U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 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 402, Boca Raton, Florida 33433
-----------------------------------------------------------
(Address of Principal Executive Offices)
(561) 367-8283
--------------
(Issuer's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding as of October 31, 1998: 7,099,842
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
INDEX
Pages
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet as of September 30, 1998 3
Statements of Operations for the three
month and nine month periods ended
September 30, 1998 and 1997 4
Statement of Stockholders' Equity for the
nine months ended September 30, 1998 5
Statements of Cash Flows for the nine months
ended September 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 12
SIGNATURE 16
EXHIBIT INDEX 17
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 87,119
Temporary investments 26,214
Certificates of deposit 200,000
Accounts receivable, less allowance
for doubtful accounts of $31,057 2,772,894
Inventories 4,116,370
Prepaid expenses 123,197
---------------
Total current assets 7,325,794
PROPERTY AND EQUIPMENT, At Cost
Land 20,000
Buildings 544,789
Equipment 1,988,717
Vehicles 62,985
-------
2,616,491
Less accumulated depreciation 1,536,355
---------
Net property and equipment 1,080,136
OTHER ASSETS
Security deposits 36,779
Deferred finance charges, less accumulated amortization of $159,899 328,515
Trademarks, less accumulated amortization of $108,904 406,956
-------
Total other assets 772,250
---------
Total assets $ 9,178,180
==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line-of-credit $ 4,849,798
Current maturities of long-term debt 428,150
Checks outstanding in excess of bank balance 423,443
Accounts payable 2,607,816
Accrued restructuring/litigation 211,359
Accrued royalties 664,587
Accrued expenses 474,232
--------------
Total current liabilities 9,659,385
--------------
LONG-TERM DEBT 1,025,223
--------------
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 (10,361,546)
---------------
Total stockholders' deficit (1,506,428)
--------------
Total liabilities and stockholders' deficit $ 9,178,180
==============
</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 Nine Month Period
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $4,123,616 $4,232,476 $8,929,280 $8,342,082
COST OF GOODS SOLD 3,023,424 3,512,065 6,720,850 6,943,802
--------- --------- --------- ---------
GROSS PROFIT 1,100,192 720,411 2,208,430 1,398,280
--------- ---------- --------- ---------
OPERATING EXPENSES
Selling 508,558 360,028 1,266,004 1.022.514
General and administrative 161,328 963,444 1,266,721 1,959,640
---------- ------------ ---------- ---------
669,886 1,323,472 2,532,725 2,982,154
-------- ------------ ---------- ----------
INCOME (LOSS) FROM
OPERATIONS 430,306 (603,061) (324,295) (1,583,874)
------- ------------- --------- -----------
OTHER INCOME (EXPENSE)
Miscellaneous income (50,272) ( 35,477) ( 112,217) (110,411)
Amortization of debenture
discount (606,204)
Interest expense (130,588) (182,315) (389,532) (489,350)
----------- ----------- --------- ------------
(180,860) (217,792) (1,107,953) (599,761)
----------- ------------ ----------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES 249,444 (820,853) (1,432,248) (2,183,635)
PROVISION FOR INCOME
TAXES 0 0 0 0
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $249,444 $ (820,853) $ (1,432,248) $ (2,183,635)
======== ============= ============== =============
NET INCOME (LOSS) PER
SHARE $ .04 $ ( 0.21) $ ( 0.20) $ ( 0.55)
======== ============= ================ ===============
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 7,099,842 3,995,987 7,099,842 3,959,000
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
- 4 -
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Common Stock,
$.01 par value
<TABLE>
<CAPTION>
Shares Common Additional Retained
Stock Paid-in earnings
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 - September 30, 1998 - - - (1,432,248) (1,432,248)
---------------------------------------------------------------- -----------------
Balance (deficit) September 30, 1998 7,099,842 $ 70,998 $ 8,784,120 $(10,361,546) $ (1,506,427)
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
- 5 -
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,432,248) $ (2,183,635)
Item not requiring cash:
Depreciation and amortization 294,311 211,608
Amortization of debenture discount 606,204 142,600
Changes in:
Accounts receivable (768,718) (878,998)
Inventories (850,387) (160,733)
Prepaid expenses 24,788 (87,212)
Other assets (80,568) (113,198)
Accounts payable and accrued expenses 189,393 113,723
------------- -----------
Net cash used in operating activities (2,017,225) (2,955,845)
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (76,750) (20,305)
Reductions (Purchase) of Certificate of Deposit and
temporary investments (218,452) 64,594
---------------- -----------
Net cash provided (used) in investing activities (295,202) 44,289
---------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance 146,159 (164,984)
Net borrowings (repayments) under line-of-credit
agreement 2,254,710 1,774,718
Net Proceeds from Convertible Debentures 1,436,000
Principal payments on long-term debt (504,422) (273,326)
------------ ----------
Net cash provided by financing activities 1,896,447 2,772,408
---------- -------------
DECREASE IN CASH (24,071) (139,148)
CASH, BEGINNING OF PERIOD 111,190 170,551
------------- ----------
CASH, END OF PERIOD $ 87,119 $ 31,403
============== ============
</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 (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1998 and the results of its operations,
stockholders' equity and cash flows for the three month and nine month periods
then ended.
The results of operations for the period ended September 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 period. 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 September 30, 1998 and September 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 hereof. 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 revolving loan and credit
facility (the "Credit Facility") with NationsCredit Commercial Funding, Inc., a
NationsBank Company allowing for maximum availability of $10,000,000 based on a
specified percentage of eligible accounts receivable, inventories, real
property, equipment, and trademarks. The Company experienced income from
operations in the period ended September 30, 1998 but had a working capital
deficit of $2.3 million at September 30, 1998. See "--Liquidity and Capital
Resources."
On or about August 10, 1998 the Company sold units (the "Units") to
accredited investors including warrants to purchase 20,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), and
$200,000 of the Company's 12% promissory notes in a private placement through
D.L. Cromwell Investments, Inc., a registered broker dealer ("Cromwell").
Cromwell was paid a total commission of $16,000. The Units were sold without
registration under the Securities Act of 1933, as amended (the "1933 Act"), or
the securities laws of any state, in reliance on the exemptions contained in
Rule 506 of Regulation D promulgated under the 1933 Act. The Company also
contemplated a registered public offering through Cromwell and entered into a
letter of intent in connection with such proposal. The letter of intent
- 8 -
<PAGE>
entered into in connection with it was terminated by mutual consent of the
parties as was a letter of intent with respect to the possible sale of certain
of the Company's assets.
The Company realized income from operations for the period ended
September 30, 1998 primarily through a permanent and significant reduction of
executive personnel salaries and related overhead costs due to streamlining of
executive staff and a decrease in travel and entertainment costs related to
reduced foreign sales activities. See "-Results of Operations." The Company
believes that it will continue to realize income from operations. The Company is
also seeking other potential sources of financing. There can be no assurance,
however, that the Company will continue to recognize income from operations or
that any income recognized will be sufficient to supply the Company's need for
working capital or that alternative interim financing can be obtained.
