As filed with the Securities and Exchange Commission on July 15, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
BIG SMITH BRANDS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 5136 13-3005371
(State or other jurisdiction of incorporation or (Primary Standard Industrial (I.R.S. Employer Identification
organization) Classification Code Number)
Number)
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7100 West Camino Real
Suite 402
Boca Raton, Florida 33433
(561) 367-8283
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
S. Peter Lebowitz, President
Big Smith Brands, Inc.
7100 West Camino Real
Suite 402
Boca Raton, Florida 33433
(561) 367-8283
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Michael S. Nelson, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
(212) 715-9100
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legitimate facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE PRICE FEE
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Common Stock, par value $.01 1,210,000(1) $.6875 (2) $831,875 $373
per share
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Warrants 2,420,000 $.25 (3) $605,000 (4)
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Common Stock, par value 2,420,000 $1.50 $3,932,500 $1,865
$.01 per share, issuable upon $1.75(5)
exercise of the Warrants
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Total Fee...................................................................... $2,238
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(1) This number represents the actual number of shares of Common Stock
to be registered. Elsewhere in the Prospectus the numbers have been restated to
give effect to a one-for-three reverse stock split the Company will effect
pursuant to the terms of the offering.
(2) The last sale price reported on July 12, 1999, used solely for
purposes of calculating the registration fee pursuant to Rule 457(c) promulgated
under the Securities Act of 1933, as amended.
(3) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as
amended.
(4) No separate registration fee required pursuant to Rule 457(i)
promulgated under the Securities Act of 1933, as amended.
(5) In each unit sold, one warrant is exercisable for $1.50 per share
and one warrant is exercisable for $1.75 per share.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
Subject to Completion, Dated _____, 1999
Prospectus
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to buy these securities in any state where the offer or sale is not permitted.
BIG SMITH BRANDS, INC.
403,334 Shares
2,420,000 Warrants
2,420,000 Shares Underlying the Warrants
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The company: We are a publicly traded Delaware corporation engaged in the sale
of quality sportswear and childrenswear.
The prospectus:
o Covers the resale of certain shares of our common stock.
o Covers the resale of certain warrants, each to purchase one
share of our common stock.
o Covers the exercise of certain warrants.
o May be used by the selling security holders or by any
broker-dealer who may participate in sales of the common
stock or warrants covered here.
The securities covered include:
o 366,667 shares of our common stock issued to the selling
security holders in a private placement in February 1999.
o 2,420,000 warrants each to purchase one share of our common
stock issued to the selling security holders in the private
placement.
o 2,420,000 shares of common stock underlying the warrants.
o 36,667 shares of our common stock and 220,000 warrants (and
220,000 shares of common stock issuable upon exercise of the
warrants) issuable to D.L. Cromwell Investments, Inc. upon
exercise of placement agent's warrants issued to Cromwell.
The securities to be resold:
o Represent approximately 49.58% of our currently outstanding
common stock (assuming the exercise of all warrants covered
here).
o Are being offered on a continuous basis pursuant to Rule 415
under the Securities Act of 1933, as amended.
o Will be sold at prevailing market prices or at prices
negotiated by the selling security holder and buyer.
Our securities are traded on the over-the-counter bulletin
board under the trading symbol "BSBI." The last reported
sale price of our common stock on July 12, 1999 on the
over-the-counter bulletin board was $.6875 per share.
The resale of the securities:
o Involves no underwriting discounts, commissions or expenses.
o We will pay any expenses of registering the securities which
we estimate at $165,338.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The securities offered hereby involve a high degree of risk and should be
purchased only by persons who can afford to sustain a total loss of their
investment. See "Risk Factors" on pages 7 through 13.
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TABLE OF CONTENTS
Page
----
Prospectus Summary.............................................................5
Risk Factors...................................................................7
1. We have sold our workwear business and are dependent on recently
initiated product lines..............................................7
2. Our financial condition is critical and we may need additional
financing to continue as a going concern.............................7
3. We are dependent on a few major customers with whom we have no long
term agreements......................................................8
4. We have large outstanding accounts receivable with customers with
whom we no longer do a substantial amount of business................9
5. We have had significant recent operating losses and have accumulated
a large deficit......................................................9
6. We are involved in several disputes with a former licensor and with
foreign distributors.................................................9
7. We may fail to achieve sales sufficient to make us a profitable
business.............................................................9
8. We operate in a highly competitive industry that is sensitive to
fashion trends......................................................10
9. Our business may be subject to seasonal variations. ................10
10. We are dependent on contract manufacturers..........................10
11. We are dependent on key personnel...................................10
12. We have not paid any dividends recently nor do we anticipate doing
so..................................................................10
13. We must comply with financial covenants related to our credit
facility............................................................11
14. There are significant consequences associated with our stock trading
on the NASD over-the-counter bulletin board rather than a national
exchange............................................................11
15. We have no assurance of future Nasdaq SmallCap Market
Listing.............................................................11
16. We are subject to the application of the Penny Stock
Rules...............................................................12
17. We have outstanding restricted shares that will be available for
future sales........................................................12
18. Outstanding options may have an effect on the price of our
securities..........................................................13
19. There are limits on how we can use our income tax loss
carryforwards.......................................................13
Selling Securityholders.......................................................13
Plan of Distribution..........................................................15
Price Range of Common Stock...................................................15
Dividend Policy...............................................................17
Capitalization................................................................17
Management's Discussion and Analysis of Results
of Operations and Financial Condition.......................................18
Business......................................................................31
Management....................................................................39
Certain Relationships and Related Transactions................................43
Principal Stockholders........................................................43
Description of Securities.....................................................45
Shares Eligible for Future Sale ..............................................46
Legal Matters.................................................................47
Experts.......................................................................47
Change in Independent Auditors................................................47
Where You Can Find More Information...........................................47
Index to Financial Statements................................................F-1
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Except for the financial statements and unless otherwise stated, all
information contained in this prospectus has been restated to give effect to a
one-for-three reverse stock split which we will effect. Because we will issue
whole shares to any stockholder to whom a fractional share is due, we cannot
estimate precisely how many shares of stock we will have outstanding after the
reverse stock split. To account for this inability to estimate how many whole
shares will be issued in lieu of fractional shares, we have added 500 shares to
the restated total wherever it appears in this prospectus. The actual number of
shares issued and outstanding after the reverse stock split may be slightly
different from the numbers we use here. The warrants issued in the offering and
the shares underlying them will not be affected by the reverse stock split.
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that
may be important to you. You should read the financial statements with their
accompanying notes and the other, more detailed, sections of this prospectus for
more complete information.
The Company
Big Smith Brands, Inc. is a publicly traded Delaware corporation
incorporated on December 12, 1979. We are an apparel company that, until
recently, was primarily engaged in the manufacture and sale of work apparel. In
1997, we organized a division to focus on fashion-oriented top and bottom
apparel ("sportswear"), especially for the young adult market.
On April 22, 1999, we sold to Walls Industries, Inc., Cleburne, Texas
all of our assets related to the workwear business, other than real estate and
trademarks, and licensed to Walls the Big Smith trademark and certain related
trademarks for use in the manufacture, sale and licensing of workwear products.
The consummation of the sale and license to Walls has changed our business
substantially, primarily in that we no longer manufacture, hold inventory or
market workwear products. The sale and license to Walls has freed us from our
low-margin workwear focus and the related overhead and interest costs enabling
us to focus on the growth of our higher-margin sportswear business. Walls will
also pay us a total of $4,600,000 in consideration of our entering a ten-year
non-compete agreement.
Current Financial Situation
In July 1997, we introduced a line of sportswear products under our own
brand. During the first fiscal quarter of 1999 our sportswear produced revenues
of approximately $190,000 as compared to revenues of approximately $222,500 in
the first fiscal quarter of 1998. The decrease in sales of our sportswear
products resulted primarily from the sale of last season's inventory at a
reduced rate and the reduction of our sales force. We plan to maximize revenues
from our sportswear business by capitalizing on the experience we gained from
marketing high-end workwear under licensed brands.
Historically, we reported sales of our childrenswear (ranging from
infants through student sizes) as part of our Big Smith branded workwear. We
retained our childrenswear product lines when we sold our workwear business to
Walls. Net sales for our childrenswear products for the three months ended March
31, 1999 were approximately $33,000 as compared to net sales of $26,000 for the
three months ended March 31, 1998. We intend to add additional products to the
childrenswear line for the fall and spring.
Our revenues, including sales of workwear products, for the year ended
December 31, 1998 increased by 5.1% as compared to the year ended December 31,
1997. This increase in revenues followed a precipitous 45.6% decline in revenues
for 1997 compared to 1996 resulting from our decision in 1996, as a result of a
licensing dispute with our principal licensor, to liquidate through below-market
sales our substantial inventory of license-branded workwear and to cease the
manufacture and sale of such workwear. See "Business--Legal Proceedings." In
connection with the dispute and related downsizing, we recorded restructuring
charges of $1.71 million in 1996, $1.01 million in 1997, $0 in 1998 and $0 for
the three months ended March 31, 1999.
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As a result of on-going litigation, however, we estimate that we will have
restructuring charges of approximately $200,000 for the year ended December 31,
1999. As a result of these factors, we experienced a net loss of $3.94 million
for 1996, $4.63 million for 1997 and $1.38 million for 1998.
Looking Forward
Our ability to take advantage of growth opportunities in the sportswear
and childrenswear markets has been hampered by our existing capital structure
and the related going-concern qualification to our financial statements. This
situation has restricted our ability to finance growth in inventory and thereby
our ability to meet an increased volume of orders. The net proceeds of the
original private sale of the securities offered by this prospectus and the
proceeds of the sale and license to Walls have improved our capital structure.
Additionally, the sale and license to Walls removed the overhead and interest
costs associated with the low-margin workwear business allowing us to
concentrate on the higher-margin sportswear and childrenswear business. We
believe that the proceeds from the sale and license to Walls, the proceeds for
the sale of common stock and the achievement of profitable operations will
result in the removal of the going-concern qualification in future years which
will increase the availability under our bank and trade credit lines. As a
result, we believe we are poised to take advantage of various growth
opportunities for our retained products, including additional penetration of
existing markets, expansion into new domestic and foreign markets and extension
of our product lines.
Our principal executive offices are located at 7100 West Camino Real,
Suite 402, Boca Raton, Florida 33433 and our telephone number is (561) 367-8283.
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<PAGE>
RISK FACTORS
Investing in our common stock is very risky. You should be able
to bear a complete loss of your investment. You should consider carefully the
following factors, together with all other information included in the
prospectus, any prospectus supplement and the documents we have incorporated by
reference before deciding to buy any of the securities offered by this
prospectus.
Furthermore, we may use certain forward-looking statements in the
prospectus and other documents we have incorporated by reference. Such
statements
o use forward-looking words such as "believes," "expects," "may,"
"will," "projects," "anticipates," "intends," "plans," "seeks"
and "estimates," variations on such words and similar
expressions,
o discuss goals, intentions and expectations as to future trends,
plans, events, results of operations or financial condition or
state other "forward-looking" information,
o are based on current expectations, estimates and projections
about our business and the industry in which we operate and our
beliefs and assumptions about our future,
o are not guarantees of future performance,
o involve certain risks, uncertainties and assumptions which are
difficult to predict, and
o express results that may differ materially from what our actual
results may be for many reasons, including those discussed below
and elsewhere in the prospectus.
Risks of our Business
1. We have sold our workwear business and are dependent on recently initiated
product lines.
The workwear product line we sold to Walls produced 88.26% of our sales
in the fiscal year that ended December 31, 1998. The costs of manufacturing and
maintaining inventory of those workwear products, however, were among our
greatest expenses and resulted in continued net losses. Because of the high
costs, we decided to sell the workwear product line and concentrate on the
product lines that are outsourced and therefore expected to produce higher
margins.
We have been producing and selling childrenswear since our workwear was
first produced and sold. The childrenswear line was expanded and marketed as a
separate line of products from workwear in 1972. We introduced our sportswear
products in the last two years. Because we will no longer produce any of the
products we sell and because many of the products on which we now depend are new
to us, we have little experience on which to base projections of how profitable
they will be. We believe, now that our resources are freed from supporting the
sourcing and manufacture of workwear, that we can expand our distribution of the
sportswear and childrenswear lines and that these lines will produce income for
us. We cannot give you any assurance that this will happen. If we fail to
substantially increase our sales of these retained product lines, our failure
could have a material adverse effect on our financial position which, in turn,
could significantly affect your investment.
2. Our financial condition is critical and we may need additional financing to
continue as a going concern.
Our viability as a going concern is dependent upon our ability to raise
sufficient working capital and to meet any liquidity needs that may exceed the
availability under our credit facility. Based upon our current plans
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<PAGE>
and assumptions relating to our operations, we anticipate that the net proceeds
of the original private sale of the securities offered by this prospectus, the
proceeds of the sale and license to Walls and the cash flow from operations will
be sufficient to satisfy our working capital requirements for approximately
twelve months from the closing of the sale and license to Walls on April 22,
1999. If our plans change or our assumptions prove to be inaccurate, we may be
required to seek additional funds or to curtail our operations.
