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, 1998
[ ] 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, 1998: 7,099,842
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, 1998 3
Statements of Operations for the three
month and six month periods ended
June 30, 1998 and 1997 4
Statement of Stockholders' Equity for the
six months ended June 30, 1998 5
Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 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 13
SIGNATURE 17
EXHIBIT INDEX 18
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash $ 20,211
Temporary investments 16,214
Accounts receivable, less allowance
for doubtful accounts of $261,333 1,216,527
Inventories 4,931,737
Prepaid expenses 235,325
-----------
Total current assets 6,420,014
PROPERTY AND EQUIPMENT, AT COST
Land 20,000
Buildings 557,289
Equipment 1,981,631
Vehicles 81,511
----------
2,640,431
Less accumulated depreciation 1,488,216
Net property and equipment 1,152,215
OTHER ASSETS
Security deposits 12,880
Deferred finance charges, less accumulated amortization of $113,266 332,551
Trademarks, less accumulated amortization of $91,708 418,420
-----------
Total other assets 763,851
Total assets $ 8,336,080
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line-of-credit $ 4,056,624
Current maturities of long-term debt 431,595
Checks outstanding in excess of bank balance 304,549
Accounts payable 2,763,047
Accrued restructuring/litigation 244,169
Accrued royalties 665,674
Accrued expenses 679,262
-----------
Total current liabilities 9,144,920
LONG-TERM DEBT 947,081
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value; authorized 10,000,000 shares:
issued and outstanding 7,099,842 shares 70,998
Additional paid-in capital 8,784,120
Accumulated Deficit (10,611,040)
------------
Total stockholders' deficit (1,755,922)
Total liabilities and stockholders' deficit $ 8,336,079
===========
</TABLE>
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
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 2,541,746 $ 2,365,784 $ 4,805,664 $ 4,109,607
COST OF GOOD SOLD 1,894,916 1,964,980 3,697,426 3,431,738
----------- ----------- ------------ ------------
GROSS PROFIT 646,831 400,804 1,108,238 677,869
----------- ----------- ----------- ------------
OPERATING EXPENSES
Selling 390,454 373,208 757,445 662,486
General and administrative 636,913 516,468 1,105,393 996,196
----------- ------------ ----------- -----------
1,027,367 889,676 1,862,838 1,658,682
----------- ------------ ----------- -----------
LOSS FROM OPERATIONS (380,536) (488,872) (754,600) (980,813)
----------- ------------ ------------ -----------
0THER INCOME (EXPENSE)
Miscellaneous income ( 27,240) ( 48,946) ( 61,994) (74,934)
Amortization of debenture
discount (606,204)
Interest expense (137,158) (198,872) (258,944) (307,035)
------------ ----------- ----------- ------------
(164,398) (247,818) (927,142) (381,969)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME
TAXES (544,934) (736,690) (1,681,742) (1,362,782)
PROVISION FOR INCOME
TAXES 0 0 0 0
------------- ------------- -------------- -------------
NET LOSS $ (544,934) $ (736,690) $ (1,681,742) $ (1,362,782)
============= ============= ============== =============
NET LOSS PER SHARE $ ( 0.08) $ ( 0.18) $ ( 0.24) $ ( 0.34)
============== ============= ================ ===============
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 7,099,842 3,995,987 7,099,842 3,995,987
============ =========== ============== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock,
$.01 par value
-----------------------------
Additional Retained
Common Paid-in earnings
Shares Stock capital (deficit) Total
------ ----- ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance (deficit), January 1, 1998 4,199,842 $ 41,998 $ 7,181,620 $ (8,929,297) $ (1,705,679)
Conversion of convertible debentures
into common shares 2,900,000 29,000 1,602,500 1,631,500
Net loss - June 30, 1998 - - - (1,681,743) (1,681,743)
---------- --------- ---------- ------------- -------------
Balance (deficit), June 30, 1998 7,099,842 $ 70,998 $ 8,784,120 $(10,611,040) $ (1,755,922)
========= ======== =========== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
-5-
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(1,681,742) $(1,362,782)
Item not requiring cash:
Depreciation and amortization 185,093 122,898
Amortization of debenture discount 606,204
Changes in:
Accounts receivable 787,649 770,924
Inventories (1,665,754) (1,023,073)
Prepaid expenses (73,731) (102,680)
Other assets (24,699) (84,481)
Accounts payable and accrued expenses 582,463 41,962
----------- -----------