Results of Operations
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Net sales for the three months ended September 30, 1998 decreased by
$.11 million, or 2.6%, to $4.12 million from $4.23 million for the three months
ended September 30, 1997. Net sales for the three months ended September 30,
1998 of Big Smith workwear and other branded workwear, Big Smith sportswear and
private label products were $2.88 million, $.47 million and $.77 million,
respectively, as compared with $3.82 million, $.0 and $.41 million,
respectively, for the three months ended September 30, 1997. The decrease in
sales resulted from product purchases which fell into the first week of the next
quarter by existing customers, especially Wal-Mart Stores, Inc.
Cost of goods sold for the three months ended September 30, 1998
decreased by $0.49 million, or 14.0%, to $3.02 million from $3.51 million for
the three months ended September 30, 1997. This decrease resulted primarily from
savings recognized by the Company by extending its annual summer vacation
closing for two additional weeks. The annual summer vacation closing allows the
Company to make needed repairs and improvements to the plant and equipment and
to effect other routine maintenance. The Company planned and implemented the
additional closing to accommodate cash flow requirements relating to making
certain accounts with suppliers current and to implement planned changes
relating to supervisory and executive personnel reductions.
Gross profit for the three months ended September 30, 1998 was $1.10
million, or 26.7% of net sales, compared to $.72 million, or 17.0% of net sales,
for the three months ended September 30, 1997. The increase in gross profit
percentage was primarily due to the increased production levels and plant
efficiencies resulting in lower overhead and an increase in the gross profit
margins of Big Smith workwear and other branded workwear and private label
products. For the three months ended September 30, 1998, Big Smith workwear and
other branded workwear, Big Smith sportswear and private label products
accounted for 69.8%, 11.6% and 18.6% of net sales, respectively, as compared
with 90.37%, 0% and 9.7% of net sales, respectively, for the three months ended
September 30, 1997.
Selling expenses increased by $.15 million to $.51 million, or 12.3% of
net sales, for the three months ended September 30, 1998, from $.36 million, or
8.5% of net sales, for the three months ended September 30, 1997. This increase
in selling expenses resulted principally from an increase of $.21 million in
selling expense related to the new Big Smith sportswear line. General and
administrative expenses were $.16 million, or 3.9% of net sales for the three
months ended September 30, 1998, compared with $.96 million, or 22.7% of net
sales, for the three months ended September 30, 1997. The decrease in the
general and administrative expenses was primarily due to a decrease in
restructuring and related litigation costs to $0 for the period ended September
30, 1998, as compared with approximately $358,000 for the three month period
ended September 30, 1997, a permanent and significant reduction in executive
personnel salaries and related overhead costs due to streamlining of executive
staff and a decrease in travel and entertainment costs related to reduced
foreign sales activities.
The Company's interest expense for the three months ended September 30,
1998 was $.13 million, or 3.2% of net sales, as compared with $.18 million, or
4.3% of net sales, for the three months ended
- 9 -
<PAGE>
September 30, 1997. The decrease in interest expense was primarily due to a
decrease in borrowings and loan fees.
As a result of the foregoing, the Company's net income for the three
months ended September 30, 1998 was $249,444 compared to a net loss of $820,853
for the three months ended September 30, 1997.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997
Net sales for the nine months ended September 30, 1998 increased by
$.59 million, or 7.0%, to $8.93 million from $8.34 million for the nine months
ended September 30, 1997. Net sales for the nine months ended September 30, 1998
of Big Smith workwear and other branded workwear, Big Smith sportswear, private
label products and Caterpillar branded products were $6.91 million, $.93
million, $1.09 million and $0, respectively, as compared with $7.33 million, $0,
$.93 million and $.08 million, respectively, for the nine months ended September
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.
Cost of goods sold for the nine months ended September 30, 1998
decreased by $0.22 million, or 3.2%, to $6.72 million from $6.94 million for the
nine months ended September 30, 1997. This decrease resulted primarily from
savings recognized by the Company by extending its annual summer vacation
closing for two additional weeks. The annual summer vacation closing allows the
Company to make needed repairs and improvements to the plant and equipment and
to effect other routine maintenance. The Company planned and implemented the
additional closing to accommodate cash flow requirements relating to making
certain accounts with suppliers current and to implement planned changes
relating to supervisory and executive personnel reductions.
Gross profit for the nine months ended September 30, 1998 was $2.20
million, or 24.7% of net sales, compared to $1.40 million, or 16.8% of net
sales, for the nine months ended September 30, 1997. The increase in gross
profit percentage was primarily due to the increased production levels and plant
efficiencies resulting in lower overhead and an increase in gross profit margins
of Big Smith workwear and other branded workwear and private label products. For
the nine months ended September 30, 1998, Big Smith workwear and other branded
workwear, Big Smith sportswear, private label products and Caterpillar branded
products accounted for 77.4%, 10.4%, 12.2% and 0% of net sales, respectively, as
compared with 87.9%, 0%, 11.2% and 0.9% of net sales, respectively, for the nine
months ended September 30, 1997.
Selling expenses increased by $.24 million to $1.27 million, or 14.2%
of net sales, for the nine months ended September 30, 1998, from $1.02 million,
or 12.2% of net sales, for the nine months ended September 30, 1997. This
increase in selling expenses resulted principally from an increase of $.47
million in selling expense related to the new Big Smith sportswear line. General
and administrative expenses were $1.27 million, or 14.2% of net sales for the
nine months ended September 30, 1998, compared with $1.96 million, or 23.5% of
net sales, for the nine months ended September 30, 1997. The decrease in the
general and administrative expenses was primarily due to a decrease in
restructuring and litigation costs to $0 for the nine month period ended
September 30, 1998, as compared with approximately $358,000 for the nine month
period ended September 30, 1997, a permanent and significant reduction in
executive personnel salaries and related overhead costs due to the streamlining
of executive staff, a decrease in travel and entertainment costs related to
reduced foreign sales activities and the closing of two manufacturing plants.
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 nine months ended September 30,
1998 was $.39 million, or 4.4% of net sales, as compared with $.49 million, or
5.9% of net sales, for the nine months ended
- 10 -
<PAGE>
September 30, 1997. The decrease in interest expense was primarily due to $.10
million of interest expense related to the Debentures, which were outstanding at
September 30, 1997, and less borrowings and loan fees.
As a result of the foregoing, the Company's net loss for the nine
months ended September 30, 1998 was $1.43 million compared to a net loss of
$2.18 million for the nine months ended September 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 nine months ended
September 30, 1998 was $.83 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 had income
from operations in the period ended September 30, 1998 but had a working capital
deficiency of $2.3 million at September 30, 1998.
On or about August 10, 1998 the Company sold Units to accredited
investors including warrants to purchase 20,000 shares of the Company's Common
Stock and $200,000 of the Company's 12% promissory notes in a private placement
through Cromwell. Cromwell was paid a total commission of $16,000. The Units
were sold without registration under the 1933 Act, or the securities laws of any
state, in reliance on the exemptions contained in Rule 506 of Regulation D
promulgated under the 1933 Act. The Company also contemplated a registered
public offering through Cromwell and entered into a letter of intent in
connection with such proposal. The letter of intent entered into in connection
with it was terminated by mutual consent of the parties as was a letter of
intent with respect to the possible sale of certain of the Company's assets.