At March 31, 1999, on a pro forma basis giving effect to the proceeds of
the sale and license to Walls we had cash and cash equivalents of approximately
$5.0 million and a working capital deficit of $1.53 million. During the three
months ended March 31, 1999 and March 31, 1998 we allocated approximately $1.02
million and $774,000 of net cash to fund our operating activities. We
experienced a loss of approximately $600,000 during the three months ended March
31, 1999 and incurred a net loss of approximately $1.38 million for the year
ended December 31, 1998. We have greatly reduced our general and administrative
expenses over the past twenty months. General and administrative expenses for
the three months ended March 31, 1999, and the years ended December 31, 1998 and
1997 were $349,000, $1.63 million and $1.90 million. On a pro forma basis,
giving effect to the sale and license to Walls, general and administrative
expenses for the same time periods would have been $108,000, $1.34 million and
$1.66 million.
Our future capital requirements will depend on many factors, including:
o the cost of marketing activities,
o our ability to market our products successfully,
o the availability of additional bank financing and/or factoring
facilities,
o the length of time required to collect accounts receivable,
o competing market developments, and
o the pace and outcome of our various litigations. See
"Business--Legal Proceedings."
If we were to raise additional funds through the issuance of equity or
convertible debt securities, you could experience substantial additional
dilution of the value of your stock. Such new securities could also have rights,
preferences and privileges senior to yours. We cannot give you any assurance
that any additional financing, if required, will be available to us, or if
available, will be on terms favorable to us. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
3. We are dependent on a few major customers with whom we have no long term
agreements.
Eighty percent of our sales of sportswear in the year ended 1998 were to
three customers. Sales to Gadzooks, J.C. Penney and Jean Country of sportswear
products represented approximately 39%, 22% and 20% for 1998. Although we have
long-established relationships with some of these customers, such relationships
are based primarily on our past sales of the discontinued workwear lines. The
majority of our sales of childrenswear are to three customers. Sales to Busy Bee
Stores, Midstates Distributors, Inc. and Wheatbelt, Inc. of childrenswear
products represented approximately 19%, 12% and 20% of our net sales of
childrenswear for the year ended December 31, 1998. We do not have long-term
agreements with any of our customers.
As a result of our dependence on a limited number of chain stores, such
stores may have the ability to influence certain of our business decisions. The
loss of any one or all of such customers, any significant decrease in sales to
any one or all them for any reason or any significant difficulty experienced by
any of our major customers in meeting their financial obligations could have a
material adverse effect on our financial position which, in turn, could
significantly affect your investment.
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4. We have large outstanding accounts receivable with customers with whom we
no longer do a substantial amount of business.
Prior to the consummation of the sale and license to Walls, our sales to
our largest customer, Wal-Mart, represented 56.4%, 55.4% and 45.6% of our
operating revenues in the three months ended March 31, 1999 and the years ended
December 31, 1998 and 1997. Accounts receivable from Wal-Mart accounted for
43.2%, 56.4% and 51.1% of our total accounts receivable at March 31, 1999,
December 31, 1998 and December 31, 1997, After the consummation of the sale and
license to Walls, our continuing business with Wal-Mart has been drastically
curtailed. Any failure by Wal-Mart to pay its accounts receivable to us could
have a material adverse effect on our financial position which, in turn, could
significantly affect your investment.
5. We have had significant recent operating losses and have accumulated a
large deficit.
We have incurred significant net losses, including net losses of $1.38
million and $4.6 million for the years ended December 31, 1998 and 1997. We
realized net income from operations for two of the last three quarters but at
March 31, 1999, we had an accumulated deficit of $732,000. Based on our current
operating plan, we expect to begin consistently to realize income from
operations by the end of 1999. We cannot give you any assurance, however, that
we will begin consistently to realize income from operations. See "Financial
Statements" and the Notes thereto.
6. We are involved in several disputes with a former licensor and with foreign
distributors.
From 1993 through 1996, a significant portion of our business consisted
of the manufacture and sale of workwear under a license with Caterpillar, Inc.
In June 1996, Caterpillar sent us a notice purporting to terminate the license,
based upon alleged violations of the license agreement. Caterpillar has since
sued for unspecified damages in respect of such alleged violations. We have
asserted counterclaims against Caterpillar and certain licensees of Caterpillar
alleging that the termination and certain related steps taken by Caterpillar
were improper. We are seeking to recover $20 million of damages. There are
currently motions before the court. See "Business--Legal
Proceedings--Caterpillar Litigation."
We cannot give you any assurance that the outcome of the litigation with
Caterpillar will be favorable to us. If the outcome of the litigation is not
favorable to us, such outcome could have a material adverse effect on our
financial position which, in turn, could significantly affect your investment.
Following our announcement in 1996 that we would cease to manufacture
and sell Caterpillar branded products, certain of our foreign distributors
refused to pay royalties that we believe are due in respect of sales by such
distributors of Caterpillar branded products prior to and following such
cessation. We have instituted collection actions against such distributors. Most
of these litigations have been resolved. See "Business--Legal Proceedings--Other
Litigation." We can give you no assurance that the outcomes of the remaining
litigations will be favorable to us.
7. We may fail to achieve sales sufficient to make us a profitable business.
Following the consummation of the sale and license to Walls, we expect
the following factors to result in increased sales:
o our new concentrated focus on our sportswear and childrenswear
lines, and
o increased marketing and distribution.
Total net sales for the three months ended March 31, 1999 were $2.13
million as compared with net sales of $2.26 million for the three months ended
March 31, 1998. Net sales of our retained product lines for
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the three months ended March 31, 1999 were $236,000 as compared with net sales
of the retained product lines of $279,000 for the three months ended March 31,
1998. We can give you no assurance that we will successfully restore our sales
to previous levels or achieve profitability. If we fail to do so, our failure
could have a material adverse effect on our financial position which, in turn,
could significantly affect your investment. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
8. We operate in a highly competitive industry that is sensitive to fashion
trends.
The apparel industry is highly competitive and characterized generally
by ease of entry. Most of our competitors are substantially larger and have
greater financial, marketing and other resources. See "Business--Competition."
In addition, the sportswear market is subject to rapidly changing consumer
preferences. Some of our designs may not be marketable from one season to the
next. From time to time, we may have to sell such post-season inventory at
reduced prices like we did in the first quarter of 1999. Any failure on our part
successfully to compete in the industry or to mitigate losses on post-season
inventory could have a material adverse effect on our financial position which,
in turn, could significantly affect your investment.
9. Our business may be subject to seasonal variations.
Our sales of workwear were generally higher in the last six months of
the year as compared to the first six months of the year in terms of revenues
generated and, to a lesser extent, total garments sold. This seasonality had a
significant impact on our cash flow because our inventory levels tended to
increase during the summer months in preparation for anticipated higher sales in
September, October and November.
We believe that our continuing business will be less subject to seasonal
variation than it historically has been. Our sportswear and childrenswear
products sell at a generally constant rate with some acceleration of sales in
the spring and fall. We can give you no assurance, however, that our continuing
business will not experience significant seasonal variation. Significant
seasonal variation in our sales could have a material adverse effect on our
financial position which, in turn, could significantly affect your investment.
10. We are dependent on contract manufacturers.
We source substantially all of our sportswear and childrenswear products
by contracting with offshore sewing and knitting contract manufacturers. Our use
of offshore contractors and resulting lack of direct control could subject us to
difficulty in obtaining timely delivery of products or delivery of products of
acceptable quality. We do not have any long-term supply agreements with any of
our contractors. The loss of any one or more of these contractors or any other
difficulty in obtaining timely delivery of acceptable merchandise could have a
material adverse effect on our financial position which, in turn, could
significantly affect your investment. See "Business-- Manufacturing and
Sourcing."
11. We are dependent on key personnel.
We depend on the services of S. Peter Lebowitz, our founder, Chief
Executive Officer, President and Chairman of the Board. We have an employment
agreement with Mr. Lebowitz which expires December 31, 2003. See
"Management--Executive Compensation." We believe that the loss of the services
of Mr. Lebowitz could have a material adverse effect on our financial position
which, in turn, could significantly affect your investment. We maintain keyman
life insurance on Mr. Lebowitz in the amount of $1,500,000, the proceeds of
which insurance is pledged to our principal working capital lender.
12. We have not paid any dividends recently nor do we anticipate doing so.
We expect that we will retain all available earnings generated by our
operations for the development and growth of our business. Accordingly, we do
not anticipate paying any cash dividends on our common stock
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<PAGE>
in the foreseeable future. Any future determination as to dividend policy will
be made at the discretion of our Board of Directors and will depend on a number
of factors, including our future earnings, capital requirements, financial
condition and business prospects and such other factors as our Board of
Directors may deem relevant. In addition, the payment of cash dividends on our
common stock is restricted under the provisions of our credit facility, which
requires the prior written consent of our lender for any payment of dividends.
13. We must comply with financial covenants related to our credit facility.
We are subject to certain financial covenants under our credit facility.
If we fail to comply with the covenants in our credit facility and also fail to
renegotiate the covenants or to receive a waiver of such non-compliance, our
failure would constitute an event of default at the lender's option. If we
failed to meet any financial covenant and our lender opted to declare an event
of default, our financial position could be materially adversely affected which,
in turn, could significantly affect your investment. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
14. There are significant consequences associated with our stock trading on the
NASD over-the-counter bulletin board rather than a national exchange.
The effects of not being able to list our securities on a national exchange
include:
o limited release of the market prices of our securities,
o limited news coverage of the company,
o limited interest by investors in our securities,
o increased difficulty in selling our securities in certain states
due to "blue sky" restrictions, and
o limited ability to issue additional securities or to secure
additional financing.
15. We have no assurance of future Nasdaq SmallCap Market Listing.
In the future, we intend to apply for listing of our common stock on the
Nasdaq SmallCap Market. The Nasdaq SmallCap Market quantitative criteria for
initial inclusion include, without limitation:
o a public float of one million shares with a market value of at
least $5 million,
o a minimum bid price of $4.00,
o three market makers,
o at least 300 stockholders holding 100 shares or more, and
o either:
o net tangible assets of $4 million,
o market capitalization of $50 million or
o net income of $750,000.
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<PAGE>
We do not currently meet the majority of these requirements. We can give you no
assurance that we will achieve the quantitative criteria required by the Nasdaq
SmallCap Market or that, even if we do, our listing application would be
approved by Nasdaq.
16. We are subject to the application of the Penny Stock Rules
Because our common stock is not trading in the Nasdaq SmallCap Market or
some other similar national trading market, and the trading price of the common
stock is less than $5 per share, we are subject to the Penny Stock Rules under
the Securities Enforcement and Penny Stock Reform Act of 1990. In addition to
the risk of volatility of stock prices, low price stocks are subject to the
risks of additional federal and state regulatory requirements and the potential
loss of effective trading markets. In particular, broker-dealers trading in our
common stock are subject to Rule 15g-9 under the Securities Exchange Act of
1934, as amended. Rule 15g-9, among other things, requires that broker-dealers
satisfy special sales practice requirements, including making individualized
written suitability determinations and receiving any purchaser's written consent
prior to any transaction.
Broker-dealers handling trades in our securities are required to make
additional disclosure in connection with those trades, including the delivery of
a disclosure schedule explaining the nature and risks of the penny stock market.
Such requirements could severely limit the liquidity of our securities and your
ability to sell your securities in the secondary market.
17. We have outstanding restricted shares that will be available for future
sales.
We have 2,871,682 shares of common stock issued and outstanding. Of
these shares, all of the 366,667 shares of common stock sold in the original
private sale of the securities offered by this prospectus, the 566,667 shares of
common stock we sold in our initial public offering in February 1995, the 85,000
shares of common stock issued to the underwriter of our initial public offering
upon exercise of the underwriter's options, 98,667 shares of common stock that
have been transferred pursuant to the volume restrictions of Rule 144 of the
Securities Act of 1933, as amended, by S. Peter Lebowitz and the trusts
benefitting members of his family and 1,056,614 shares of common stock which
were issued upon the conversion of certain debt securities are generally freely
transferable by persons other than our affiliates, without restriction or
further registration under the Securities Act. Another 559,667 shares of common
stock are held by Mr. Lebowitz and the trusts and may be transferred in
accordance with the volume restrictions of Rule 144 of the Securities Act. The
remaining 137,902 shares of common stock outstanding are "restricted securities"
as defined in Rule 144 under the Securities Act and may not be sold in the
absence of registration under the Securities Act unless an exemption is
available, including an exemption afforded by Rule 144. We sold these restricted
shares in reliance on exemptions from the registration requirements of the
Securities Act. The sale of a substantial number of shares of common stock or
the availability of common stock for sale could adversely affect the market
price of our common stock prevailing from time to time. S. Peter Lebowitz and
the trusts established for the benefit of Mr. Lebowitz's children have entered
into an agreement which prohibits them from selling stock in the company for up
to eighteen months following the offering. See "Principal Stockholders" and
"Shares Eligible for Future Sale".
The holders of 618,667 shares of our common stock, including the 559,667
shares held by Mr. Lebowitz and the trusts, have agreed not to transfer or
otherwise dispose of any of our securities for a period of eighteen months
following the close of the private placement in which the securities covered by
this prospectus were sold, without the prior written consent of the placement
agent for the offering.
- 12 -
<PAGE>
18. Outstanding options may have an effect on the price of our securities.
We have granted 447,000 options, each to purchase one share of our
common stock, to key employees, officers, directors and consultants under our
1994 Stock Incentive Plan. These outstanding options could have a significant
adverse effect on the trading price of our common stock, especially if a
significant volume of the options were exercised and the stock issued were
immediately sold into the public market.