Net cash used in operating activities (1,284,517) (1,637,232)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (100,690) (11,994)
Reductions (Purchase) of temporary investments (8,452) 72,673
Net cash provided (used) in investing activities (109,142) 60,679
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance 27,265 80,294
Net borrowings (repayments) under line-of-credit 1,461,258 (32,791)
agreement (115,226)
Principal payments on long-term debt (185,843) 1,436,000
----------- -----------
Net cash provided by financing activities 1,302,680 1,368,277
----------- -----------
DECREASE IN CASH (90,975) (129,773)
CASH, BEGINNING OF PERIOD 111,190 170,551
----------- -----------
CASH, END OF PERIOD $ 20,211 $ 40,778
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-6-
<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 and sportswear 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, 1997.
NOTE 2: INTERIM FINANCIAL STATEMENTS
The accompanying consolidated 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 audited financial statements. The financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes of the Company for the year ended December 31, 1997, which are included in
its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
In the opinion of the 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, 1998 and the results of its operations, stockholders'
equity and cash flows for the three month period then ended.
The results of operations for the period ended June 30, 1998, 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
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. Basic and
diluted earnings per share are the same.
NOTE 4: CONVERTIBLE DEBENTURES
In March 1998, the convertible long-term debt was converted into 2,900,000
shares of common stock. At the date of conversion there was $606,204 remaining
of unamortized discount which had been netted against the principal amount at
December 31, 1997. Upon conversion this unamortized portion resulted in a
non-cash, non-recurring charge against income of $606,204 in the period ended
March 31, 1998.
-7-
<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
periods ended June 30, 1998 and June 30, 1997. It should be read in conjunction
with the unaudited Consolidated 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, 1997
and December 31, 1996 and the related Notes thereto appearing in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997 (the "Form
10-KSB"). The Company believes that its business is seasonal and has experienced
and expects to continue to experience generally higher sales 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 increased sales in the apparel industry during the
Christmas season and to an increase in sales of winter weight garments, which
sell at higher prices than the Company's other products, and back-to-school
clothes during the months of August through November, combined with continued
sales of regular weight garments. 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. This
seasonality has a significant impact on the cash flow of the Company because the
Company's inventory levels tend to increase during the summer months in
preparation for anticipated higher sales levels in September, October and
November. 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 ability of the Company to meet its working
capital and liquidity needs, the status of relations between the Company, its
primary customers and distributors, the availability of long-term credit,
unanticipated changes in the U.S. and international economies, business
conditions and growth in the workwear/sportswear 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 Form
10-KSB. 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.
Going Concern. The Company's viability as a going concern is dependent
upon its ability to raise sufficient working capital and to meet any liquidity
needs that may exceed the availability under the Credit Facility (as defined
below). The Company experienced a loss from operations in the periods ended June
30, 1998 and 1997 and had a working capital deficit of $1.135 million at June
30, 1998. See "--Liquidity and Capital Resources."
The Company has authorized an investment banker to identify potential
purchasers of bridge notes and warrants of the Company. The terms and conditions
of such interim financing facility are currently under negotiation. The Company
also has entered into a letter of intent for a registered public offering (the
"Proposed Public Offering") of the Company's Common Stock pursuant to a
prospectus during 1998. There can be no assurance, however, that the Proposed
Public Offering will be consummated or that interim financing can be obtained.