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 September 30, 1998 and 1997 working capital was approximately $(2.3)
million and $1.04 million, respectively. This decrease resulted from the
Company's net loss resulting 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 $2.08 million and $2.96
million for the nine months ended September 30, 1998 and September 30, 1997,
respectively. This decrease reflected primarily savings recognized by the
Company by extending its annual summer vacation closing for two additional
weeks. 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. See
"-Seasonality."
Cash flows from financing activities totaled $1.90 million and $2.77
million for the nine months ended September 30, 1998 and September 30, 1997,
respectively.
The Company secured the Credit Facility at December 10, 1997 allowing
for maximum availability of $10,000,000 based on a specified percentage of
eligible accounts receivable, inventories, real property, equipment, and
trademarks. At September 30, 1998, the Company had no unused availability. The
amount outstanding under the revolving portion of the Credit Facility as of
September 30, 1998 was $4,849,798. The Credit Facility bears interest at prime
plus 1.875% (10.375% at September 30, 1998).
- 11 -
<PAGE>
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 $.08 million for the three
months ended September 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.
Year 2000 Compliance
Management has initiated a Company-wide program to prepare the
Company's computer systems and applications for year 2000 compliance. The
Company expects to incur internal staff costs as well as other expenses
necessary to prepare its systems for the year 2000 ("Y2K"). The Company expects
to replace some systems and upgrade others. Maintenance or modification costs
will be expensed as incurred. Specifically, the Company's accounting software
must be upgraded to be Y2K compliant, the payroll system will be Y2K compliant
upon the purchase of a new personal computer unit and the Electronic Data
Information system, through which major customers electronically order
merchandise and invoices are electronically issued, is currently Y2K compliant.
Management estimates the total cost of this effort to be approximately $75,000.
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.
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.
- 12 -
<PAGE>
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.
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 has been involved in litigation with a number of its
foreign distributors in connection with their refusal to pay royalties the
Company believed 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 made claims against the Company
relating to the effects of the purported termination of the Caterpillar license
on their arrangements with the Company. Most of this litigation has been
resolved. 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.
- 13 -
<PAGE>
Item 2. Changes in Securities.
On or about August 10, 1998 the Company sold Units to accredited
investors including warrants to purchase 20,000 shares of the Company's Common
Stock and $200,000 of the Company's 12% promissory notes in a private placement
through D.L. Cromwell Investments, Inc., a registered broker dealer
("Cromwell"). Cromwell was paid a total commission of $16,000. The Units were
sold without registration under the 1933 Act, or the securities laws of any
state, in reliance on the exemptions contained in Rule 506 of Regulation D
promulgated under the 1933 Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
- 14 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
None.
(a) Exhibits:
EXHIBIT TABLE
Exhibit Description
No.
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.**
(ae) Form of Subscription Agreement, dated May __, 1998 relating to
placement of bridge notes and warrants.****
(af) Form of 12% Promissory Note, dated May __, 1998 relating to bridge
financing.****
(ag) Form of Warrant to Purchase Common Stock, dated May __, 1998
relating to bridge financing.****
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.
- 15 -
<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.
<TABLE>
<S> <C>
Date: November 13, 1998
------------------------------------------------------------------------
By: Susan A. Leonhardt
Director -- Accounting/Administration and
Authorized Registrant Signer
(Principal Accounting and Financial Officer)
</TABLE>
- 16 -
<PAGE>
EXHIBIT INDEX
Exhibit Description
No.
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.**
(ae) Form of Subscription Agreement, dated May __, 1998 relating to
placement of bridge notes and warrants.****
(af) Form of 12% Promissory Note, dated May __, 1998 relating to bridge
financing.****
(ag) Form of Warrant to Purchase Common Stock, dated May __, 1998
relating to bridge financing.****
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
- 17 -
BIG SMITH BRANDS, INC.
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT made as of this day of May, 1998 between Big
Smith Brands, Inc., a Delaware corporation (the "Company") and the undersigned
(the "Subscriber").
WHEREAS, the Company desires to issue no less than 5 and up to 10 Units
("Units" ) for $100,000 per Unit on the terms and conditions hereinafter set
forth and the Subscriber desires to acquire the Units in a private placement,
each Unit consisting of $100,000 principal amount of 12% Notes of the Company
(the "Notes") in the form attached hereto as Exhibit A, and warrants to purchase
10,000 shares of Common Stock, $.01 par value per share (the "Common Stock") of
the Company at an exercise price of $1.30 per share (the "Warrants") in the form
attached hereto as Exhibit B;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby subscribes for and agrees to purchase from the Company Units
for a price equal to $100,000 per Unit and the Company agrees to sell such Units
to the Subscriber for said purchase price. The purchase price is payable by
certified or bank check or wire transfer payable to _______________ as Escrow
Agent [the Company], contemporaneously with the execution and delivery of this
Subscription Agreement.
1.2 The Subscriber recognizes that the purchase of Units involves a
high degree of risk in that (i) the Company has had substantial losses in recent
periods and requires substantial funds in addition to the proceeds of this
private placement; (ii) an investment in the Company is highly speculative and
only investors who can afford the loss of their entire investment should
consider investing in the Company; (iii) the Subscriber may not be able to
liquidate this investment; (iv) transferability of the Units is extremely
limited; and (v) in the event of a disposition, a Subscriber could sustain the
loss of the Subscriber's entire investment.
1.3 The Subscriber represents that the Subscriber is an "accredited
investor" as such term in defined in Rule 501 of Regulation D promulgated under
the United States Securities Act of 1933, as amended (the "Act") qualifying as
such on the basis set forth in the executed Investor Questionnaire provided by
the Subscriber to the Company concurrently herewith and that the Subscriber is
able to bear the economic risk of an investment in the Units.
1.4 The Subscriber acknowledges that the Subscriber has prior
investment experience, including investment in non-listed and non-registered
securities and to evaluate the merits and risks of such an investment on the
Subscriber's behalf, and that the Subscriber recognizes the highly speculative
nature of this investment. The Subscriber or the Subscriber's purchaser
<PAGE>
representative has such knowledge and experience in finance, securities,
investments and other business matters so as to be able to protect the interests
of the Subscriber in connection with this transaction, and the Subscriber's
investment in the Company hereunder is not material when compared to the
Subscriber's total financial capacity. The Subscriber understands the various
risks of an investment in the Company as proposed herein and can afford to bear
such risks, including, without limitation, the risks of losing the entire
investment.
1.5 The Subscriber represents that the Subscriber has been furnished by
the Company during the course of this transaction with all information regarding
the Company which the Subscriber had requested or desired to know; that all
documents which could be reasonably provided have been made available for the
Subscriber's inspection and review; and that such information and documents
have, in the Subscriber's opinion, afforded the Subscriber with all of the same
information that would be provided the Subscriber in a registration statement
filed under the Act; that the Subscriber has been afforded the opportunity to
ask questions of and receive answers from duly authorized officers or other
representatives of the Company concerning the terms and conditions of the
offering, and any additional information which the Subscriber had requested.