19. There are limits on how we can use our income tax loss carryforwards.
Certain events may constitute an "ownership change" within the meaning
of Section 382 of the Internal Revenue Code of 1986, as amended. The conversion
on March 19, 1998 by the holders of our subordinated debentures and/or the
private placement of the shares offered for resale by this prospectus may have
resulted in such an "ownership change". If we have had an ownership change, our
right to use any income tax loss carryforwards we may have had as of the date of
the ownership change will be limited.
SELLING SECURITYHOLDERS
The Selling Securityholders consist of the Investors and Cromwell, each
as defined below. The registration statement of which this prospectus is a part
is being filed, and the shares and warrants offered hereby are included herein,
pursuant to various registration rights granted by the Company to the Selling
Securityholders (collectively, the "Registration Rights Agreements"). We are
unable to determine the exact amount of securities that will actually be sold
pursuant to this prospectus due to (i) the ability of the Selling
Securityholders to determine individually when and whether they will sell any
securities under this prospectus and (ii) the uncertainty as to how many of the
warrants will be exercised.
The Investors
The Selling Securityholders identified in the table below as "Investors"
acquired in a private placement transaction (the "Private Placement") pursuant
to Subscription Agreements dated as of February 1, 1999 (collectively, the
"Subscription Agreements") an aggregate of 1,100,000 units (the "Units"), each
consisting of 1 share (issued prior to the reverse stock split, each, a "Share"
and collectively, the "Shares") of our common stock, par value $ .01 per share
(the "Common Stock"), and two warrants (the "Warrants"). Each Warrant is
exercisable for the purchase of one share of Common Stock for a period of three
years ending January 31, 2002. The number of Warrants and the number of shares
of Common Stock underlying the Warrants will not be affected by the reverse
stock split. In each Unit, one Warrant is exercisable for $1.50 per share and
one Warrant is exercisable for $1.75 per share.
Cromwell
In connection with its services as placement agent for the Private
Placement, D.L. Cromwell Investments, Inc. ("Cromwell") received warrants (the
"Placement Agent's Warrants") to purchase up to 110,000 Units at an exercise
price of $1.20 per Unit, and received a placement agent's fee of $121,000.
- 13 -
<PAGE>
The following table and accompanying footnotes identify each Selling
Securityholder based upon information provided to the Company, set forth as of
July 12, 1999, with respect to the Shares beneficially held by or acquirable by,
as the case may be, each Selling Securityholder and the shares of Common Stock
beneficially owned by the Selling Securityholder which are not covered by this
prospectus. Other than Cromwell, no Selling Securityholder has had any position,
office or other material relationship with the Company within the past three
years, other than Cromwell which acted as placement agent. The percentage
figures reflected in the table assume the exercise of all Warrants into
2,456,667 shares of Common Stock.
<TABLE>
<CAPTION>
Common Stock Common Stock
Beneficially Owned After
Number of Shares Owned Number of Offering
of Common Stock Prior to Shares (1)(2)
Number of Underlying Offering(1) to be Number
Name of Investor Shares of Common Stock Warrants Number Percent Offered Percent
- ---------------- ---------------------- -------- -------------- ------- -------
Investors:
<S> <C> <C> <C> <C> <C>
Leonard and Bernice Davidson
Family Trust Dated July 1, 1992 8,334 50,000 58,334 58,334 0
Richard Knoll/Susan Knoll 25,000 150,000 175,000 175,000 0
Smith, Knoll Smith Partnership
Jeffrey C. Ames 8,334 50,000 58,334 58,334 0
Matthew Fino 36,667 220,000 256,667 256,667 0
Harvey Goldman 5,000 30,000 35,000 35,000 0
Tolland Limited 33,334 200,000 233,334 233,334 0
Tony Morello 66,667 400,000 466,667 466,667 0
Rothchild Capital Holdings 66,667 400,000 466,667 466,667 0
Fierce Company, Inc. 33,334 200,000 233,334 233,334 0
Phil Lyons, Trustee, Lyons 50,000 300,000 350,000 350,000 0
Community Property Trust
Dated June 19, 1975
Bernard Greenblatt 33,334 200,000 233,334 233,334 0
Cromwell:
D.L. Cromwell Investments, ______ 236,667 236,667 236,667 0
Inc.
Total 336,671 2,436,667 2,773,338 2,773,338 0
======= ========= ========= ========= =
</TABLE>
- ----------------------
(1) Under the Securities Exchange Act of 1934, as amended, a person or group of
persons is deemed to have "beneficial ownership" of any shares of Common
Stock which such person has the right to acquire within sixty days after
the date of this prospectus. After the one-for-three reverse stock split
but before selling any of the securities offered by this Prospectus, some
of the Selling Securityholders may beneficially own more than 5% of the
Company's Common Stock (including the shares of Common Stock underlying the
warrants held by such persons). Based on information supplied by such
persons, the Company believes that the persons named in this table have
sole voting power with respect to all shares of Common Stock which they
beneficially own.
(2) Assumes the sale of all shares of Common Stock offered hereby.
- 14 -
<PAGE>
PLAN OF DISTRIBUTION
The registration statement of which this prospectus (the "Prospectus")
forms a part has been filed pursuant to the Registration Rights Agreements. To
the Company's knowledge, as of the date hereof, no Selling Securityholder has
entered into any agreement, arrangement or understanding with any particular
broker or market maker with respect to the Shares offered hereby, nor does the
Company know the identity of the brokers of market makers which will participate
in the offering.
The Shares and Warrants covered hereby may be offered and sold from time
to time by the Selling Securityholders. The Selling Securityholders will act
independently of the Company in making decisions with respect to the timing,
manner and size of each sale. Each such sale may be made on the OTC Bulletin
Board or otherwise, at prices and on terms then prevailing or at prices related
to the then market price, or in negotiated transactions. The Shares and Warrants
may be sold by one or more of the following methods:
(a) a block trade in which the broker-dealer engaged by the Selling
Securityholder will attempt to sell the Shares and Warrants as
agent but may position and resell a portion of the block as
principal to facilitate the transaction;
(b) purchases by the broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this Prospectus; and
(c) ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
To the Company's knowledge, the Selling Securityholders have not, as of
the date hereof, entered into any arrangement with a broker-dealer for the sale
of Shares and Warrants through a block trade, special offering, or secondary
distribution of a purchase by a broker-dealer. In effecting sales,
broker-dealers engaged by the Selling Securityholders may arrange for other
broker-dealers to participate. Broker-dealers will receive commissions or
discounts from the Selling Securityholders in amounts to be negotiated.
In offering the Shares and Warrants, the Selling Securityholders and any
broker-dealers who execute sales for the Selling Securityholders may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act") in connection with such sales, and any profits
realized by the Selling Securityholders and the compensation of such
broker-dealer may be deemed to be underwriting discounts and commissions.
Rule 10b-6 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") prohibits participants in a distribution from bidding for or
purchasing for an account in which the participant has a beneficial interest,
any of the securities that are the subject of the distribution. Rule 10b-7 under
the Exchange Act governs bids and purchases made to stabilize the price of a
security in connection with a distribution of the security.
This offering will terminate as to each Selling Securityholder on the
earlier of (a) the date on which such Selling Securityholder's Shares may be
resold pursuant to Rule 144 under the Securities Act; or (b) the date on which
all Shares offered hereby have been sold by the Selling Securityholders. There
can be no assurance that any of the Selling Securityholders will sell any or all
of the Shares and Warrants offered hereby.
PRICE RANGE OF COMMON STOCK
The Company's securities were delisted by the Nasdaq SmallCap Market on
December 4, 1997. The Pacific Exchange delisted the Company's securities
effective April 1, 1999.
- 15 -
<PAGE>
The following table sets forth the high and low trading price ranges for
the Common Stock and certain warrants issued by the Company in its initial
public offering (the "IPO Warrants") as quoted on Nasdaq SmallCap Market until
December 3, 1997 and thereafter on the over-the-counter bulletin board for the
periods indicated. The quotes represent interdealer prices without retail
markup, markdown or commission, and may not necessarily represent actual
transactions. The trading volume of the Company's securities fluctuates and may
be limited during certain periods. As a result, the liquidity of an investment
in the Company's securities may be adversely affected.
<TABLE>
<CAPTION>
Common Stock IPO Warrants(1)
------------ ---------------
Fiscal Year Ending December 31, 1999
<S> <C> <C> <C> <C>
Quarter ended June 30, 1999.............. - -
Quarter ended March 31, 1999............. 2 3/8 1 1/8 - -
Fiscal Year Ending December 31, 1998
Quarter ended March 31, 1998............. 1 13/32 9/64 - -
Quarter ended June 30, 1998.............. 2 3/64 7/8 - -
Quarter ended September 30, 1998......... 2 1/4 1 1/4 - -
Quarter ended December 31, 1998.......... 3 1/2 1 1/4 - -
Fiscal Year Ending December 31, 1997
Quarter ended March 31, 1997............. 4 13/64 2 5/8 17/32 1/8
Quarter ended June 30, 1997.............. 4 5/16 29/64 3/32
Quarter ended September 30, 1997......... 1 1/32 3/16 3/16 1/32
Quarter ended December 31, 1997.......... 1 9/16 1/8 5/32 1/64
Fiscal Year Ending December 31, 1996
Quarter ended March 31, 1996............. 4 19/32 2 1/8 1 3/64 5/16
Quarter ended June 30, 1996.............. 3 1/8 2 9/16 1/8
Quarter ended September 30, 1996......... 3 1/4 1 1/4 7/16 3/32
Quarter ended December 31, 1996.......... 3 1/8 2 1/8 9/32 1/8
</TABLE>
- --------------------
(1) Each of the IPO Warrants entitled the holder to purchase one share of
Common Stock, par value $.01 per share at an exercise price of $4.60 per
share, subject to certain adjustments. The IPO Warrants expired on February
8, 1998. The last trade was on November 19, 1997.
At March 3, 1999, the Company's Common Stock was held by 37 holders of
record and approximately 821 beneficial holders. When they expired on February
8, 1998, the IPO Warrants were held by 18 holders of record. At July 12, 1999,
the high and low bid prices for the Company's Common Stock on the
over-the-counter bulletin board were $.6875 and $.6875.
- 16 -
<PAGE>
DIVIDEND POLICY
We do not anticipate paying any dividends in the immediate future. See
"Risk Factor Number 12."
CAPITALIZATION
The following table sets forth our capitalization after giving effect to
the anticipated one-for-three reverse stock split: (i) as of March 31, 1999, and
(ii) as of March 31, 1999 on a pro forma basis to reflect the consummation of
the sale and license to Walls (the "Walls Sale and License").
<TABLE>
<CAPTION>
MARCH MARCH 31,
31, 1999 1999(1)
PRO FORMA
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C>
Short-term obligations, including current portion
of long-term debt and checks outstanding in
excess of bank balance $7,263 $4,183
Long-term obligations, excluding current portion 774 344
Stockholders' equity: Common Stock, par value
$.01 per share:
10,000,000 shares authorized, 2,871,682 shares
issued and outstanding; 10,000,000 shares
authorized, 2,871,682 shares issued and outstanding
pro forma (2) 29 29
Additional paid-in capital 10,146 10,146
Accumulated deficit (10,907) (10,077)
Total stockholders' equity (deficit) (732) 98
------ ------
Total capitalization $ (7,305) $ 4,625
------- ------
-----------------------
</TABLE>
(1) Pro forma to give effect to the Walls Sale and License. See Note 16 to
the Notes to the Financial Statements.
(2) Does not include (i) 447,000 shares issuable upon exercise of options
granted under the Company's stock incentive plan or (ii) 31,667 shares
issuable upon exercise of warrants issued to other investors. See
"Shares Eligible for Future Sales."
- 17 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PRO FORMA FINANCIAL INFORMATION
On April 22, 1999, we completed the sale of our workwear product lines
to Walls Industries, Inc., Cleburne, Texas. We have sold to Walls our entire
inventory of workwear products and raw materials along with the machinery and
equipment used in the manufacture of those workwear products (excluding only
certain computer equipment). We leased Walls our facilities in Carthage,
Missouri for one year and are allowing Walls to use certain of our retained
computer equipment while they are involved in the transition of the business
from us to them. Walls has assumed our leases for properties used in the
manufacture and distribution of workwear products and has hired substantially
all of our employees who were involved in our workwear business. We retained
substantially all of the assets currently used in our sportswear business, and,
although historically part of the workwear business, we also retained our
childrenswear products and the right to market ladieswear in the same
distribution channels in which we market our sportswear.
In addition, we transferred all of our trademarks at closing to a
subsidiary, Big Smith Holdings, Inc. ("Holdings"). Holdings has granted to Walls
a royalty-free, perpetual license to use the Big Smith trademark and certain
related tradenames in connection with the manufacture, sale and licensing of
workwear products. Holdings granted to us a royalty-free, perpetual license to
use the Big Smith trademark and certain related tradenames for sportswear and,
subject to certain approval rights of Walls, for all other purposes. Any other
licenses granted by Holdings will require the unanimous vote of its Board of
Directors including one director designated by Walls.
Because of this transfer of our workwear business at the beginning of
the second fiscal quarter of 1999, the actual results of operations for the
first fiscal quarter do not accurately reflect our current financial position or
what may be expected for our future.
The following pro forma financial information is based on our unaudited
Financial Statements and the related Notes thereto for the three months ended
March 31, 1999 and our audited Financial Statements and the related Notes
thereto for the year ended December 31, 1998 appearing elsewhere in this
Prospectus. This pro forma financial information is presented to assist you in
analyzing the impact of the sale and license to Walls on our Balance Sheet and
Statement of Operations. You should not assume, however, that the following pro
forma information reflects what our financial condition or results of operations
actually would have been if the sale and license to Walls had occurred on March
31, 1999 (Balance Sheet) or January 1, 1999 (Statement of Operations).