-8-
<PAGE>
At December 10, 1997, the Company secured a new revolving loan and
credit facility (the "Credit Facility") with NationsCredit Commercial Funding, a
NationsBank Company ("NationsCredit") allowing for maximum availability of
$10,000,000 based on a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks. The amount outstanding
under the Credit Facility as of June 30, 1998 was $4,056,624. See "--Liquidity
and Capital Resources."
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
Net sales, for the three months ended June 30, 1998 increased by $.18
million, or 7.44%, to $2.54 million from $2.37 million for the three months
ended June 30, 1997. Net sales for the three months ended June 30, 1998 of Big
Smith workwear and other branded workwear, Big Smith sportswear and private
label products were $2.19 million, $.24 million and $.11 million respectively,
as compared with $2.15 million, $.0 and $.11 million, respectively, for the
three months ended June 30, 1997. The increase in sales resulted from the
increase in sales of Big Smith sportswear to new and existing customers, the
addition of new customers including Mills Fleet & Farm Corp., and increased
product purchases by existing customers, especially Wal-Mart Stores, Inc.,
reflecting the increased marketing by the Company of such products.
Gross profit for the three months ended June 30, 1998 was $.65 million,
or 25.4% of net sales, compared to $.40 million, or 16.9% of net sales, for the
three months ended June 30, 1997. The increase in gross profit percentage was
primarily due to the increased production levels and plant efficiencies
resulting in lower overhead and the relatively higher gross profit margins of
Big Smith sportswear compared to Big Smith workwear and other branded workwear
and private label products. For the three months ended June 30, 1998, Big Smith
workwear and other branded workwear, Big Smith sportswear and private label
products accounted for 86.2%, 9.5% and 4.3% of net sales, respectively, as
compared with 93.7%, 0% and 6.3% of net sales, respectively, for the three
months ended June 30, 1997.
Selling expenses increased by $.02 million to $.39 million, or 15.4% of
net sales, for the three months ended June 30, 1998, from $.37 million, or 15.8%
of net sales, for the three months ended June 30, 1997. This increase in selling
expenses resulted principally from an increase of $.02 million in selling
expense related to the new Big Smith sportswear line. General and administrative
expenses were $.64 million, or 25.1% of net sales during the three months ended
June 30, 1998, compared with $.52 million, or 21.8% of net sales, for the three
months ended June 30, 1997. The decrease in the general and administrative
expenses percentage of net sales was primarily due to the increase in sales for
the three months ended June 30, 1998 as compared to the three months ended June
30, 1997.
The Company's interest expense for the three months ended June 30, 1998
was $.14 million, or 5.4% of net sales, as compared with $.20 million, or 8.4%
of net sales, for the three months ended June 30, 1997. The increase in interest
expense was primarily due to $20,000 of interest expense related to the
Debentures, which were not outstanding in the three months ended June 30, 1997.
As a result of the foregoing, the Company's net loss for the three
months ended June 30, 1998 was $544,934 compared to a net loss of $736,690 for
the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Net sales, for the six months ended June 30, 1998 increased by $.70
million, or 16.9%, to $4.81 million from $4.11 million for the six months ended
June 30, 1997. Net sales for the six months ended June 30, 1998 of Big Smith
workwear and other branded workwear, Big Smith sportswear, private label
products and Caterpillar branded products were $4.03 million, $.46 million, $.32
million and $0, respectively, as compared with $3.92 million, $0, $.11 million
and $.08 million, respectively, for the six months ended June
-9-
<PAGE>
30, 1997. The increase in sales resulted from the increase in sales of Big Smith
sportswear to new and existing customers, the addition of new customers
including Mills Fleet & Farm Corp., and increased product purchases by existing
customers, especially Wal-Mart Stores, Inc., reflecting the increased marketing
by the Company of such products.]