1.6 The Subscriber hereby acknowledges that this offering of Units has
not been reviewed by the United States Securities and Exchange Commission
("SEC") because of the Company's representations that this is intended to be a
nonpublic offering pursuant to Sections 4(2) or 3(b) of the Act. The Subscriber
represents that the Units are being purchased for his own account, for
investment and not for distribution or resale to others. The Subscriber agrees
that he will not sell or otherwise transfer such securities unless they are
registered under the Act or unless an exemption from such registration is
available.
1.7 The Subscriber understands that the Units have not been registered
under Act by reason of a claimed exemption under the provisions of the Act which
depends, in part, upon his investment intention and other representations and
warranties set forth herein. In this connection, the Subscriber understands that
it is the position of the SEC that the statutory basis for such exemption would
not be present if his representation merely meant that his present intention was
to hold such securities for a short period, such as the capital gains period of
tax statutes, for a deferred sale, for a market rise, assuming that a market
develops, or for any other fixed period. The Subscriber realizes that, in the
view of the SEC, a purchase now with an intent to resell would represent a
purchase with an intent inconsistent with his representation to the Company, and
the SEC might regard such a sale or disposition as a deferred sale to which such
exemptions are not available.
1.8 The Subscriber understands that there is no public market for the
Units. The Subscriber understands that even if a public market develops for the
Common Stock, Rule 144 (the "Rule") promulgated under the Act requires, among
other conditions, a one year holding period prior to the resale (in limited
amounts) of securities acquired in a non-public offering without having to
satisfy the registration requirements under the Act. The Subscriber understands
and hereby acknowledges that the Company is under no obligation to register the
securities comprising the Units under the Act, except as provided in Paragraph 4
hereof. The Subscriber consents that the Company may, if it desires, permit the
transfer of the securities comprising the
2
<PAGE>
Units out of his name only when his request for transfer is accompanied by an
opinion of counsel reasonably satisfactory to the Company that neither the sale
nor the proposed transfer results in a violation of the Act or any applicable
state "blue sky" laws (collectively "Securities Laws"). The Subscriber agrees to
hold the Company and its directors, officers and controlling persons and their
respective heirs, representatives, successors and assigns harmless and to
indemnify them against all liabilities, costs and expenses incurred by them as a
result of any misrepresentation made by him contained herein or any sale or
distribution by the undersigned Subscriber in violation of any Securities Laws.
1.9 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Units stating that they have not
been registered under the Act and setting forth or referring to the restrictions
on transferability and sale thereof.
1.10 The Subscriber hereby represents that the address of Subscriber
furnished by him at the end of this Subscription Agreement is the undersigned's
principal residence if he is an individual or its principal business address if
it is a corporation or other entity.
1.11 The Subscriber hereby represents that no representations or
warranties have been made to the Subscriber by the Company or any agent,
employee or affiliate of the Company and in entering into this transaction, the
Subscriber is not relying on any information, other than that contained in this
Agreement and the results of independent investigation by the Subscriber.
In furtherance of the foregoing and not by way of limitation, it never
has been represented, guaranteed or warranted by any broker, the Company, D.H.
Cromwell Investments, Inc., any of the officers, directors, stockholders,
partners, employees or agents of either, or any other persons, whether expressly
or by implication, that: (i) the Company or the Subscriber will realize any
given percentage of profits and/or amount or type of consideration, profit or
loss as a result of the Company's activities or the Subscriber's investment in
the Company; or (ii) the past performance or experience of the management of the
Company, or of any other person, will in any way indicate the predictable
results of the ownership of the securities or of the Company's activities.
1.12 If a natural person, the Subscriber is a bona fide resident of the
State contained in the address set forth on the signature page of this Agreement
as the under-signed's home address; at least 21 years of age; and legally
competent to execute this Subscription Agreement. If an entity, the undersigned
is duly authorized to execute this Agreement and this Agreement constitutes the
legal, valid and binding obligation of the undersigned enforceable against the
undersigned in accordance with its terms.
1.13 The undersigned will acquire the Securities for the undersigned's
own account (or for the joint account of the undersigned and the undersigned's
spouse either in joint tenancy, tenancy by the entirety or tenancy in common)
for investment and not with a view to the sale or distribution thereof or the
granting of any participation therein, and has no present intention of
distributing or selling to others any of such interest or granting any
participation therein.
1.14 No oral or written representations have been made other than as
stated in this Agreement, and no oral or written information furnished to the
Subscriber or the Subscriber's
3
<PAGE>
advisor(s) in connection with this offering were in any way inconsistent with
the information stated herein.
1.15 The Subscriber is not subscribing for Units as a result of or
subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, or presented at any seminar or meeting, or any solicitation
of a subscription by a person other than a representative of D.L. Cromwell
Investments, Inc. or the Company with which the undersigned had a pre-existing
relationship in connection with investments in securities generally.
1.16 The Subscriber is not relying on the Company with respect to the
tax and other economic considerations of an investment.
1.17 The Subscriber has received and carefully read copies of the
Company's Annual Report on Form 10-KSB for the period ended December 31, 1997
and the Quarterly Report on Form 10-QSB for the period ended March 31, 1998. The
Subscriber has had the opportunity to ask questions about the contents of such
reports and is satisfied as to the responses of the Company.
1.18 Without limiting any of the Subscriber's other representations and
warranties hereunder, the Subscriber acknowledges that the undersigned has
reviewed and is aware of the risk factors described in the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1997 and the
Company's other periodic reports filed with the SEC from time to time.
1.19 The Subscriber acknowledges that the representations, warranties
and agreements made by the Subscriber herein shall survive the execution and
delivery of this Agreement and the purchase of the Units.
1.20 The Subscriber has consulted his own financial, legal and tax
advisors with respect to the economic, legal and tax consequences of an
investment in the Units and has not relied on the Company, its officers,
directors or professional advisors for advice as to such consequences.
II. REPRESENTATIONS BY THE COMPANY
The Company represents and warrants to the Subscriber that prior to the
consummation of this offering and at the Closing Date:
(a) The Company is a corporation duly organized and existing under the
laws of the State of Delaware and has the corporate power to conduct the
business which it conducts and proposes to conduct. Upon the payment of past due
franchise taxes upon the closing of this offering, the Company will be in good
standing in the State of Delaware
4
<PAGE>
(b) The execution, delivery and performance of this Subscription
Agreement by the Company will have been duly approved by the Board of Directors
of the Company and all other actions required to authorize and effect the offer
and sale of the Units will have been duly taken and approved.
(c) The Notes and Warrants comprising the Units have been duly and
validly authorized and when issued and paid for in accordance with the terms
hereof, will be valid and binding obligations of the Company enforceable in
accordance with their respective terms.
(d) Except as disclosed in its public filings, the Company knows of no
pending or threatened legal or governmental proceedings to which the Company is
a party which could materially adversely affect the business, property,
financial condition or operations of the Company.