- 18 -
<PAGE>
BIG SMITH BRANDS, INC.
Pro Forma Balance Sheet
March 31, 1999
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS After
March 31, 1999 Sale of Assets Other Non-Compete Transaction Note #
-------------- -------------- ----- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 33,647 $ $ 32,000 $ 400,000 $ 465,647 1,3a &3c
Temporary Investments 7,991 7,991
Accounts Receivable, less allowance
for doubtful accounts of $56,717 1,302,918 (90,000) 1,212,918
Due from Seller - Miami Security
Deposits 4,060 4,060 3c
A/R Non-Compete 400,000 400,000 1
A/R Rental Income 22,000 22,000 3a & 3b
Inventories 3,648,718 (3,209,357) 439,361 2a
Prepaid Expenses 60,157 60,157
------------ ------------- --------- ---------- -----------
Total current assets 5,053,431 (3,299,357) 58,060 800,000 2,612,134
------------ ------------- ---------- ---------- -----------
PROPERTY AND EQUIPMENT, At Cost
Land 20,000 20,000
Buildings 600,317 (11,000) 589,317 2b
Equipment 1,948,221 (1,415,559) 532,662 2b
Vehicles 46,471 (46,471) 0 2b
------------ ------------- ---------- ---------- -----------
2,615,009 (1,473,030) 1,141,979
Less accumulated depreciation (1,662,672) 1,239,611) (423,061) 2b
------------ ------------- ---------- ---------- -----------
Net property and equipment 952,337 (233,419) 718,918
------------ ------------- ---------- ---------- -----------
OTHER ASSETS
Certificate of Deposit 200,000 200,000
Security Deposits 41,640 (4,970) 36,670 3c, 4
Non compete expenses 112,554 112,554
Deferred finance charges, less
accumulated amortization of
$195,650 555,572 555,572
Trademark, less accumulated
amortization of $126,099 389,760 389,760
----------- ------------ ---------- ---------- ----------
Total other assets 1,299,526 1,294,556
----------- ------------ ---------- ---------- ----------
Total Assets $ 7,305,294 $(3,532,776) $ 53,090 $ 800,000 $4,625,608
=========== ============ ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line-of-credit $ 2,784,281 $(1,962,506) $ $ $ 821,775 2c
Current maturities of long
term debt 284,176 (160,952) 123,224 2c
Checks outstanding in excess
of bank balance 67,821 67,821
Accrued restructuring/litigation 81,053 81,053
Deferred income 22,000 22,000 1, 3a & 3b
Accrued royalties 664,588 664,588
Account Payable 2,711,875 (710,528) 30,060 2,031,407 2c,3a
Accrued Expenses 419,852 (48,759) 371,093
Due to stockholder (Note 12) 250,000 (250,000) 0
----------- ----------- ---------- ---------- ----------
Total current liabilities 7,263,646 (3,132,745) 52,060 4,182,961
----------- ----------- ---------- ---------- ----------
LONG-TERM DEBT 774,046 (429,732) - - 344,314
----------- ----------- ---------- ---------- ----------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value; authorized
10,000,000 shares: issued and 28,713 28,713
outstanding 2,871,682
Additional paid-in capital 10,146,333 10,146,333
Accumulated Deficit (10,907,444) 29,701 1,030 800,000 (10,076,713)
----------- ----------- ---------- ---------- -----------
Total stockholders' deficit (732,398) 29,701 1,030 800,000 98,333
----------- ----------- ---------- ---------- -----------
Total liabilities and
stockholders' deficit $7,305,294 $(3,532,776) $ 53,090 $ 800,000 $ 4,625,608
=========== =========== ========= ========== ===========
</TABLE>
- 19 -
<PAGE>
BIG SMITH BRANDS, INC.
PRO FORMA STATEMENT OF OPERATIONS
Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Sale of After
March 31, 1999 Adjustments Assets Other Non-Compete Transaction Note #
-------------- ----------- ------ ----- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $2,132,332 $(1,909,290) $ 0 $ 0 $ 0 $ 223,032
Cost of Goods Sold 1,817,537 (1,524,318) 293,219
---------- ------------ -------- ------- --------- ----------
Gross Profit 314,785 (384,972) 0 0 0 (70,187)
---------- ----------- -------- ------- --------- ----------
Operating Expenses
Selling 315,859 (223,758) 0 0 0 92,101 4
General & Administrative 348,932 (240,763) 0 30,970 0 139,139 3a
Bad debts 0 0 0
---------- ----------- -------- ------- --------- ----------
Total operating expenses 664,791 (464,521) 0 30,970 0 231,240
---------- ----------- -------- ------- --------- ----------
Gain/(Loss) from operations (350,006) (79,549) 0 (30,970) 0 (301,427)
---------- ----------- -------- ------- --------- ----------
Other Income (Expenses)
Royalty Income 0 0
Interest income 0 0
Interest expense (129,348) 74,913 (54,435)
Non-compete income 800,000 800,000 1
Rental Income 32,000 32,000 3a & 3b
Gain/(Loss) sale of assets 29,701 29,701 2b
Amortization of trademarks and
loan fees (47,725) (47,725)
Amortization of debenture discount 0 0 0
Depreciation (71,301) (71,301)
Loss on sale of equipment 0 0 0
Other expense (1,335) 0 (1,335)
----------- ----------- -------- ------- --------- ----------
(249,709) 74,913 29,701 32,000 800,000 686,905
----------- ----------- -------- ------ ---------
Gain/(Loss) before Income Taxes (599,715) 154,462 29,701 1,030 800,000 385,478
Provision for Income Taxes - - - - - -
---------- ----------- ------- ------ --------- ----------
Net Gain/(Loss) $ (599,715) $ 154,462 $29,701 $1,030 $ 800,000 $ 385,478
=========== =========== ======= ======= ========= ==========
Net Gain/(Loss) per share $ (0.02) $ 0.13
========== ==========
Weighted Average
Common shares outstanding 2,871,682 2,871,682
========== ==========
</TABLE>
- 21 -
<PAGE>
Big Smith Brands, Inc.
Notes To Pro Forma Financial Statements
December 31, 1998
1. Accounting treatment for the transaction:
The various elements of the transaction were recorded in their entirety
as though the transaction had been consummated as of March 31, 1999 (Balance
Sheet) and January 1, 1999 (Statement of Operations). In most instances the
various elements of the transaction were recorded on a cash basis. At March 31,
1999, approximately $3,128,206 would have been due upon the closing of the
transaction (the "Closing") for the workwear inventory and fixed assets. The
payments under the non-compete agreement extend over a period of eight (8)
years, with $400,000 due upon Closing and an additional $400,000 due six (6)
months thereafter. Walls Industries, Inc., Cleburne, Texas ("Walls") will rent
certain retained computer equipment at $10,000 per month for a minimum of three
(3) months. Walls will also rent the Company's facilities in Carthage, Missouri
for $2,000 per month for a minimum of twelve (12) months. The first month's rent
for the Carthage, Missouri facilities and three (3) months computer rental
payments aggregating $32,000 were paid at Closing. The assumption of the leases
for the Miami, Oklahoma facilities will effect the return of the $4,060 security
deposits relating thereto. All expenses related to the transaction were
recorded. At March 31, 1999, the total cash due at Closing would have been
$3,564,266.
The consummation of the transaction also affected the outstanding
revolving line-of-credit and principal balances with NationsCredit Commercial
Funding, a NationsBank Company ("NationsCredit"). As a result of the
transaction, the revolving line-of-credit and the term loan were reduced by
$1,970,474 and $554,797 leaving a total balance due NationsCredit of $2,525,271.
This transaction effected a reduction of the Company's monthly interest and loan
payments of approximately $20,000.
The actual working capital deficit for the year ended March 31, 1999 was
$1.53 million. If the transaction had been consummated as of March 31, 1999, the
working capital deficit would have been $1.57 million.
2. The federal income tax consequences of the transaction:
Non-compete income $800,000
Rental income 54,000
Related expenses (30,060)
Security deposits (910)
Gain on sale of assets 29,701
-------
Income before income taxes 852,731
Provision for income taxes 285,000
Benefit from NOL carryforward (285,000)
Net income tax expense 0
-------
Net Income $852,731
=======
The Company currently has net operating loss carryforwards of $3,825,509
which should be sufficient to offset all income received under the non-compete
agreement even if the Company's use of such carryforwards is limited. See "Risk
Factor Number 19."
3. Notes to transaction recorded:
1. The Company will grant to Walls a royalty-free, perpetual license to
use the "Big Smith" trademark and certain related tradenames in
connection with the manufacture, sale and
- 22 -
<PAGE>
licensing of workwear products. In consideration for the Company
entering a ten-year non-compete agreement, Walls will pay the
Company a total of $4,600,000, as follows:
Year 1 $800,000
Year 2 $700,000
Year 3 $700,000
Year 4 $600,000
Year 5 $600,000
Year 6 $400,000
Year 7 $400,000
Year 8 $400,000
Year one (1) payment includes $400,000 at Closing and the
remaining $400,000 is due and payable six (6) months thereafter.
The subsequent year payments will be due and payable on the
anniversary of the Closing.
2. Sale of Assets:
a. Workwear:
Work in process $ 358,784
Piece goods 353,792
Trim 303,121
Finished Goods 2,193,660
---------
Total $3,209,357
The above figures are based on Company records as of March 31,
1999. The inventory had been financed by NationsCredit at an
advance rate of sixty percent (60%). At March 31, 1999, the
payment due to NationsCredit on the sale of the inventory would
have been $1,925,614. The Company has further agreed with
NationsCredit to reduce the revolving line-of-credit by
$1,962,506. These payments will reduce the Company's revolving
line-of-credit with NationsCredit to $821,775 and also will
reduce the Company's interest costs.
b. Machinery and equipment:
Factory Equipment $1,127,371
Furniture & Fixtures 345,659
Trucks 46,471
----------
Subtotal $1,473,030
Less depreciation $1,239,611
----------
Total $ 233,419
==========
Walls paid to the Company for the assets purchased a price that
included the appraised value (on a liquidated basis) of the
machinery and equipment sold which, at March 31, 1999, would have
been $263,120. At March 31, 1999, the net gain on the sale of the
machinery and equipment would have been $29,701.
The Company's obligation at March 31, 1999 to NationsCredit on
the term loan portion of the Credit Facility against the
machinery and equipment would have been $411,600, with a
remaining loan availability of $138,340. The original principal
amount of the loan was based on the forced liquidation value of
machinery and equipment at December 10, 1997 of $686,000, with an
advance of eighty percent (80%) and repayment over five (5)
years. The
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Company had been repaying the loan at the average rate of $9,146
per month. At March 31, 1999, the pro forma repayment to
NationsCredit for the portion of the term loan based on the value
of the trademarks would have been $143,197. The Company currently
has one (1) other long-term obligation to NationsCredit on the
term loan portion of the credit facility against the Carthage,
Missouri real property of $117,000 with a monthly payment of
$2,600.
c. On a pro forma basis as of March 31, 1999, the cash
received for the sale of the Inventory and Machinery and
Equipment would have been $3,128,206. The distribution and
application of the cash received would have been as
follows:
Revolving line-of-credit $1,962,506
Machine & Equipment and Trademark loans 554,797
S. Peter Lebowitz loan 250,000
Accounts Payable 312,144
Other Accrued expenses 48,759
----------
Total Distribution $3,128,206
==========
The first funds received pursuant to the non-compete
agreement and the rental income will be applied to working
capital. All accounts receivable, $1,302,918 at March 31,
1999, are security for the credit facility with
NationsCredit, and are expected to generate additional
working capital availability of approximately $195,438.
3. Rental Income and Miami Security Deposit:
a. Computer Rental:
Walls has agreed to rent the AS400 computer and RLM
program for a period of at least three (3) months at
$10,000 per month. The Company expends $10,020 on the
lease and service contract resulting in a loss of $20 per
month.
b. Building occupancy:
Walls has agreed to rent all of the Company's real
property located in Carthage, Missouri at a monthly rental
of $2,000 for at least twelve (12) months. This monthly
payment will be used to offset certain costs related to
the ownership of this real property.
c. Miami, Oklahoma Security Deposits:
Walls has agreed to assume both of the leases covering the
Miami, Oklahoma facilities. Accordingly, all deposits
relating to these facilities will be refunded to the
Company.
4. Outlet and Retail Stores:
Other than the outlet store located in Carthage, Missouri which
is now being operated by Walls, the Company retained ownership of
its outlet and retail stores and the leaseholds on the leased
properties related to these stores. The security deposits on the
Monett, Missouri and the Miami, Oklahoma outlet stores
aggregating $910 were applied to last month's rents. The two
retained workwear outlet stores were closed. The Miami, Florida
retail store will remain open for business.
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ACTUAL RESULTS
Going Concern
Our viability as a going concern is dependent upon our ability to raise
sufficient working capital and to meet any liquidity needs that may exceed our
availability under our Credit Facility. See "Risk Factor Number 2" and
"--Liquidity and Capital Resources." We experienced a loss from operations in
1998 and had a working capital deficit at December 31, 1998. We also experienced
a loss from operations of $599,715 for the fiscal quarter ended March 31, 1999
and had a cumulative working capital deficit of $1.53 million at March 31, 1999.
Also, our liquidity needs could exceed the amount of borrowings available under
our Credit Facility. See "--Results of Operations", "--Liquidity and Capital
Resources" and "Business--Legal Proceedings--Caterpillar Litigation."