Gross profit for the six months ended June 30, 1998 was $1.11 million,
or 23.1% of net sales, compared to $.68 million, or 16.5% of net sales, for the
six months ended June 30, 1997. The increase in gross profit percentage was
primarily due to the increased production levels and plant efficiencies
resulting in lower overhead and the relatively higher gross profit margins of
Big Smith sportswear compared to Big Smith workwear and other branded workwear
and private label products. For the six months ended June 30, 1998, Big Smith
workwear and other branded workwear, Big Smith sportswear, private label
products and Caterpillar branded products accounted for 83.8%, 9.5%, 6.7% and
1.9% of net sales, respectively, as compared with 95.4%, 0%, 2.7% and 1.9% of
net sales, respectively, for the six months ended June 30, 1997.
Selling expenses increased by $.09 million to $.76 million, or 15.8% of
net sales, for the six months ended June 30, 1998, from $.66 million, or 16.1%
of net sales, for the six months ended June 30, 1997. This increase in selling
expenses resulted principally from an increase of $143,000 in selling expense
related to the new Big Smith sportswear line. General and administrative
expenses were $1.11 million, or 23.0% of net sales during the six months ended
June 30, 1998, compared with $.97 million, or 23.5% of net sales, for the six
months ended June 30, 1997. The decrease in the general and administrative
expenses percentage of net sales was primarily due to the increase in sales for
the six months ended June 30, 1998 as compared to the six months ended June 30,
1997.
On March 19, 1998, the holders of the Company's 6% Convertible
Preferred Debentures due March 31, 2000 (the "Debentures") converted the
remaining $1,631,500 of the Debentures into 2,900,000 shares of Common Stock
resulting in a non-recurring charge to earnings of $606,204 of related discount
during the three months ended March 31, 1998.
The Company's interest expense for the six months ended June 30, 1998
was $.26 million, or 5.4% of net sales, as compared with $.31 million, or 7.5%
of net sales, for the six months ended June 30, 1997. The decrease in interest
expense was primarily due to $20,000 of interest expense related to the
Debentures, which were outstanding at June 30, 1997.
As a result of the foregoing, the Company's net loss for the six months
ended June 30, 1998 was $1.68 million compared to a net loss of $1.36 million
for the six months ended June 30, 1997. Excluding a one time non-recurring
convertible debenture amortization discount of $606,204 arising as a result of
the retirement of all outstanding convertible debentures of the Company in March
1998, the Company's net loss for the six months ended June 30, 1998 was $1.08
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's viability as a going concern is dependent upon its
ability to raise sufficient working capital and to meet any liquidity needs that
may exceed the availability under the Credit Facility. The Company experienced a
loss from operations in the periods ended June 30, 1998 and 1997 and had a
working capital deficiency of $1.135 million at June 30, 1998. The Company has
commenced several steps to obtain additional sources of liquidity including the
pursuit of bridge financing arrangements and the sale of additional common
stock.
The Company has authorized an investment banker to identify potential
purchasers of bridge notes and warrants of the Company. This interim financing
facility is currently in the process of being funded. The Company also has
entered into a letter of intent for a Proposed Public Offering of the Company's
Common Stock pursuant to a prospectus during 1998. There can be no assurance,
however, that the Proposed Public Offering will be consummated or that interim
financing can be obtained.
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<PAGE>
On April 2, 1997, in order to meet its liquidity needs the Company
closed an offshore placement of $1,700,000 of its Debentures. By March 1998, the
Debentures had been converted to 3,169,842 shares of the Company's Common Stock.
As a result, the Company no longer has outstanding any convertible debentures.
The Company experienced a significant decrease in revenues in 1997 as a
result of the purported termination effective in January 1997 by Caterpillar,
Inc. ("Caterpillar") of the Company's license to manufacture and sell workwear
under the Caterpillar label (the "Caterpillar Termination"). See "Part II. Item
1. Legal Proceedings - Caterpillar Litigation."
At June 30, 1998 and 1997 working capital was approximately $1.135
million and $.40 million, respectively. This decrease resulted primarily from
the loss of revenue due to the Caterpillar Termination]. Working capital also
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.