III. TERMS OF SUBSCRIPTION
3.1 The subscription period will begin as of May 18, 1998 and will
terminate at 11:59 PM Eastern time on May 31, 1998 , unless extended by the
Company for an additional 15 days (the "Termination Date"). Five Units will be
offered on a "best efforts-all or none" basis and the remaining five Units will
be offered on a "best efforts" basis.
3.2 Placement of the Units will be made by D.L. Cromwell Investments,
Inc., which will receive a placement fee of 5% of the purchase price of the
Units placed.
3.3. Pending the sale of the Units, all funds paid hereunder shall be
deposited by the Company in escrow at [escrow agent]. If the Company has not
obtained subscriptions for at least five Units ($500,000) by the Termination
Date, then this subscription shall be void and all funds paid hereunder by the
Subscriber, without interest, shall be promptly returned to the Subscriber.
IV. REGISTRATION RIGHTS
4.1. Commencing April 1, 1998 through May 31, 2001, the Company shall
advise the holder of the Warrants or its transferee (the "Holder"), whether the
Holder holds the Warrants or has exercised the Warrants and holds Common Stock,
by written notice at least 30 days prior to the filing of any new registration
statement or post-effective amendment thereto under the Act covering any
securities of the Company, for its own account or for the account of others
(other than a registration statement on Form S-4 or S-8 or any successor forms
thereto), and will for a period of one year from the effective date of the
Registration Statement, upon the request of the Holder, include in any such
registration statement, such information as may be required to permit a public
offering of the Warrants or the Common Stock issuable upon the exercise of the
Warrants (the "Registrable Securities"). The Company shall supply prospectuses
and such other documents as the Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities,
use its best efforts to register and qualify any of the Registrable Securities
for sale in such states as such Holder reasonably designates provided that the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or execute a general consent to service of process in any
jurisdiction in any action and do any and
5
<PAGE>
all other acts and things which may be reasonably necessary or desirable to
enable such Holders to consummate the public sale or other disposition of the
Registrable Securities, and furnish indemnification in the manner provided in
paragraph 4.2 hereof. The Holder shall furnish information and indemnification
as set forth in paragraph 4.2 except that the maximum amount which may be
recovered from the Holder shall be limited to the amount of proceeds received by
the Holder from the sale of the Registrable Securities. The Company shall use
its reasonable efforts to cause the managing underwriter or underwriters of a
proposed underwritten offering to permit the holders of Registrable Securities
requested to be included in the registration to include such securities in such
underwritten offering on the same terms and conditions as any similar securities
of the Company included therein, including but limited to executing the
underwriting agreement and providing reasonable and customary representations
and indemnification. Notwithstanding the foregoing, if the managing underwriter
or underwriters of such offering advises the holders of Registrable Securities
that the total amount of securities which they intend to include in such
offering is such as to materially and adversely affect the success of such
offering, then the amount of securities to be offered for the accounts of
holders of Registrable Securities shall be eliminated, reduced, or limited to
the extent necessary to reduce the total amount of securities to be included in
such offering to the amount, if any, recommended by such managing underwriter or
underwriters (any such reduction or limitation in the total amount of
Registrable Securities to be included in such offering to be borne by the
holders of Registrable Securities proposed to be included therein pro rata). The
Holder will pay its own legal fees and expenses and any underwriting discounts
and commissions on the securities sold by such Holder and shall not be
responsible for any other expenses of such registration.
4.2. (a) Whenever pursuant to paragraph 4.1 a registration statement
relating to the Registrable Securities, is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each holder of the
securities covered by such registration statement, amendment, or supplement
(such holder being hereinafter called the "Distributing Holder"), and each
person, if any, who controls (within the meaning of the Act) the Distributing
Holder, and each underwriter (within the meaning of the Act) of such securities
and each person, if any, who controls (within the meaning of the Act) any such
underwriter, against any losses, claims, damages, or liabilities, joint or
several, to which the Distributing Holder, any such controlling person or any
such underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse the Distributing Holder
and each such controlling person and underwriter for any legal or other expenses
reasonably incurred by the Distributing Holder or such controlling person or
underwriter in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement in reliance upon and in conformity with written information furnished
by such Distributing Holder or any other Distributing Holder, for use in the
preparation thereof.
6
<PAGE>
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Act) against any
losses, claims, damages, or liabilities, joint and several, to which the Company
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in said registration statement, said preliminary prospectus,
said final prospectus, or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer, or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this paragraph
4.2 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against any indemnifying party, give
the indemnifying party notice of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Paragraph 4.2.
In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this paragraph 4.2 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof.
V. MISCELLANEOUS
5.1 Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by registered or certified mail, return
receipt requested, addressed to the Company, at 7100 W. Camino Real, Suite 402,
Boca Raton, Florida 33433, Attention: President and to the Subscriber at his
address indicated on the last page of this Subscription Agreement. Notices shall
be deemed to have been given on the date of mailing, except notices of change of
address, which shall be deemed to have been given when received.
5.2 This Subscription Agreement shall not be changed, modified or
amended except by a writing signed by the parties to be charged, and this
Subscription Agreement may not be
7
<PAGE>
discharged except by performance in accordance with its terms or by a writing
signed by the party to be charged.
5.3 This Subscription Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Subscription Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter thereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
5.4 Notwithstanding the place where this Subscription Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed in accordance with and governed
by the laws of the State of Florida.
5.5 This Subscription Agreement may be executed in counterparts. Upon
the execution and delivery of this Subscription Agreement by the Subscriber,
this Subscription Agreement shall become a binding obligation of the Subscriber
with respect to the purchase of Units as herein provided; subject, however, to
the right hereby reserved to the Company to enter into the same agreements with
other subscribers and to add and/or to delete other persons as subscribers.
5.6 The holding of any provision of this Subscription Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Subscription Agreement, which shall remain in full
force and effect.
5.7 It is agreed that a waiver by either party of a breach of any
provision of this Subscription Agreement shall not operate, or be construed, as
a waiver of any subsequent breach by that same party.
5.8 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action as
may be necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
V. BLUE SKY LEGENDS
Connecticut
The undersigned acknowledges that the Securities have not been
registered under the Connecticut Uniform Securities Act, as amended (the "Act")
and are subject to restrictions on transferability and sale of securities as set
forth herein. The undersigned hereby agrees that such Securities will not be
transferred or sold without registration under the Act or exemption therefrom.
Missouri
The undersigned acknowledges that the Securities have not been
registered under the Missouri Uniform Securities Act, as amended (the "Act") and
are subject to restrictions on transferability and sale of securities as set
forth herein. The undersigned hereby acknowledges
8
<PAGE>
that such Securities may be disposed of only through a licensed broker-dealer.
It is a felony to sell securities in violation of the Missouri Securities Act.
Pennsylvania
The undersigned hereby acknowledges that the Issuer is relying upon the
exemption from registration of securities set forth in Section 203(d) of the
Pennsylvania Securities Act of 1972, as amended (the "Pennsylvania Act") in
connection with the sale of the Securities to the undersigned.