General
The discussion and analysis set forth below is for the three months
ended March 31, 1999 and March 31, 1998, and for the years ended December 31,
1998 and December 31, 1997. It should be read in conjunction with our Financial
Statements and the related Notes thereto appearing elsewhere in this Prospectus.
The information presented for the three months ended March 31, 1999 and March
31, 1998, was derived from unaudited financial statements which, in our opinion,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation. The three-month results of operations are not
indicative of the results of operations you may expect for the full year for
reasons including, without limitation, the consummation of the Walls Sale and
License as we have discussed above.
Overview
Following the consummation of the Walls Sale and License, our business
plan now focuses on refining our retained product lines and increasing
merchandising, sales and marketing of those retained products, with emphasis on
sportswear and childrenswear. In order to achieve our objectives, our strategy
currently includes:
o finalizing negotiations expected to lead to a joint venture for
the design, acquisition of raw materials, manufacture, marketing,
sales and sourcing of Big Smith branded sportswear with
individuals and organizations with long-standing worldwide
reputations in the apparel industry,
o continuing enhancement of our retained product lines,
o increasing the value of the Big Smith trademarks through direct
consumer advertising,
o offshore subcontracting of substantially all manufacturing and
production activities for the foreseeable future,
o retaining testing and quality assurance functions,
o licensing Amita, srl, an Italian company, for the production,
sale and marketing of sweaters and outergarments to complement
our sportswear products,
o occupying in the fall of 1999 a facility to serve as executive
office and warehouse space in Deerfield, Florida,
o developing a business plan to introduce a line of ladieswear as a
complement to our sportswear and childrenswear, and
o focusing solely on the development and marketing of products
under our Big Smith labels.
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We have incurred substantial losses from operations, including losses
from operations for the three months ended March 31, 1999 and the years ended
December 31, 1998 and 1997, and we had a working capital deficit of $1.53
million and an accumulated deficit of $732,399 at March 31, 1999. As a result,
our Financial Statements are qualified by a going concern opinion. See "Risk
Factor Number 2," "Liquidity and Capital Resources" and Note 1 and Note 14 to
the Financial Statements.
On December 10, 1997, we obtained a revolving line-of-credit and term
loan credit facility (the "Credit Facility") with NationsCredit Commercial
Funding, a NationsBank Company ("NationsCredit"). The Credit Facility allows for
a maximum availability of $7,000,000, after an amendment related to the
consummation of the Walls Sale and License, based on a specified percentage of
eligible accounts receivable, inventories and real property. See "--Liquidity
and Capital Resources."
Our business may be subject to significant seasonal variation. See "Risk
Factor Number 9."
Our sportswear and childrenswear products are sold primarily through a
small number of customers. See "Risk Factor Number 3" and "Wholesale
Operations."
In the following discussion, the figures presented for Big Smith
workwear and other branded workwear include our childrenswear which we have
retained. For the three months ended March 31, 1999, childrenswear represented
1.5% of net sales. For the year ended December 31, 1998 childrenswear
represented 1.4% of net sales.
Results of Operations
The following discussion and analysis should be read in conjunction with
our financial statements appearing elsewhere in this Prospectus.
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Net sales, for the three months ended March 31, 1999 decreased by $.13
million, or 5.8%, to $2.13 million from $2.26 million for the three months ended
March 31, 1998. Net sales for the three months ended March 31, 1999 of Big Smith
sportswear, Big Smith workwear and other branded workwear and private label
products were $.19 million, $1.72 million and $.22 million, respectively, as
compared with $.22 million, $1.83 million and $.21 million, respectively, for
the three months ended March 31, 1998. The decrease in sales resulted from the
sale of last season's sportswear inventory at a reduced rate.
Cost of goods sold for the three months ended March 31, 1999 increased
by $15,000, or 0.83%, to $1.82 million from, $1.80 million for the three months
ended March 31, 1998. This increase resulted primarily from the sale of the
Company's inventory of irregular products.
Gross profit for the three months ended March 31, 1999 was $.31 million,
or 14.76% of net sales, compared to $.46 million, or 20.4% of net sales, for the
three months ended March 31, 1998. The decrease in gross profit percentage was
primarily due to the sale of prior season's sportswear inventory at cost or at a
smaller profit margin. For the three months ended March 31, 1999, Big Smith
sportswear, Big Smith workwear and other branded workwear and private label
products accounted for 8.9%, 80.7% and 10.4% of net sales, respectively, as
compared with 9.7%, 81% and 9.3% of net sales, respectively, for the three
months ended March 31, 1998.
Selling expenses decreased by $.06 million to $.31 million, or 14.8% of
net sales, for the three months ended March 31, 1999, from $.37 million, or
16.2% of net sales, for the three months ended March 31, 1998. This decrease in
selling expenses resulted principally from a reduction in sales personnel and a
redistribution of sales responsibility among existing administrative personnel.
General and administrative expenses were $.35 million, or 16.3% of net sales,
during the three months ended March 31, 1999, compared with $.47 million, or
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20.7% of net sales, for the three months ended March 31, 1998. The decrease in
the general and administrative expenses as a percentage of net sales was
primarily due to restructuring of the accounting department and a continued
decrease in travel and entertainment expenses.
The Company's interest expense for the three months ended March 31, 1999
was $.13 million, or 6.1% of net sales, as compared with $.12 million, or 5.3%
of net sales, for the three months ended March 31, 1998. The increase in
interest expense was primarily due to financing of raw materials for the
workwear line through a line of credit with Actrade Capital, Inc., a longtime
supplier to the Company.
On March 19, 1998, the holders of the Company's 6% Convertible Preferred
Debentures due March 31, 2000 (the "Debentures") converted the remaining $1.63
million of the Debentures into 2,900,000 shares of Common Stock resulting in a
charge to earnings of $.61 million of related discount during the three months
ended March 31, 1998.
As a result of the foregoing, the Company's net loss for the three
months ended March 31, 1999 was $.60 million compared to a net loss of $1.14
million for the three months ended March 31, 1998. Excluding the non-recurring
convertible debenture amortization discount of $.61 million, the Company's net
loss for the three months ended March 31, 1998 was $.53 million.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net sales for the year ended December 31, 1998 increased by $.65
million, or 5.1%, to $13.21 million from $12.56 million for the year ended
December 31, 1997. Net sales for the year ended December 31, 1998 of Big Smith
workwear and other branded workwear, Big Smith sportswear and private label
products were $11.43 million, $1.14 million and $1.57 million, respectively, as
compared with $11.11 million, $0.17 million and $1.2 million, respectively, for
the year ended December 31, 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 year ended December 31, 1998 decreased by
$1.37 million, or 12.0%, to $9.99 million from, $11.36 million for the year
ended December 31, 1997. This decrease resulted primarily from increased
production levels and plant efficiencies, a decrease in employee turnover, the
elimination of certain supervisory positions and savings recognized by the
Company by extending its annual summer vacation closing for two additional
weeks. The Company planned and implemented the extension to temporarily reduce
its cash flow requirements to facilitate bringing certain accounts with
suppliers current and to implement planned changes relating to supervisory and
executive personnel reductions. The annual summer closing allowed the Company to
make needed repairs and improvements to its manufacturing plant and equipment
and to effect other routine maintenance.
Gross profit for the year ended December 31, 1998 was $3.22 million, or
24.3% of net sales, compared to $1.21 million, or 9.6% of net sales, excluding
income from net royalties, for the year ended December 31, 1997. The increase in
gross profit percentage was primarily due to the increased production levels and
plant efficiencies and an increase in gross profit margins of Big Smith
sportswear compared to Big Smith workwear and other branded workwear and private
label products along with the maintenance of lower inventory levels, for the
year ended December 31, 1998 compared to the year ended December 31, 1997 and
the depression of profit margins in 1997 as a result of a provision for obsolete
inventory of $218,000 at December 31, 1997. For the year ended December 31,
1998, Big Smith workwear and other branded workwear, Big Smith sportswear and
private label products accounted for 79.5%, 8.61% and 11.92% of net sales,
respectively, as compared with 88.6%, 1.3% and 9.5% of net sales, respectively,
for the year ended December 31, 1997.
Selling expenses decreased by $.76 million to $1.67 million, or 12.6% of
net sales, for the year ended December 31, 1998, from $1.75 million, or 13.9% of
net sales, for the year ended December 31, 1997. This
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<PAGE>
decrease in selling expenses resulted principally from reductions in supervisory
personnel, including the vice president of sales and marketing. General and
administrative expenses were $1.63 million, or 12.3% of net sales, for the year
ended December 31, 1998, compared with $1.90 million, or 15.1% of net sales, for
the year ended December 31, 1997. The decrease in the general and administrative
expenses was primarily due to a decrease in restructuring and related litigation
costs, a permanent and significant reduction in executive personnel salaries and
related overhead costs due to the 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 year ended December 31, 1998 was
$.59 million, or 4.4% of net sales, as compared with $.64 million, or 5.1% of
net sales, for the year ended December 31, 1997. The decrease in interest
expense was primarily due to a decrease in borrowings on the Credit Facility.
On March 19, 1998, the holders of the Company's 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 $ .61 million of related
discount.
As a result of the foregoing, the Company's net loss for the year ended
December 31, 1998 was $1.38 million compared to a net loss of $4.62 million for
the year ended December 31, 1997. Excluding a one time non-recurring charge of
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 year ended December 31, 1998 was $.77
million.
Year 2000 Compliance
We have initiated a Company-wide program to prepare our computer systems
and applications for year 2000 compliance. We expect to incur internal staff
costs as well as other expenses necessary to prepare our systems for the year
2000 ("Y2K"). We expect to replace some systems and upgrade others. Maintenance
or modification costs will be expensed as incurred. Specifically, our accounting
and payroll software has been upgraded and is currently Y2K compliant. In
addition, the Electronic Data Information system, through which major customers
electronically order merchandise and invoices are electronically issued, is
currently Y2K compliant. The Company's hardware will be upgraded in connection
with our move to our new executive office and warehouse facility in Deerfield,
Florida. See "Facilities," and "Capital Expenditures." We estimate the total
cost of the hardware upgrade to be approximately $75,000.
Liquidity and Capital Resources
Our viability as a going concern is dependent upon our ability to raise
sufficient working capital and to meet any liquidity needs that may exceed the
availability under the Credit Facility. The Company experienced a loss from
operations during the three months ended March 31, 1999 and in 1998 and 1997 and
had a working capital deficiency at March 31, 1999, December 31, 1998 and
December 31, 1997. Also, the Company's liquidity needs could exceed the amount
of borrowings available under the Credit Facility. At March 31, 1999, December
31, 1998 and December 31, 1997, working capital deficiency was approximately
$1.53 million, $2.5 million and $1.5 million primarily 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"). As a result, the Company
has faced an on-going liquidity deficit. 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. The Company has
taken several steps to obtain additional sources of liquidity. See "Risk Factor
Number 2."
The net proceeds of the Walls Sale and License improved our capital
structure. Additionally, the Walls Sale and License removes the overhead and
interest costs associated with the low-margin workwear business allowing us to
concentrate on the higher-margin sportswear business.
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In order to fund its cash needs, on April 2, 1997, the Company completed
a Regulation S placement of $1.7 million of its 6% Convertible Preferred
Debentures due March 31, 2000. By March 1998, the Debentures had been converted
to 3,169,842 shares of the Company's Common Stock.
On December 10, 1997, the Company obtained a new revolving
line-of-credit and term loan credit facility (the "Credit Facility") with
NationsCredit Commercial Funding, a NationsBank Company ("NationsCredit")
allowing for maximum availability of $10.00 million based on a specified
percentage of eligible accounts receivable, inventories, real property,
equipment, and trademarks. The amount outstanding under the Credit Facility as
of December 31, 1998 was $4.65 million, with $3.91 million on the revolving
line-of-credit and $74,000 under the term loan portion of the Credit Facility.
The amount outstanding under the Credit Facility as of March 31, 1999 was $2.78
million, with $2.09 million on the revolving line-of-credit and $609,000 under
the term loan portion of the Credit Facility. At March 31, 1999 and December 31,
1998 we had approximately $85,110 and $121,816 of unused availability under the
total credit facility. On April 23, 1999, after the consummation of the Walls
Sale and License, our availability under the Credit Facility was $75,000.
After the consummation of the Walls Sale and License, the amount
outstanding under the Credit Facility was $821,775, with $704,775 on the
revolving line-of-credit and $117,000 under the term loan portion. The loan
bears interest at prime rate plus 1.875% (9.625% at March 31, 1999) and matures
in December 2001. The agreement also provides for additional interest under
certain circumstances and other fixed fees payable. The loan is secured by all
of our retained assets which includes, without limitation, accounts receivable,
inventories and property and equipment.
On or about August 10, 1998, the Company sold Units to accredited
investors including warrants to purchase 6,667 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. ("Cromwell"). Cromwell was paid a total
commission of $16,000. The Units were sold to accredited investors without
registration under the Securities 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. In December, 1998, the Company redeemed the 12%
promissory notes using funds borrowed from S. Peter Lebowitz. See "Certain
Relationships and Related Transactions."