Cash used in operating activities totaled $1.28 million and $1.64
million for the six months ended June 30, 1998 and June 30, 1997 respectively.
This increase reflected primarily an increase in inventory resulting from the
increased build-up of inventory of winter weight workwear and the new sportswear
products. The Company typically experiences negative cash flow from operations
during the first half of each year due to the build-up of inventory in
preparation for increased sales volume in the second half of each year. In the
six months ended June 30, 1998 such inventory build-up increased over the six
months ended June 30, 1997 due to anticipation of increased sales in the second
half of 1998. See "-Seasonality."
Cash flows from financing activities totaled $1.37 million and $1.37
million for the six months ended June 30, 1998 and June 30, 1997, respectively.
At December 10, 1997, the Company secured a new revolving loan and
Credit Facility with NationsCredit allowing for maximum availability of
$10,000,000 based upon a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks. The amount outstanding
under the Credit Facility as of June 30, 1998 was $4,056,624. The Credit
Facility bears interest at prime plus 1.875% ( 10.375% at June 30, 1998).
The Credit Facility also provides for additional interest under certain
circumstances and other fixed fees payable annually during the term of the loan.
A portion of the proceeds under the Credit Facility were used to pay off the
previous revolving line-of-credit and other equipment and working capital loans
in an aggregate principal amount of approximately $4.1 million. The loan is
secured by all of the assets of the Company including the accounts receivable,
inventories, property and equipment and trademarks.
CAPITAL EXPENDITURES
Capital expenditures totaled approximately $.12 million for the
three months ended June 30, 1998, primarily for necessary physical improvements
at the Carthage plant and leasehold improvements at the Miami, Florida store.
INTANGIBLE ASSETS
In 1995, the Company purchased the Big Smith trademark in the
seven countries in Europe for which the Company did not previously have
trademark rights for an aggregate purchase price of $500,000 payable over four
years.
-11-
<PAGE>
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 increased sales in the apparel industry during the Christmas season and to an
increase in sales of winter weight garments, which sell at higher prices than
the Company's other products, and back-to-school clothes during the months of
August through November, combined with continued sales of regular weight
garments. 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. This seasonality has a
significant impact on the cash flow of the Company because the Company's
inventory levels tend to increase during the summer months in preparation for
anticipated higher sales levels in September, October and November.
-12-
<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 (the
"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 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"). The complaint alleges trademark infringement,
unfair competition, false advertising and breach of contract, and seeks
injunctive relief and unspecified damages in connection with the Company's
alleged violations of the Agreement and Caterpillar's proprietary marks.
On July 26, 1996 the defendants answered the complaint filing
responsive defenses of failure to assert a claim, waiver, amendment, promissory
estoppel, equitable estoppel, laches, failure to provide an opportunity to cure,
unclean hands and misuse. The Company and BSG (collectively, the "Corporate
Defendants") filed counterclaims for breach of contract, tortious interference
with contractual relations, interference with prospective business relations,
conspiracy, commercial disparagement and breach of franchise agreement in
connection with what the Corporate Defendants believe to be Caterpillar's
wrongful efforts to terminate the Corporate Defendants' license to use certain
Caterpillar trademarks on its apparel. S. Peter Lebowitz also filed a motion to
dismiss for failure to state a claim against him in his individual capacity.