In accordance with the requirements of Section 203(d) of the
Pennsylvania Act, the undersigned hereby agrees not to sell his Securities
within twelve (12) months from the date of purchase except pursuant to Section
204.01 of the Blue Sky Regulations of the Pennsylvania Securities Act of 1972.
Additionally, the undersigned is aware of the right of withdrawal under Section
207(m) of the Act described in the cover pages of the Memorandum.
Texas
The undersigned hereby acknowledges that the Securities cannot be sold
unless they are subsequently registered under the Securities Act of 1933, as
amended, and the Texas Securities Act, or an exemption from registration is
available. The undersigned further acknowledges that because the Securities are
not readily transferable, he must bear the economic risk of his investment for
an indefinite period of time.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Subscription Agreement as of the day and year first written above.
- ------------------------------ ---------------------------
Signature of Subscriber(s)
- ------------------------------ ---------------------------
Name of Subscriber(s)
[please print]
- ------------------------------ ---------------------------
Address of Subscriber(s)
- ------------------------------ ---------------------------
Social Security or Taxpayer
Identification Number of Subscriber(s)
Subscription Accepted:
BIG SMITH BRANDS, INC.
By: ______________________________
Name:
Title:
Date: ____________________
10
<PAGE>
BIG SMITH BRANDS, INC.
INVESTOR QUESTIONNAIRE
Purpose of this Questionnaire
The Units are being offered without registration under the Securities
Act of 1933, as amended (the "1933 Act"), or the securities laws of any state,
in reliance on the exemptions contained in Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The Company may be required to
determine that an individual, or an individual together with a "purchaser
representative" or each individual equity owner of an investing entity meets
certain suitability requirements before selling the Units to such individual or
entity. You understand that the Company will rely on the following information
for purposes of such determination, and that the Units will not be registered
under the 1933 Act in reliance on an exemption from registration provided under
Section 4(2) under the 1933 Act. THE COMPANY MAY, AT ITS ELECTION, NOT SELL
UNITS TO A SUBSCRIBER WHO HAS NOT THOROUGHLY FILLED OUT A QUESTIONNAIRE. IN THE
CASE OF AN INVESTOR THAT IS A PARTNERSHIP, TRUST, OR CORPORATION, EACH EQUITY
OWNER MUST COMPLETE A QUESTIONNAIRE. This Questionnaire does not constitute an
offer to sell or a solicitation of an offer to buy the Units or any other
security.
Instructions
One (1) copy of this Questionnaire should be completed, signed, dated,
and delivered to David Davidson, D.L. Cromwell Investments, Inc., 1200 N.
Federal Highway, Boca Raton, Florida 33432 . Please contact Michael Karsch--
telephone (561) 394-8383-- if you have any questions with respect to the
Questionnaire.
Please Answer All Questions
If the appropriate answer is "None" or "Not Applicable," so state.
Please print or type your answers to all questions. Attach additional sheets if
necessary to complete your answers to any item.
Your answers will be kept strictly confidential at all times; however,
the Company may present this Questionnaire to such parties as it deems
appropriate, including its counsel, in order to assure itself that the offer and
sale of the Units will not result in a violation of the registration provisions
of the 1933 Act or a violation of the securities laws of any state and if called
on to establish that the proposed offer and sale of the security is exempt from
registration under the 1933 Act or meets the requirements of applicable state
securities laws.
(1) Please provide the following personal information:
Name: Age:
-------------------- --------
11
<PAGE>
Residence Address
(including zip code): ________________________
------------------------
Telephone Numbers: Residence:________________________
Business: ________________________
(2) Please describe your present or most recent business or occupation and
indicate such information as the nature of your employment, the principal
business of your employer, the principal activities under your management
or supervision, and the scope (e.g., dollar volume, industry rank, etc.) of
such activities.
(3) Please provide the following information concerning your financial
experience.
3.1 Indicate by check mark which of the following categories best
describes the extent of your prior experience in the areas of
investment listed below:
Substantial Limited No
Experience Experience Experience
Marketable Securities
Equity Securities for which
no market exists
Limited Partnerships
Initial Public Offerings
3.2 Indicate by check mark whether or not you maintain any of the
following types of accounts over which you, rather than a third party,
exercise investment discretion, and the length of time you have
maintained each type of account.
Securities (cash) _______ _______ Number of years ______
Yes No
Securities (margin) _______ _______ Number of years ______
Yes No
12
<PAGE>
(4) Please answer the following questions concerning your financial condition:
4.1 Does your net worth/1/(or joint net worth with your spouse, if
greater) exceed $1,000,000?
Yes _____ No _____
4.2 Did you have an individual income/2/ in excess of $200,000 or joint
income together with your spouse in excess of $300,000 in each of 1996
and 1997 and do you reasonably expect to reach the same income level
in the current year?
Yes _____ No _____
(5) Check, if appropriate:
(7) By signing this Questionnaire, I hereby confirm the following statements:
. I am aware that the offering of the Units will involve
securities for which no market currently exists, thereby
requiring any investment to be maintained for an indefinite
period of time, and I have no need to liquidate the
investment.
. I acknowledge that any delivery to me of any documentation
relating to the Units prior to the determination by the
Company of my suitability as an investor shall not constitute
an offer of the Units until such determination of suitability
shall be made, and I agree that I shall promptly return all
such documentation to the Company upon request.
- --------
/1/For purposes hereof, net worth shall be deemed to include all of your assets,
liquid or illiquid (including such items as home, furnishings, automobile, and
restricted securities) minus any liabilities (including such items as home
mortgages and other debts and liabilities).
/2/For purposes hereof, the term "income" is not limited to "adjusted gross
income" as that term is defined for Federal Income Tax purposes, but rather
includes certain items of income which are deducted in computing "adjusted gross
income." For investors who are salaried employees, the gross salary of such
investor, minus any significant expenses personally incurred by such investor in
connection with earning the salary, plus any income from any other source
including unearned income, is a fair measure of "income" for purposes hereof.
For investors who are self-employed, "income" is generally construed to mean
total revenues received during the calendar year minus significant expenses
incurred in connection with earning such revenues.
13
<PAGE>
. I hereby represent and warrant that I have such knowledge and
experience in financial and business matters that I am capable of
evaluating the merits and risks of any prospective investment in
the Company.
. Neither I nor any of my associates or affiliates: (i) are a
member or a person associated with a member firm of the NASD,
(ii) own any stock or other securities of any NASD member, or
(iii) made subordinated loans to any NASD member.
. My answers to the foregoing questions are true and complete to
the best of my information and belief, and I will promptly notify
the Company of any changes in the information I have provided.
. I also understand and agree that, although the Company will use
its best efforts to keep the information provided in answers to
this Questionnaire strictly confidential, the Company may present
this Questionnaire and the information provided in answers to it
to such parties as it may deem advisable if called upon to
establish the availability under any federal or state securities
laws of an exemption from registration of the private placement
or if the contents thereof are relevant to any issue in any
action, suit, or proceeding to which the Company is a party or by
which it or they are or may be bound.
. I realize that this Questionnaire does not constitute an offer by
the Company to sell the Units but is merely a request for
information.