On February 18, 1999, the Company received the proceeds of a private
placement offering (the "Private Placement") of 1,100,000 units (the "Units") of
the Company's securities, with each Unit consisting of one share (before the
reverse stock split) of the Company's Common Stock and two Warrants each to
purchase one share of the Company's Common Stock, one of which is exercisable at
a price of $1.50 per share and the second of which is exercisable at a price of
$1.75 per share. The Warrants have a three-year term. Cromwell was the placement
agent for the offering. The Company paid Cromwell a commission of 11% of the
total aggregate purchase price and Cromwell also received Placement Agent's
Warrants to purchase 110,000 Units of the Company's securities as described
above at an exercise price of $1.20 per Unit. The terms of the offering provided
that the number and exercise prices of the Warrants would not be adjusted by
virtue of the reverse stock split which we will effect shortly.
In 1998, the Company financed its operations primarily with borrowings
under its Credit Facility with NationsCredit. Cash used in operating activities
totaled $1.02 million for the three months ended March 31, 1999 as compared with
cash used in operating activities of $0.77 million for the three months ended
March 31, 1998. This increase reflected primarily the routine building up of
inventory and the reduction of payables using the proceeds of the Private
Placement. The Company typically experiences negative cash flow from operations
during the first half of each year due to the buildup of inventory in
preparation for increased sales volume in the second half of each year.
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Capital Expenditures
Capital expenditures totaled $126,179 for the year ended December 31,
1998. These expenditures consisted primarily of improvements to the Carthage,
Missouri plant and leasehold improvements to the retail store in Miami, Florida.
Capital expenditures totaled $12,077 for the three months ended March
31, 1999. These expenditures consisted primarily of improvements to the
executive offices in Boca Raton, Florida to facilitate moving the accounting
department into those offices. The Company anticipates further capital
expenditures in 1999 connected with leasing and occupying the Deerfield, Florida
executive office and warehouse facility. The Company estimates these capital
expenditures at approximately $100,000.
Intangible Assets
See "Business--Trademarks."
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<PAGE>
BUSINESS
Recent Developments
At the 1999 Annual Meeting of the Stockholders, held on April 20, 1999,
our stockholders approved the recommendation of the Board of Directors to sell
to Walls Industries, Inc., Cleburne, Texas ("Walls") all assets of our workwear
business, other than real estate and trademarks, and to license to Walls the Big
Smith trademark and certain related trademarks for use in the manufacture, sale
and licensing of workwear products (the "Walls Sale and License").
We consummated the Walls Sale and License on April 22, 1999. Pursuant to
the Asset Purchase Agreement between Walls and us, we sold to Walls our entire
inventory of workwear products and raw materials and our machinery and equipment
used in the manufacture of workwear products (excluding only certain computer
equipment). We also leased to Walls our facilities in Carthage, Missouri for a
minimum of twelve months. We entered into a Transition Services Agreement with
Walls by which we will allow Walls to use certain of our retained computer
equipment for a minimum of three months. Walls assumed responsibility for all of
our leases for properties used in the manufacture and distribution of workwear
products. Walls also hired substantially all of our employees involved in the
workwear business. We retained substantially all of the assets currently used in
our sportswear business. Although historically part of the workwear business, we
also retained our childrenswear product line.
In addition, we transferred all of our trademarks to a subsidiary, Big
Smith Holdings, Inc. ("Holdings"). See "--Trademarks."
In consideration of the Walls Sale and License, Walls paid to us for the
assets purchased a price equal to the appraised value (on a liquidated basis) of
the machinery and equipment sold plus the book value of our good, saleable and
useable inventory. Based on this formula, we have received to date approximately
$3.12 million. Walls will pay us $2,000 per month for a minimum of one year for
its lease of our Carthage, Missouri facilities and $10,000 per month for a
minimum of three months for its use of our retained computer equipment.
In addition, in consideration for our entering a ten-year non-compete
agreement, Walls will pay us an aggregate of $4.6 million over the eight-year
period commencing at closing. Payments under the non-compete agreement together
with the consideration to be paid for machinery, equipment and inventory and
rental payments for the Carthage, Missouri facility and the computer equipment
will result in total payments to us estimated at approximately $7.76 million.
We believe that the consummation of the Walls Sale and License frees us
from our low-margin workwear focus and the related overhead and interest costs,
enabling us to focus on the growth of our higher-margin sportswear business.
Our outstanding line of credit was reduced to approximately $2.48
million upon closing of the Walls Sale and License, reducing interest costs. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
The consummation of the Walls Sale and License has substantially changed
our business, primarily in that we no longer manufacture, hold inventory or
market workwear products.
Growth Strategy
We have changed the direction of the Company's business to concentrate
on the design, sale and marketing of sportswear, childrenswear and ladieswear
through third party licensing agreements, joint ventures and other strategic
marketing alliances.
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<PAGE>
Products
Our line of sportswear currently includes fashion jeans, casual pants,
shirts, jackets and sweaters for adults, young men and teenagers. Items in this
line of products sell at retail in the $30 to $55 range.
Our childrenswear products are limited to sizes including infants,
toddlers and boys 4 to 7. Our childrenswear products currently include denim
overalls, shortalls and jeans and sell at retail in the $20 to $35 range. We
expect to expand the childrenswear product line to include specialized spring
and fall collections. We expect these new childrenswear products to sell at
retail in the $20 to $60 range.
The production of Big Smith sportswear and childrenswear involves
substantial design and styling changes from year to year. These products require
fashion industry driven alterations from year to year. See "Risk Factor No. 8."
The cost of production, however, is recovered in the high margin sales of Big
Smith sportswear and childrenswear products. Substantially all of our sportswear
products are manufactured by offshore contractors typically employing processes
designed to produce sturdy, high-quality, long-lasting garments. See "Risk
Factor Number 10." Sportswear products are also manufactured by an international
sublicensee for distribution in Italy. See "Business--Wholesale
Operations--Foreign Sportswear."
The Company is currently developing a business plan for the contracted
manufacture and sale of ladieswear products in the same or similar channels of
distribution through which it currently sells its sportswear products.
We expect the ladieswear products to benefit from the value of the Big
Smith trademark in the workwear and sportswear markets as well as our
merchandising and marketing experience and relationships in the apparel
industry. See "Risk Factor Number 7" and "Business--Products."
Trademarks
As part of the consummation of the Walls Sale and License, we
transferred all of our trademarks to a subsidiary, Big Smith Holdings, Inc.
("Holdings"), the stock of which is owned 60% by us and 40% by Walls. Walls has
the right to designate one member of the Board of Directors of this subsidiary,
and we have the right to designate all other directors. The Certificate of
Incorporation of Holdings restricts its activities solely to owning and
licensing these trademarks.
Holdings has granted to Walls a royalty-free, perpetual license to use
the Big Smith trademark and certain related tradenames in connection with the
manufacture, sale and licensing of workwear products. Holdings has granted to us
a royalty-free, perpetual license to use the Big Smith trademark and certain
related tradenames for sportswear and, subject to certain approval rights of
Walls, for all other purposes. Any other licenses granted by Holdings will
require the unanimous vote of its Board of Directors.
In 1995, we purchased the Big Smith trademark in the seven countries in
Europe for which we did not previously have trademark rights for an aggregate
purchase price of $500,000 payable over four years. The final payment of $50,000
is due in September 1999.
Wholesale Operations
General
The Company is integrated into a program purchasing of mass
merchandisers whereby it is informed at the beginning or just prior to the
beginning of each calendar year of the minimum purchases to be made by the
customer during that calendar year, and informed weekly of updated delivery
schedules and locations. This system permits us to anticipate over half of our
annual sales and plan and schedule production accordingly.
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<PAGE>
The overall average gross margins of all sales was approximately 24% for
the year ended December 31, 1998, compared to 9.6% for the year ended December
31, 1997. The increase in overall average gross margins of all sales resulted
from an increase in the selling price of workwear products, the introduction of
ladieswear products which sell at higher margins than our historical workwear
products and the increase in sales of the higher margin sportswear products.
The overall average gross margins of the sales of our retained products
was approximately 27.9% for the year ended December 31, 1998, compared to 21.4%
for the year ended December 31, 1997. The increase in overall average gross
margins of the sales of the Company's retained products resulted from increased
offshore production and an increase in the price range of our sportswear and
childrenswear products. Sales of our retained products were approximately $1.55
million, or 11.74% of total net sales, for the year ended December 31, 1998
compared to approximately $440,000, or 3.5% of total net sales, for the year
ended December 31, 1997.
At March 31, 1999, we had unfilled orders for merchandise totaling
approximately $44,000 as compared with unfilled orders of sportswear and
childrenswear of approximately $37,000 at March 31, 1998. The increase in
unfilled orders resulted primarily from advance orders for second quarter
delivery.
Domestic Sportswear
We formally introduced Big Smith sportswear at the leading annual
industry trade show in August 1997. Sales of this line for the three months
ended March 31, 1999 were approximately $190,000 or 8.93% of total net sales
compared to approximately $1.14 million or 8.61% of total net sales, for the
year ended December 31, 1998 and $0.17 million, or 1.3% of total net sales, for
the year ended December 31, 1997. Big Smith sportswear is marketed at higher
margins than most of our discontinued products. The current margin on Big Smith
sportswear is between 20% and 35%.
Our sportswear products are marketed through a growing number of
department stores and independent fashion apparel shops. We estimate that our
sportswear products were sold in approximately 800 stores and 400 stores in the
years ended December 31, 1998 and December 31, 1997. Substantial customers for
our sportswear products include Gadzooks, J.C. Penney, Jean Country, Delia,
Urban Outfitters, Scream and Marshalls.
Eighty percent of our sales of sportswear in the year ended 1998 were to
three customers. Sales to Gadzooks, J.C. Penney and Jean Country of sportswear
products represented approximately 39%, 22% and 20% for 1998. See "Risk Factor
Number 3." We have significant pending orders for sportswear from two customers,
Delia and Urban Outfitters. We expect sales to these customers to continue and
we will continue to enhance our product line and increase the value of the Big
Smith trademark through direct advertising.
Foreign Sportswear
Beginning in 1997, we began an effort to implement a corporate strategy
designed to convert the Company to a multi-brand, regionally conceived, designed
and sourced global producer and marketer of both workwear and sportswear. We
have also begun to establish international markets for our Big Smith sportswear
through participation in international trade shows and meetings with
international distributors. Cash flow restrictions have impeded the success of
these efforts. With the consummation of the Walls Sale and License, we believe
that necessary resources for establishing the international markets for
sportswear products will be freed and we will be able to increase international
distribution of our sportswear products.
In December 1998, we entered into a one-year, renewable sublicense with
Amita srl, an Italian company ("Amita"), to design, manufacture and be the
exclusive sales representative throughout Italy for Big Smith branded sweaters,
jackets and other sportswear products. We maintain quality and design control
over the products produced under this sublicense.
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<PAGE>
We intend to sublicense certain international rights to Big Smith and
related trademarks to other manufacturers of sportswear. We also intend to
leverage our experience in the international market to create a network of
international distribution channels for our Big Smith branded sportswear.
Childrenswear
We intend to continue to broaden the customer base for our childrenswear
products, lessening the concentration in any one customer or small group of
customers. We are currently searching for a new manager or management team to
head our childrenswear operations.
Retail Operations
In May 1998, we opened a small retail store in South Beach, Florida to
heighten the visibility of our sportswear products in the target fashion market
and to serve as a center for showing our sportswear products to potential
wholesale customers. Sales at our South Beach retail store have been increasing
at a steady rate since its opening. This retail store focuses primarily on the
sale of first quality Big Smith sportswear products and had net sales for the
three months ended March 31, 1999 were approximately $19,500 as compared to net
sales of approximately $16,000 for the year ended December 31, 1998. We located
the sportswear retail store in South Beach because it is primarily populated by
the target market for our sportswear products. We currently have no plans for
further expanding our retail network for our sportswear products.
Manufacturing and Sourcing
We contract for outside design services as needed. Sample designs are
reviewed by our senior management staff who establish the final line of
sportswear and childrenswear products from such samples. When the designs have
been established, substantially all of our sportswear and childrenswear products
are produced by offshore manufacturing contractors. Such offshore manufacturing
contractors assemble sportswear and childrenswear products according to our
specifications. The contractors supply all fabric and trim except for any
necessary labels which are provided by us. Our design and quality control
personnel monitor the manufacturing process to ensure that sportswear and
childrenswear products to be marketed by us under our brand names meet our
quality standards. Our quality control program includes on-site inspection of
work-in-process and finished goods during the manufacturing process and
inspection of finished goods upon receipt. Currently we experience a return rate
for poor quality garments of less than 1%. See "Risk Factor Number 10."
Sales and Marketing
We believe that our primary assets in marketing are the quality of our
products, our reputation as a reliable supplier and our past history of mutually
satisfactory relationships with our customers. We also believe that the brands
we sell are widely recognized and therefore provide retailers with a reasonable
assurance of substantial market penetration.
We have commission arrangements with eight independent sales
representatives. In addition, S. Peter Lebowitz, our president, is actively
involved in our marketing efforts. We emphasize the development of long-term
customer relationships by consulting with our customers concerning optimal
delivery schedules, pricing and other merchandising considerations. Frequent
communication between Mr. Lebowitz and other sales personnel and their
counterparts at various levels in the buying organizations of our customers is
an essential element of our marketing and sales efforts. These contacts allow us
to closely monitor retail sales volume and to adjust product timing, mix and
pricing to maximize sales at acceptable profit margins for both us and our
customers. See "Risk Factor Number 11."
To date, we have not done substantial direct consumer advertising, but
we intend to achieve wider consumer recognition of the variety of labels for
which we are the distribution channel through strategically
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<PAGE>
placed advertisements in apparel industry magazines and our participation in the
annual Men's Apparel Guild In California trade show (the "MAGIC Show").