On July 18, 1996, Caterpillar filed an emergency motion for summary
judgment seeking a declaratory judgment that the Agreement had been properly
terminated. 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"),
which was subsequently confirmed in a Reconsideration Order denying the
Corporate Defendants' motion for a preliminary injunction and granting
Caterpillar's motion for summary judgment on the basis of a finding that the
Agreement, by its terms, provided for termination by Caterpillar following
certain breaches of the Agreement by BSG regardless of whether or not such
breaches were material. 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 April 16, 1997 Big Smith filed an Amended Counterclaim adding
Overland Group, Ltd. and Stephen Palmer as counterdefendants seeking damages in
excess of $20 million plus costs. Thereafter, on October 31, 1997, a Corrected
Second Amended Counterclaim was filed by Big Smith naming Overland Footwear,
Limited as an additional counter-defendant. The Second Amended Counterclaim
alleges similar claims as in the original counterclaim and, among others, newly
alleges that Caterpillar was barred from terminating the Corporate Defendants'
license to use its marks since a common law franchise relationship existed
between the parties which could not be terminated absent good cause.
Counterdefendants have filed motions to dismiss the Second Amended
Counterclaim for failure to state a claim. Additionally, Palmer and the Overland
defendants have filed motions seeking dismissal for lack of jurisdiction over
them. On December 16, 1997, the Court heard oral arguments on the motions to
dismiss. To date the Court has not ruled on said motions.
-13-
<PAGE>
Management intends to vigorously defend the claims of Caterpillar and
to diligently pursue its counterclaims and its claims against Palmer and the
Overland defendants. At this stage of litigation, it is not possible to evaluate
the likelihood of favorable or unfavorable outcome. There can be no assurance
that the outcome of this litigation will be favorable to the Company, that the
Company's defenses to the claims against it will vindicated or that any of its
counterclaims will be found to be valid. If the outcome of the litigation is not
favorable, such outcome could have a material adverse effect on the financial
condition of the Company.
Other Litigation
The Company is involved in litigation with a number of its foreign
distributors in connection with their refusal to pay royalties the Company
believes to be due in respect of sales by such distributors of Caterpillar
branded products prior to the Company's ceasing to sell such products.
Additionally, certain distributors have made claims against the Company relating
to the effects of the purported termination of the Caterpillar license on their
arrangements with the Company. A summary of these actions follows.
On 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 believed were due and owing. Since the suit
was commenced, All American has paid substantially all of the amount in
controversy.
The Company has begun discussions with Selected Brands Shoe Company
seeking recovery of at least $73,000 of accounts receivable it believes are due
and payable and with Fashion Fever CC seeking recovery of an as yet undetermined
amount of royalties it believes are due and payable. These discussions are
preliminary to filing collection actions if satisfactory settlements cannot be
reached.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security-Holders.
Stockholders holding 4,183,000 shares of the Company's Common Stock,
constituting more than a majority of the outstanding shares of the Common Stock,
acted by written consent, executed as of June 11, 1998, to approve the
following: (i) the amendment and restatement (the "Plan Amendment") of the
Company's 1994 Stock Incentive Plan (a) to increase to 1,800,000 the number of
shares reserved for issuance under the 1994 Plan, and to increase to 1,000,000
the number of shares of Common Stock with respect to which options may be
granted to any one employee in any calendar year, and (b) to bring the 1994 Plan
into compliance with certain provisions of the Internal Revenue Code of 1986, as
amended and the Exchange Act; (ii) the amendment and restatement of the
Company's Amended and Restated Certificate of Incorporation (the "Charter
Amendment") to create a new class of "blank check" preferred stock, $.01 par
value per share, consisting of 100,000 shares; and (iii) a reverse stock split
of the Common Stock of the Company (the "Reverse Split") pursuant to which each
three shares of Common Stock of the Company presently issued and outstanding
will be changed into one share of Common Stock and any fractional number of
shares due to any holder of record resulting from such reverse stock split will
be rounded up to the next whole number of shares. The above referenced actions
were to become effective on or after July 1, 1998.
The Board of Directors was specifically given the authority to change
the ratio of the Reverse Split and to postpone the effective date of the reverse
stock split or to abandon the reverse stock split as they, in their business
judgment, deem to be in the best interests of the Company and its stockholders.