-------------------------------------
Printed Name
-------------------------------------
Signature
-------------------------------------
Social Security Number or
Employee Identification Number
Date and Place Executed:
Date:
-------------
Place:
-------------
14
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE, NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.
BIG SMITH BRANDS, INC.
12% Promissory Note
$100,000
BIG SMITH BRANDS, INC., a Delaware corporation (the "Company"), having
its principal place of business at 7100 Camino Real, Suite 402, Boca Raton,
Florida 33433, for value received, hereby promises to pay to
______________________ ("Holder"), or permitted registered assigns, at its
address at on the earlier of (i) twelve (12) months from the date hereof, or
(ii) the ________________ closing of an offering of securities of the Company
with gross proceeds of at least $1 million (the "Maturity Date"), the sum of One
Hundred Thousand Dollars ($100,000) and to pay interest thereon from the date
hereof, payable at the rate of twelve percent (12%) per annum. Interest shall be
payable semiannually commencing six months from the date of this Note, provided
if the Maturity Date is less than six months from the date hereof, then all
accrued interest shall be payable on the Maturity Date. All remaining accrued
interest shall be payable on the Maturity Date. If any interest payment date or
the Maturity Date would fall on a day that is not a Business Day (as defined
below), the payment due on such interest payment date or Maturity Date will be
made on the next succeeding Business Day with the same force and effect as if
made on the interest payment date or the Maturity Date, as the case may be.
"Business Day" means any day which is not a Saturday or Sunday and is not a day
on which banking institutions are generally authorized or obligated to close in
the City of Boca Raton, Florida.
1. Transfer and Exchange.
1.1 No View Toward Distribution. The Holder represents and warrants
that it has purchased this Note for his own account for investment purposes and
not with a view toward the distribution of this Note.
1.2 Transfer of Restricted Securities. This Note is transferable only
pursuant to (i) a public offering registered under the Securities Act of 1933,
as amended (the "Securities Act"), (ii) Rule 144 promulgated under the
Securities Act (or any similar rule then in force) if such rule is available, or
(iii) any other legally available means of transfer.
2. Payment and Prepayment. Payments of principal and interest on this
Note shall be made by check sent to the Holder's address as the Holder may
designate for such purpose from time to time
<PAGE>
by written notice to the Company, in such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts. At any time following the date hereof, the Company may
prepay the outstanding principal amount of this Note and accrued and unpaid
interest thereon, without the prior written consent of Holder.
3. Events of Default; Remedies.
3.1 Events of Default; Acceleration. If any of the following conditions
or events ("Events of Default") shall occur (whether voluntary or involuntary or
arising by operation of law or otherwise):
(1) the Company shall default in the payment of any principal or principal
on this Note when the same becomes due and payable; or
(2) the Company (i) files, or consents by answer (or failure to contest) or
otherwise to the filing against it of, a petition for relief or
reorganization or arrangement of any other petition in bankruptcy, for
liquidation or dissolution or to take advantage of any present or future
bankruptcy or insolvency law of any jurisdiction, (ii) make an assignment
for the benefit of its creditors, (iii) seek or consent to the appointment
of a custodian, receiver, trustee, liquidator or other officer with similar
powers of itself or of any substantial part of its property, (iv) be
adjudicated a bankrupt or an insolvent or be liquidated or dissolved, or
(v) take corporate action for the purpose of any of the foregoing; or then,
the unpaid principal amount of this Note, together with the interest
accrued thereon shall automatically become and be due and payable, without
presentment, demand, protest, notice or other requirements of any kind, all
of which are hereby expressly waived by the Company.
3.2 Remedies on Default. If any Event of Default shall have occurred
and be continuing for a period of five (5) days, the Holder of this Note may
proceed to protect and enforce the rights available to such Holder either by an
action at law, suit in equity or both, whether for the specific performance of
any agreement contained in this Note, or for an injunction against a violation
of any of the terms hereof, or in aid of the exercise of any power granted
hereby or by law or otherwise, and the Company will pay the Holder such further
amounts as shall be sufficient to cover the cost and expenses of collection,
including, without limitation, reasonable attorneys' fees, expenses and
disbursements.
3.3 Remedies Not Waived. No course of dealing and no delay on the part
of Holder in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice Holder's rights, powers or remedies.
3.4 Remedies Not Cumulative. No right, power or remedy conferred upon
Holder shall be exclusive of any other right, power or remedy referred to herein
or now or hereafter available at law, in equity, by statute or otherwise.
4. Modification and Waiver.
The rights and obligations of the Company may not be modified or
waived, except in writing signed by the Company and the Holder.
2
<PAGE>
5. Governing Law.
This Note shall be governed by and construed in accordance with the
substantive laws of the State of Florida without reference to the conflicts of
law rules thereof.
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed under its corporate seal.
Date: May __, 1998
BIG SMITH BRANDS, INC.
By:
------------------------------
S. Peter Lebowitz, President
3
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED,
SOLD, ASSIGNED OR OTHERWISE TRANSFERRED UNTIL A (1) REGISTRATION STATEMENT UNDER
THE ACT AND ANY APPLICABLE STATE SECURITIES LAW HAS BECOME EFFECTIVE WITH
RESPECT THERETO, OR (2) RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL TO THE
COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAW IS NOT REQUIRED IN CONNECTION WITH THE PROPOSED TRANSFER.
WARRANT TO PURCHASE 10,000 SHARES
OF COMMON STOCK
OF
BIG SMITH BRANDS, INC.
This is to Certify That, FOR VALUE RECEIVED, (the "Holder"), is entitled to
purchase, subject to the provisions of this Warrant, from Big Smith Brands,
Inc., a Delaware corporation (the "Company"), 10,000 fully paid, validly issued
and nonassessable shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") at a price of $1.30 per share at any time or from time
to time from June 1, 1999 to May 31, 2001. The number of shares of Common Stock
to be received upon the exercise of this Warrant and the price to be paid for
each share of Common Stock may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares" and the exercise price of a share of Common Stock in effect at any time
and as adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price".
(a) EXERCISE OF WARRANT. (1) These Warrants may be exercised in whole
or in part at any time or from time to time from June 1, 1999 to May 31, 2001
(the "Exercise Period"); provided, however, that if either such day is a day on
which banking institutions in the State of New York are authorized by law to
close, then on the next succeeding day which shall not be such a day. This
Warrant may be exercised by presentation and surrender hereof to the Company at
its principal office, or at the office of its stock transfer agent, if any, with
the Purchase Form annexed hereto duly executed and accompanied by payment of the
Exercise Price for the number of Warrant Shares specified in such form. As soon
as practicable after each such exercise of the Warrants, but not later than
seven (7) days from the date of such exercise, the Company shall issue and
deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the rights of the Holder thereof to purchase the balance of
the Warrant Shares purchasable thereunder. Upon receipt by the Company of this
Warrant at its office, or by the stock transfer agent of the Company at its
office, in proper form for exercise, the Holder shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be physically delivered to the Holder.
