 was
$3.5 million, and $6.9 million respectively. The line of credit bore interest at
the MBCI prime rate plus a premium interest factor. This premium interest factor
varied from 1.5 to 2.0 percent, based upon the Company's leverage ratio. MBCI
has amended the loan agreement, retroactive to February 16, 1995, to provide for
interest at the MBCI prime rate plus a premium interest factor of 0.75 percent.
The line of credit also permits overadvances for up to 120 days per year,
peaking at $.5 million. The overadvance portion of the line of credit has an
interest rate equal to the prime rate as published by MBCI plus an interest
premium factor of 1.75. In addition, the Company must maintain stockholders'
equity of at least $6,000,000 at December 31, 1996. The line of credit is
secured by the Company's accounts receivable, inventory, property and equipment
and general intangibles and matures on June 30, 1997. At December 31, 1996 the
Company was not, and currently the Company is not, in compliance with certain of
the loan agreement's financial covenants.
CAPITAL EXPENDITURES
Capital expenditures totaled approximately $7,000 for the three months
ended March 31, 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."
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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 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
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<PAGE>
Caterpillar summary judgment. On September 24, 1996, the District Court
certified for appeal the question of whether Illinois common law has a "good
cause" requirement for terminating a franchise agreement that meets the
definition of a franchise under Illinois law, but does not involve a franchise
located in the State of Illinois and stayed further action in the pending
litigation until the Count of Appeals rules on the certified question. On
October 4, 1996, the Defendants filed a Petition for Permission to Appeal with
the Seventh Circuit Court of Appeals (the "Court of Appeals"), and on October
15, 1996, Caterpillar filed a response to such petition. On December 6, 1996,
the Court of Appeals denied the Petition for Permission to Appeal.
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.
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.
On January 6, 1997, All American filed suit against BSG in the UK High
Count seeking damages for breach of contract and interference with contractual
relations and interest. All American has not yet specified its damages. On March
19, 1997, All American indicated through its attorneys that the suit will be
withdrawn.
On March 20, 1997, the Company and BSG filed suit against All American
in the Commercial Court of Paris, France seeking recovery of approximately
$133,000 of accounts receivable it believes are due and owing. A hearing on a
summary judgment motion is currently scheduled for May 22, 1997. The defendant
has indicated its interest in settling this action, and the Company is currently
engaged in settlement discussions with the defendant.
The Company has engaged in discussions with Selected Brands Shoe
Company in seeking recovery of at least $73,000 of accounts receivable it
believes are due and owing and with Fashion Fever CC seeking recovery of an as
yet undetermined amount of royalties it believes are due and owing. These
discussions are preliminary to filing collection actions if the amounts due from
these parties are not settled in such discussions.
- 13 -
<PAGE>
Although the Company's international attorney's have advised the
Company that it has valid claims in these actions for royalties owing, there can
be no assurance that the outcome of these litigations or of any of them will be,
on net favorable to the Company. Additionally, the Company believes that the
outcome of these actions, and particularly with respect to any claims against it
in these actions, may depend, in part, on the outcome of the Caterpillar
litigation.
ITEM 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)
- 14 -
<PAGE>
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, 1997***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997***
(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 ___, 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 5, 1997.
- 15 -
<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: May 14, 1996 /s/ Terry. L. Dober
-------------------
Terry L. Dober
Vice President of Finance and
Authorized Registrant Signer
(Principal Accounting
and Financial Officer)
- 16 -
<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, 1997***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997***
(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 ___, 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 5, 1997.
- 17 -