In addition, the proper officers of the Corporation (such proper officers being
the Chairman of the Board, the Chief Executive
-14-
<PAGE>
Officer, the President, any Vice President, the Treasurer, the Chief Financial
Officer and the Secretary of the Corporation) were specifically authorized to
determine in their sole discretion the filing date of the Charter Amendment or
in such discretion determine not to file such Charter Amendment. As of August
19, 1998, neither the Reverse Split nor the Charter Amendment have been
effected.
At the Annual Meeting of Stockholders held on June 25, 1998, 4,210,100
of the 7,099,842 shares eligible to vote at the meeting were present at the
meeting. Of the 4,210,100 shares present at the meeting, 4,210,100 shares were
voted 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. No shares eligible to vote at the meeting were cast against the
election of the above named persons as directors or were withheld. 4,210,100 of
the shares present at the meeting were voted for approving the appointment of
the firm of Daszkal, Bolton & Manela, CPAs, as the Company's Independent
Auditors for the fiscal year ending December 31, 1998. No shares eligible to
vote at the meeting were cast against the approval of the appointment of
Daszkal, Bolton & Manela, CPAs, or were withheld. No other business was brought
before the Annual Meeting of Stockholders.
ITEM 5. Other Information.
None.
-15-
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS:
EXHIBIT TABLE
EXHIBIT
NO. DESCRIPTION
--- -----------
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
10(c) Loan and Security Agreement, dated December __, 1997, between the
Company and NationsCredit Commercial Funding, Inc., a NationsBank
Company.***
(z) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997.**
(ac) Letter of Intent, dated February 10, 1998, from D.L. Cromwell
Investments, Inc. ("Cromwell") to Willora Company Limited ("Willora")
with respect to the conversion of the remaining Debentures.***
(ad) Letter Agreement, dated February 10, 1998, among the Company,
Willora and Cromwell, with respect to the conversion of the
remaining Debentures.***
27 Financial Data Schedule****
- --------------------------
* Previously filed with, and incorporated herein by reference to,
the Registrant's Registration Statement on Form SB-2 (No.
33-85302), as amended, declared effective on February 8, 1995
("Form SB-2").
** Previously filed with, and incorporated herein by reference to,
the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, filed on April 15, 1997.
*** Previously filed with, and incorporated herein by reference to,
the Registrant's Annual Report on Form 10-KSB, filed on April 15,
1998.
**** Filed herewith
(b) Reports on Form 8-K
None.
-16-
<PAGE>
SIGNATURE
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.
Date: August 19, 1998 /s/ Susan A. Leonhardt
- ----- --------------- ----------------------
By: Susan A. Leonhardt
Director -- Accounting/Administration
and Authorized Registrant Signer
(Principal Accounting
and Financial Officer)
-17-
<PAGE>
EXHIBIT TABLE
EXHIBIT
NO. DESCRIPTION
--- -----------
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
10(c) Loan and Security Agreement, dated December __, 1997, between the
Company and NationsCredit Commercial Funding, Inc., a NationsBank
Company.***
(z) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997.**
(ac) Letter of Intent, dated February 10, 1998, from D.L. Cromwell
Investments, Inc. ("Cromwell") to Willora Company Limited ("Willora")
with respect to the conversion of the remaining Debentures.***
(ad) Letter Agreement, dated February 10, 1998, among the Company,
Willora and Cromwell, with respect to the conversion of the
remaining Debentures.***
27 Financial Data Schedule****
- --------------------------
* Previously filed with, and incorporated herein by reference to,
the Registrant's Registration Statement on Form SB-2 (No.
33-85302), as amended, declared effective on February 8, 1995
("Form SB-2").
** Previously filed with, and incorporated herein by reference to,
the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, filed on April 15, 1997.
*** Previously filed with, and incorporated herein by reference to,
the Registrant's Annual Report on Form 10-KSB, filed on April 15,
1998.
**** Filed herewith
-18-
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1998
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