<PAGE>
(2) At any time during the Exercise Period, the Holder may, at its
option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into
the number of Warrant Shares determined in accordance with this subsection
(a)(2), by surrendering this Warrant at the principal office of the Company or
at the office of its stock transfer agent, if any, accompanied by a notice
stating such Holder's intent to effect such exchange, the number of Warrant
Shares to be exchanged and the date on which the Holder requests that such
Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall
take place on the date specified in the Notice of Exchange or, if later, the
date the Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the shares issuable upon such Warrant Exchange and, if
applicable, a new warrant of like tenor evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within seven (7) days following the Exchange Date. In
connection with any Warrant Exchange, this Warrant shall represent the right to
subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the current market value of
a share of Common Stock. Current market value shall have the meaning set forth
Section (c) below, except that for purposes hereof, the date of exercise, as
used in such Section (c), shall mean the Exchange Date.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value ("Market Value") of a share, determined
as follows:
(1) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq system, the current market value
shall be the last reported sale price of the Common Stock on such
exchange or system on the last business day prior to the date of
exercise of this Warrant or if no such sale is made on such day, the
average closing bid and asked prices for such day on such exchange or
system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the
exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value
thereof as at the end of the most recent fiscal year of the Company
ending prior to the date of the exercise of the Warrant, determined in
such reasonable manner
<PAGE>
as may be prescribed by the Board of Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Upon surrender of this Warrant together with (in
the case of loss, theft or destruction) an indemnity and/or security against any
claim that may be made against the Company on account of such lost, stolen or
destroyed Warrant to the Company at its principal office or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Holder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(1) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date
of such subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such action. Such
adjustment shall be made successively whenever any event listed above
shall occur.
(2) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted
<PAGE>
pursuant to subsection (1) above, the number of Warrant Shares
purchasable upon exercise of this Warrant shall simultaneously be
adjusted by multiplying the number of Warrant Shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect
on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(3) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments
which by reason of this subsection (3) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations under this
Section (f) shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Anything in this Section
(f) to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Exercise Price,
in addition to those required by this Section (f), as it shall
determine, in its sole discretion, to be advisable in order that any
dividend or distribution in shares of Common Stock, or any
subdivision, reclassification or combination of Common Stock,
hereafter made by the Company shall not result in any federal income
tax liability to the holders of Common Stock or securities convertible
into Common Stock (including the Warrants).
(4) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly but no later than 20 days after any request
for such an adjustment by the Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of Warrant Shares issuable
upon exercise of each Warrant, and, if requested, information
describing the transactions giving rise to such adjustments, to be
mailed to the Holder at the last address appearing in the Warrant
Register, and shall cause a certified copy thereof to be mailed to its
transfer agent, if any. The Company may retain a firm of independent
certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any
computation required by this Section (f), and a certificate signed by
such firm shall be conclusive evidence of the correctness of such
adjustment.
(5) In the event that at any time, as a result of an adjustment
made pursuant to Subsection (1) above, the Holder of this Warrant
thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common
Stock contained in subsection (1) above.
(6) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the similar
Warrants initially issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of the foregoing Section (f), the Company
shall forthwith file in the custody of its
<PAGE>
Secretary or an Assistant Secretary at its principal office and with its stock
transfer agent, if any, an officer's certificate showing the adjusted Exercise
Price determined as herein provided, setting forth in reasonable detail the
facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the Holder or any holder of a Warrant executed and delivered
pursuant to Section (a) and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such officer's certificate to the
Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of any class or any
other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least fifteen days prior the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance.
(j) RESTRICTIVE LEGEND. Each Warrant Share, when issued, shall include
a legend in substantially the following form:
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED,
ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH
RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH
SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS."
(k) The Holder acknowledges that it has been advised by the Company
that neither this Warrant nor the Warrant Shares nor the shares of Common Stock
issuable upon conversion of the Warrant Shares have been registered under the
Act, that this Warrant is being or has been issued and the Warrant Shares and
the shares of Common Stock issuable upon conversion of the Warrant Shares may be
issued on the basis of the statutory exemption provided by Section 4(2) of the
Act or Regulation D promulgated thereunder, or both, relating to transactions by
an issuer not involving any public offering. The Holder acknowledges that it has
been informed by the Company of, or is otherwise familiar with, the nature of
the limitations imposed by the Act and the rules and regulations thereunder on
the transfer of securities. In particular, the Holder agrees that no sale,
assignment or transfer of this Warrant, the Warrant Shares or the shares of
Common Stock issuable upon conversion of the Warrant Shares issuable upon
exercise hereof shall be valid or effective, and the Company shall not be
required to give any effect to any such sale, assignment or transfer, unless (i)
the sale, assignment or transfer of this Warrant, such Warrant Shares or the
shares of Common Stock issuable upon conversion of the Warrant Shares is
registered under the Act, it being understood that neither this Warrant nor such
Warrant Shares, nor the shares of Common Stock issuable upon conversion of the
Warrant Shares are currently registered for sale and that the Company has no
obligation or intention to so register this Warrant, such Warrant Shares or the
shares of Common Stock issuable upon conversion of the Warrant Shares except as
specifically provided herein, or (ii) this Warrant or such Warrant Shares are
sold, assigned or transferred in accordance with all the requirements and
limitations of Rule 144 under the Act, it being understood that Rule 144 is not
available at the time of the original issuance of this Warrant for the sale of
this Warrant, such Warrant Shares and that there can be no assurance that Rule
144 sales will be available at any subsequent time, or (iii) such sale,
assignment, or transfer is otherwise exempt from registration under the Act.
(l) The Holder of this Warrant shall not have solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
(m) This Warrant shall be construed in accordance with the laws of the
State of Florida applicable to contracts made and performed within such State,
without regard to principles governing
<PAGE>
conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by
authorized persons.
Dated: May , 1998 BIG SMITH BRANDS, INC.
By: _________________________________
S. Peter Lebowitz, President:
[SEAL]
Attest:
- ------------------------
<PAGE>
PURCHASE FORM
Dated , 199
---------- --
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing shares of Common Stock and hereby makes
payment of in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
--------------------
(Please typewrite or print in block letters)
Address
------------------
Signature
---------------
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________________
hereby sells, assigns and transfers unto
Name ____________________
(Please typewrite or print in block letters)
Address ____________________
the right to purchase Common Stock represented by this Warrant to the extent of
______ shares as to which such right is exercisable and does hereby irrevocably
constitute and appoint ________ Attorney, to transfer the same on the books of
the Company with full power of substitution in the premises.
Date ________ , 199__
Signature ___________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 2,773
<ALLOWANCES> (31)
<INVENTORY> 4,116
<CURRENT-ASSETS> 7,326
<PP&E> 2,616
<DEPRECIATION> (1,536)
<TOTAL-ASSETS> 9,718
<CURRENT-LIABILITIES> 9,659
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> (1,506)
<TOTAL-LIABILITY-AND-EQUITY> 9,178
<SALES> 4,123
<TOTAL-REVENUES> 4,123
<CGS> 3,023
<TOTAL-COSTS> 670
<OTHER-EXPENSES> 181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 249
<INCOME-TAX> 0
<INCOME-CONTINUING> 249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 249
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