Warehousing and Distribution
All of our sportswear products are manufactured by contractors and were
stored in and distributed from our finished goods warehouse in Carthage,
Missouri. We have secured warehouse and shipping facilities in Deerfield,
Florida to replace the warehouse and shipping facilities leased or assigned to
Walls. In the interim, we are using a fulfillment house in the southern Florida
area. Our products are stored and shipped from the fulfillment house with our
management overseeing the process. Substantially all of our deliveries to
customers are made by common carriers with which we have long-standing
relationships on a collect basis per customer supplied routing guides.
Control Systems
We participate in the EDI system with certain of our customers. See
"Business--Wholesale Operations-- General."
Competition
General
The apparel industry, including the sportswear market, is fragmented and
highly competitive. We compete with a large number of domestic and foreign
manufacturers in all of its product markets. Most of our competitors have
financial resources, sales organizations and manufacturing capacities
considerably larger than ours. See "Risk Factor Number 8."
Sportswear
As we continue to increase our sportswear business, we expect our
largest competitors will be Union Bay, Pinnacle, DKNY, Dickie, Hugo Boss and
other large internationally known branded sportswear manufacturers. Competition
in this market is intense. Our principal means of meeting competition is through
pricing and design. The sportswear market requires more attention to consumer
trends. Our strategy for Big Smith sportswear is to anticipate customer demand
in design and styling while providing a solid, dependable sportswear product.
Childrenswear
As we continue to expand our childrenswear business, we expect our
larger competitors will be Oshkosh, Gap for Kids and other large internationally
known branded childrenswear distributors. Competition in the childrenswear
market is not as intense as that in the sportswear market. Our principal means
of meeting competition is through increases in our basic line of products which
is marketed year round and by adding seasonal lines of childrenswear products.
Our strategy for Big Smith childrenswear is to anticipate customer demand in
design and styling while providing a solid dependable childrenswear product.
Employees
As of December 31, 1998, we employed approximately 205 people on a
full-time basis, including 15 employees in administration and accounting, 3
employees in marketing and sales, and 187 employees in manufacturing. We also
employed 3 part-time employees and 11 independent sales representatives.
Approximately 72% of our employees were paid on a piecework basis and the
balance were hourly-paid or salaried.
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<PAGE>
After the consummation of the Walls Sale and License, we currently
employ 5 persons on a full-time basis, including 3 employees in administration
and accounting and 2 employees in marketing and sales. We expect to establish
relationships with a number of independent sales representatives to insure
adequate coverage of all appropriate North American distribution points. All
employees will be paid either on an hourly or salaried basis.
We have never experienced a material work stoppage or slowdown due to
labor disagreements. We believe that our relations with our retained employees
are satisfactory. None of our employees are covered by a collective bargaining
agreement. We provide a benefits package to all of our full-time employees,
including health insurance, paid holidays and vacations.
Facilities
We own one clothing plant with approximately 154,000 square feet of
floor space, including approximately 75,000 square feet of warehouse floor
space. This property is currently leased to Walls in connection with the
consummation of the Walls Sale and License. The lease on the property provides
for monthly rent of $2,000 and expires in April 2000. We also lease one retail
location. Our principal executive office is currently located in Boca Raton,
Florida. We expect to move our executive office to a leased facility in
Deerfield, Florida later in 1999. The Deerfield facility also contains warehouse
space which will replace the warehouse space we have leased out in Carthage,
Missouri. The following table sets forth certain information concerning each of
the Company's facilities.
Properties Owned
Location Floor Space Principal Uses
(Square Feet)
Carthage, Missouri 153,500 Leased to Walls
Properties Leased
Floor Space Lease Principal
Location (Square Feet) Expires Uses
Deerfield, Florida 6,390 (1) Office Space, Warehouse
Boca Raton, Florida 1,839 9/1/00 Office Space
Miami Beach, Florida 700 2/28/03 Retail
(1) The Deerfield, Florida lease will be dated as of our occupation of the
facility and will run for one five year term.
Our retail and office facilities meet local building code requirements.
All of our facilities have been maintained and are adequate for their present
uses.
Legal Proceedings
Caterpillar Litigation
On June 25, 1996, Big Smith Global Ltd. ("BSG"), our wholly owned
subsidiary holding the rights to our agreement (the "Agreement") with
Caterpillar licensing our use of the Caterpillar and related trademarks,
received a purported notice of termination of the Agreement, citing purported
violations of the Agreement.
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<PAGE>
On July 9, 1996, we were served with a summons and complaint naming us,
BSG and S. Peter Lebowitz, our CEO, as 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 our alleged violations of the
Agreement and Caterpillar's proprietary marks.
On July 26, 1996, we 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. With BSG, we 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 we and BSG believe to be Caterpillar's
wrongful efforts to terminate our 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, we 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 motion we made
with BSG 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, we 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 us 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 our license to use its marks since a
common law franchise relationship existed between the parties which could not be
terminated absent good cause.
The 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.
We intend to vigorously defend the claims of Caterpillar and to
diligently pursue our counterclaims and our claims against Palmer and the
Overland defendants. At this stage of litigation, we cannot evaluate the
likelihood of favorable or unfavorable outcome. We can give you no assurance
that the outcome of this litigation will be favorable to us. If the outcome of
the litigation is not favorable, such outcome could have a material adverse
effect on our financial condition.
Other Litigation
We have been involved in litigation with a number of our foreign
distributors in connection with their refusal to pay royalties we believed to be
due in respect of sales by such distributors of Caterpillar branded products
prior to our ceasing to sell such products. Additionally, certain distributors
made claims against us relating to the effects of the purported termination of
the Caterpillar license on their arrangements with us. Most of these litigations
have been resolved. We have begun discussions with Selected Brands Shoe Company
seeking recovery of at least $73,000 of accounts receivable we believe are due
and payable and with Fashion Fever CC seeking recovery of an as yet undetermined
amount of royalties we believe are due and payable. These discussions are
preliminary to filing collection actions if satisfactory settlements cannot be
reached.
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<PAGE>
In January, 1998, Triquest Group, a California corporation, began an
action in the Superior Court of the State of California, Santa Clara County
(Case No. CV 767474) against us and S. Peter Lebowitz seeking to recover a sales
commission in connection with the sale of all of the then remaining inventory of
Caterpillar branded apparel to KPR International, Inc. The plaintiff sought
recovery of a sales commission in the amount of $65,000 plus interests and
costs. By agreement of the parties, the matter was submitted to binding
arbitration in accordance with the operative provisions of the California
statutes. On May 11 and 12, 1999, the matter was heard by the designated
arbitrator, the Honorable William F. Lanam (retired). As of this date, the
arbitrator has not rendered a decision. We do not anticipate that the
arbitrator's decision will have a materially adverse effect on our financial
condition or operations.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are:
Year First Elected
Name Age Director Office(1)
- ---- --- -------- ---------
S. Peter Lebowitz 67 1985 Chief Executive Officer,
President and Director
Glen Freeman 69 1994 Director
Theodore Listerman 75 1995 Director
Jack Schultz 62 1994 Director
Julian Shaps 73 1994 Director
Susan A. Leonhardt 55 N/A Director of Accounting/
Administration
Howard H. Ward 65 N/A General Counsel
Howard Kaplan 50 N/A Secretary
(1) Only Mr. Lebowitz and Ms. Leonhardt are employees of the Company.
S. Peter Lebowitz has served as Chief Executive Officer and President of
the Company since 1980. Mr. Lebowitz has been employed full time in the men's
apparel industry for over 40 years beginning in 1954 when he joined Hochschild,
Kohn & Co., Baltimore, Maryland. Thereafter, he served as a salesman in the
Menswear Divisions at The Van Heusen Company and as Vice-President of Big Yank
Corporation and Anvil Brands, Inc. From 1971 to 1979, he was Chairman and Chief
Executive Officer of Smith Brothers Manufacturing Company, Carthage, Missouri,
then the corporate owner of the Big Smith label. In 1980, he founded the
Company, and in 1985, the Company acquired certain assets of Smith Brothers
Manufacturing Company, including the ownership of the Big Smith label.
Glen Freeman was elected a director of the Company in September 1994.
Mr. Freeman served as General Manager of the Company after its acquisition of
certain assets of Smith Brothers Manufacturing Company in 1985 until 1994. Mr.
Freeman served as Vice-President of Merchandising of Smith Brothers
Manufacturing Company from 1969, when it acquired Continental Manufacturing
Company, to 1985. From 1945 to 1969, Mr. Freeman was employed by Continental
Manufacturing Company. Mr. Freeman has been employed in the workwear industry
for 50 years.
Theodore L. Listerman was elected a director of the Company in January
1995. Mr. Listerman was involved in various aspects of the apparel business for
approximately thirty years. Mr. Listerman served in numerous senior management
positions at a number of major manufacturers and marketers of men's apparel
products. At present Mr. Listerman is a doctoral candidate at the University of
Missouri.
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<PAGE>
Jack Schultz was elected a director of the Company in February 1994.
Since 1993, Mr. Schultz has served as an active consultant to the retail
industry dealing with assignments that cover a broad range of issues and
entities involving virtually all major segments of the retail industry. Prior to
his full time entry into the consulting business, Mr. Schultz served from 1991
to 1993 as the President of the National Retail Federation, a leading retail
industry trade association.
Julian Shaps was elected a director of the Company in February 1994. Mr.
Shaps retired from full time participation in business in October 1990 following
a career that spanned forty years in the sales and merchandising segment of the
apparel industry. Mr. Shaps' previous positions include twenty-five years in
various senior management positions at Salant, Inc., and approximately fifteen
years as Vice President of Sales and Merchandising at M. Fine & Sons, Inc.
Susan A. Leonhardt joined the Company in July 1998 as Director of
Accounting and Administration. She is responsible for all financial reporting,
accounting, internal auditing and related administrative functions. Ms.
Leonhardt, a Certified Public Accountant, received a Bachelor's degree in
Business Administration from Ohio State University of Columbus, Ohio in 1966 and
a Master's degree in Accounting from the University of California of Los
Angeles, California, in 1972. Ms. Leonhardt has held increasingly responsible
financial, administrative, accounting and management positions in a variety of
business environments. From October 1997 until July 1998, Ms. Leonhardt served
as the Controller of Sunshine State Messenger Service, Inc. From August 1994
until October 1997, Ms. Leonhardt served as the Controller of InnoPet Brands,
Inc. From October 1991 until May 1994, Ms. Leonhardt served as the Controller of
Noon & Pratt.
Howard H. Ward has served the Company as a business and financial
consultant since 1993. He was appointed General Counsel by the Board of
Directors in August 1998. Mr. Ward received a Bachelor's degree in History and
English from Upsala College of East Orange, New Jersey in 1955 and a J.D. degree
from the University of Pennsylvania Law School of Philadelphia, Pennsylvania in
1958. For the past five years, Mr. Ward has been a private business and
financial consultant for various small and medium size businesses. Mr. Ward is
not currently and has never been an employee of the Company.
Howard Kaplan was elected Secretary of the Company in August 1994. Since
1991, Mr. Kaplan has served as President of Fabric Resources Corporation, a
denim jobber, and from 1988 to 1991, he served as Purchasing Agent for the
Company. Mr. Kaplan is not currently an employee of the Company.
All directors hold office until the next annual meeting of the
stockholders of the Company and until their successors have been duly elected
and qualified, or until their earlier death, resignation or removal. The
Company's outside directors devote such time as is necessary and customary to
attend meetings of the Board of Directors and committees of the Board of
Directors and otherwise to perform their duties as directors. The Company's 1994
Stock Incentive Plan, as amended, provides for periodic automatic grants of
nonqualified stock options to each member of the Board of Directors who is not
also an employee of the Company on the date of grant.
The Company's officers are elected annually by, and serve at the
pleasure of, the Board of Directors, subject to the terms of any employment
agreements. Mr. Lebowitz has an employment agreement with the Company. See
"--Executive Compensation" and "--Employment Arrangements." No familial
relationships exist between any directors or officers of the Company.
Executive Compensation
The following table sets forth information concerning the compensation
for services in all capacities for the fiscal years ended December 31, 1998,
December 31, 1997 and December 31, 1996, of the Chief Executive Officer of the
Company, who is the only executive officer at the Company who earned over
$100,000 (the "Named Executive") for the fiscal year ended December 31, 1998.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
======================================================================================================
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------------------------
Other Annual Awards All Other
Name and Fiscal Salary Bonus Compensation Options Compensation
Principal Position Year ($) ($) ($) (1) (#) ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S. Peter Lebowitz-Chief 1998 $300,000 - $ 11,379 333,334 -
Executive Officer 1997 $300,000 - $ 10,996 - -
1996 $300,000 - $ 9,973 - -
======================================================================================================
</TABLE>
(1) Represents the value of certain club membership dues and automobile lease
payments.
Employment Arrangements
S. Peter Lebowitz is employed as the Company's President and Chief
Executive Officer under an employment agreement, expiring on December 31, 2003.
Pursuant to the employment agreement, Mr. Lebowitz receives annual compensation
of $300,000 and an annual bonus of up to $200,000 if the Company achieves a
certain specified level of net income, which level has not been achieved as of
yet during the term of the employment agreement. The employment agreement with
Mr. Lebowitz further provides that if his employment were terminated by the
Company without cause or at any time following a change of control, or by Mr.
Lebowitz within twelve months after a change of control, the Company will pay to
Mr. Lebowitz three years' salary, bonus and benefits in the amount and kind then
in effect, subject to certain adjustments, in a lump sum 30 days after such
termination.
On February 11, 1998, in connection with his entry into the employment
agreement, Mr. Lebowitz was granted options for the purchase of 333,334 shares
of Common Stock pursuant to the terms and conditions of the Company's 1994 Stock
Incentive Plan, as amended (the "1994 Plan"). The options are exercisable at
$1.59 per share, the highest ask price on the last date on which trading took
place prior to the date of grant, and vest in equal annual installments on the
first four anniversaries of the date of grant.
Stock Incentive Plan
The 1994 Plan is designed to provide additional incentives for officers,
other key employees and non-employee directors of the Company to promote the
success of the business and to enhance the Company's ability to attract and
retain the services of qualified persons. The 1994 Plan is administered by an
Executive/Compensation Committee appointed by the Board of Directors (the
"Committee") which is authorized to grant to key employees (including officers)
and non-employee directors selected by it incentive stock options and
non-qualified stock options. A maximum of 600,000 shares of Common Stock are
available for issuance under the 1994 Plan. The 1994 Plan will expire on, and no
awards may be granted thereunder after, the tenth anniversary of the 1994 Plan,
subject to the right of the Board of Directors to terminate the 1994 Plan at any
time prior thereto. The Board of Directors may amend the 1994 Plan at any time,
except no such amendment may impair the rights of recipients of previous grants
without such grantee's consent and stockholder approval is required for any
amendment which would increase the number of shares available under the 1994
Plan or change the class of employees eligible to receive grants under the 1994
Plan.
Options granted under the 1994 Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options are intended to
qualify under Section 422 of the Internal Revenue Code. The exercise price of
any incentive stock options granted under the 1994 Plan may not be less than the
fair market value of the Common Stock at the time the option is granted,
provided that, with respect to an incentive stock option granted to an optionee
who is or will be the beneficial owner of more than 10% of the combined voting
power of all classes of the Company's stock, the exercise price may not be less
than 110% of the fair market value of the Common Stock on the date of grant. The
exercise price of any nonqualified stock options granted
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<PAGE>
under the 1994 Plan may be less than the fair market value of the Common Stock
but not less than $.01 per share, the par value thereof. The exercise price may
be paid in cash or, with the consent of the Committee, stock of the Company,
including stock acquired under the same option.
Incentive stock options and non-qualified stock options may be granted
with terms of no more than ten years from the date of grant, provided that in
the case of an incentive stock option granted to an optionee who is or, after
such grant, will be the beneficial owner of more than 10% of the combined voting
power of all classes of the Company's stock, the term of such option may not
exceed five years. Options will survive for a limited period of time after the
optionee's death, disability or normal retirement from the Company. Any shares
as to which an option expires, lapses unexercised, or is terminated or canceled
may be subject to a new option.
The 1994 Plan provides for periodic automatic grants of nonqualified
stock options to each member of the Board of Directors who is not also an
employee of the Company on the date of grant ("Outside Director"). Each Outside
Director who is appointed to fill a vacancy in the Board by action of the Board
subsequent to January 1, 1995 will automatically receive a grant of a
nonqualified stock option to purchase 6,667 shares, such grant to be effective
as of the last day of the fiscal quarter of the Company in which the Outside
Director was so appointed. At each annual stockholders' meeting commencing with
the 1995 annual meeting of stockholders, each Outside Director elected to serve
at such annual meeting will also automatically receive a grant of a nonqualified
stock option to purchase 3,334 shares, to be effective as of the date of the
annual meeting. The exercise price for each nonqualified stock option granted to
an Outside Director will be the fair market value of the shares subject to the
option on the date the option is granted.
Unless otherwise determined by the Committee, options are to become
exercisable cumulatively over a four year period, with 25% of the options
becoming exercisable on each of the first four anniversaries of the date of
grant. Options are to be exercised by filing a written notice of exercise with
the Company, together with payment of the exercise price by certified check (or
the equivalent thereof acceptable to the Committee) or, with the consent of the
Committee, by delivery of a promissory note or delivery of shares of Common
Stock having a fair market value equal to all or a part of the exercise price.
The Company may require as a condition to delivery of any shares issuable upon
the exercise of an option that the optionee remit to the Company an amount
sufficient to satisfy withholding tax requirements, and that the following be
obtained to the satisfaction of the Committee: (a) the listing, registration or
qualification of the shares upon any securities exchange or under any federal or
state law or regulation, (b) written agreements and representations by the
optionee with respect to the acquisition or disposition of shares or any other
matter which the Committee deems desirable to obtain an exemption from such
requirements, and (c) the consents or approval of any regulatory body. Optionees
have the right, with the consent of the Committee, to elect cashless exercises
of their options by requesting the Company to reduce the number of shares
otherwise issuable by a number of shares having a fair market value equal to all
or a part of the exercise price. Upon written application, the Committee may
also substitute a cash payment equal to the difference between the exercise
price and the fair market value of shares underlying the options.
Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
permits indemnification by a corporation of certain officers, directors,
employees and agents. Consistent therewith, Article Eleventh of the Company's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"), filed as Exhibit 3(a) to this Registration Statement, requires
that the Company indemnify all persons whom it may indemnify pursuant thereto to
the fullest extent permitted by Section 145.
In addition, Article Tenth of the Certificate of Incorporation provides
that directors and officers of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) an act related to the unlawful stock repurchase or
payment of a dividend
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<PAGE>
under Section 174 of Delaware General Corporation Law, and (iv) transactions
from which the director derived an improper personal benefit.
The Company maintains a policy of insurance under which the directors
and officers of the Company are insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company purchased some of its raw materials for the production of
workwear from a corporation whose President is the Secretary of the Company.
Such purchases for the three months ended March 31, 1999 and the years ended
December 31, 1998 and 1997 and were $146,634, $438,354 and $224,916. The Company
also purchased finished package goods for its ladieswear clothing line from this
corporation in the amount of $0 during the three months ended March 31, 1999 and
$145,000 for the year ended December 31, 1998. Accounts payable to this related
party totaled $105,324, $78,522 and $1,269 at March 31, 1999, December 31, 1998
and December 31, 1997. With the consummation of the Walls Sale and License, the
Company has ceased to purchase raw materials from this corporation. The Company
may resume, however, the purchase of finished package goods for its ladieswear
line from the above referenced corporation.
The Company's President, Chief Executive Officer and Chairman of the
Board, participated in the Company's Credit Facility by providing partial
security in the form of a $200,000 certificate of deposit. Mr. Lebowitz holds
the Company's promissory note for $200,000 as security for this participation.
The $200,000 promissory note bears interest at the rate of 8% per annum. Mr.
Lebowitz also holds the Company's promissory note dated December 23, 1998 for
$250,000 given in exchange for Mr. Lebowitz's repayment of bridge financing
obtained by the Company in May 1998. The $250,000 promissory note bears interest
at the rate of 8% per annum.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 12, 1999, the number of
shares of Common Stock (and the percentage of Common Stock) beneficially owned
by (i) each person known (based solely on Schedules 13D or 13G filed) to the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each director of the Company, (iii) the Named Executive and (iv) all directors
and executive officers of the Company as a group (based upon information
furnished by such persons). Under the rules of the Commission, a person is
deemed to be a beneficial owner of a security if such person has or shares the
power to vote or direct the voting of such security or the power to dispose of
or to direct the disposition of such security. In general, a person is also
deemed to be a beneficial owner of any securities of which that person has the
right to acquire beneficial ownership within 60 days. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities.
- 43 -
<PAGE>
Number of Shares Percentage (%)
Name and Address Beneficially Owned of Common Stock
------------------ ---------------
S. Peter Lebowitz (1) 553,000 18.72%
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Theresa Lebowitz and Michael S. Nelson,
Esq., as trustees (2) 149,000 5.19%
c/o Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Glen Freeman (3) 12,084 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Theodore Listerman (3) 12,084 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Jack Schultz (3) 12,084 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Julian Shaps (3) 12,084 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Howard Kaplan (4) 2,167 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
Howard H. Ward, Esq. (5) 4,167 *
c/o Big Smith Brands, Inc.
7100 West Camino Real, Suite 402
Boca Raton, Florida 33433
All directors and officers as a group (6
persons) (6) 607,667 20.19%
- -----------------
* Indicates beneficial ownership of less than one (1%) percent.
(1) Includes 83,334 shares issuable upon exercise of options exercisable within
60 days.
- 44 -
<PAGE>
(2) Represents shares held in trust for the benefit of Barbara Lynn Van Achte,
Karen Sue Hart and Wendy Ann Lebowitz, with respect to which Mrs. Lebowitz
and Mr. Nelson, a partner at the law firm of Kramer Levin Naftalis &
Frankel LLP, the Company's outside corporate counsel, serve as trustees.
Under the Trust Agreement, Mrs. Lebowitz and Mr. Nelson share voting and
dispositive power, subject only to the beneficiaries' right to withdraw the
shares under certain circumstances. Mrs. Lebowitz is the wife, and the
three trust beneficiaries are the daughters, of Mr. Lebowitz.
(3) Includes 12,084 shares issuable upon exercise of options exercisable within
60 days.
(4) Includes 2,167 shares issuable upon exercise of options exercisable within
60 days.
(5) Includes 4,167 shares issuable upon exercise of options exercisable within
60 days.
(6) Includes options and warrants to purchase 138,000 shares exercisable within
60 days.
DESCRIPTION OF SECURITIES
General
As of the closing of the offering, the Company's authorized capital
stock will consist of 10,000,000 shares of Common Stock, par value $.01 per
share.
Common Stock
The holders of shares of Common Stock are entitled to one vote per share
on all matters to be voted on by stockholders. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable.
The Company's Warrants being registered under this prospectus were
issued in connection with a private placement pursuant to Subscription
Agreements. An aggregate of 1,100,000 Units, each consisting of 1 share of
Common Stock and two warrants. Each Warrant is exercisable for the purchase of
one share of Common Stock for a period of three years ending January 31, 2002.
The number of Warrants and the number of shares of Common Stock underlying the
Warrants will not be affected by the reverse stock split. In each Unit, one
Warrant is exercisable for $1.50 per share and one Warrant is exercisable for
$1.75 per share.
Stock Transfer Agent, Warrant Agent and Registrar
The stock transfer agent, warrant agent and registrar for the Common
Stock is Continental Stock Transfer & Trust Company.
Stockholder Reports
The Company furnishes its stockholders with annual reports containing
audited financial statements and may furnish its stockholders quarterly or
semi-annual reports containing unaudited financial information.
- 45 -
<PAGE>
Delaware Anti-takeover Law and Certain Charter Provisions
Section 203 of the Delaware General Corporation Law. The Company is
subject to the provisions of Section 203 of the GCL (the "Anti-takeover Law")
regulating corporate takeovers. The Anti-takeover Law prevents certain Delaware
corporations from engaging, under certain circumstances, in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (defined as a
stockholder who acquires 15% or more of the corporation's outstanding voting
stock without the prior approval of the corporation's Board of Directors) for
three years following the date that such stockholder became an "interested
stockholder". A Delaware corporation may "opt out" of the Anti-takeover Law with
an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from an
amendment approved by at least a majority of the outstanding voting shares. The
Company has not "opted out" of the application of the Anti-takeover Law.
SHARES ELIGIBLE FOR FUTURE SALE
General
The sale of a substantial number of shares of common stock or the
availability of common stock for sale could adversely affect the market price of
your common stock prevailing from time to time. S. Peter Lebowitz and the trusts
established for the benefit of Mr. Lebowitz's children have entered into an
agreement which prohibits them from selling stock in the Company for certain
periods of time following the offering. For a description of shares of Common
Stock eligible for future sale, see "Risk Factor Number 17." See also "Principal
Stockholders" and "Shares Eligible for Future Sale".
Rule 144 under the Securities Act imposes certain volume restrictions on
sales by "insiders" in the Company. In general, Rule 144 provides that any
person (or persons whose shares are aggregated) to whom Rule 144 is applicable,
including an affiliate, who has beneficially owned shares for at least a
one-year period (as computed under Rule 144) is entitled to sell within any
three-month period the number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock (approximately 28,712 shares)
and (ii) the reported average weekly trading volume of the then outstanding
shares of Common Stock during the four calendar weeks immediately preceding the
date on which the notice of sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 also are subject to certain provisions relating
to the manner and notice of sale and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed an affiliate of the Company at any time during the 90 days
immediately preceding a sale, and who has beneficially owned shares for at least
a two-year period (as computed under Rule 144), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitation and other
conditions described above.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect prevailing
market prices of the Common Stock and the Company's ability to raise capital in
the future through the sale of additional securities.
Lock-up Agreements
In connection with the Private Placement, S. Peter Lebowitz and the
trusts established for the benefit of Mr. Lebowitz's children have agreed not to
offer, issue, sell, contract to sell, grant any option for the sale of or
otherwise dispose of any securities of the Company for a period of 18 months
from the date of closing of the offering, without the prior written consent of
Cromwell, which acted as the placement agent for the Private Placement.
- 46 -
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue,
New York, New York 10022.
EXPERTS
The Financial Statements of the Company for each of the years ended
December 31, 1998 and 1997 included in this Prospectus have been so included in
reliance on the report of Daszkal, Bolton & Manela, CPAs, independent
accountants of the Company for such periods, given on the authority of said firm
as experts in auditing and accounting. The Financial Statements of the Company
for the three months ended March 31, 1999 were derived from unaudited financial
statements which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. The three-month results of operations are not indicative of the
results of operations to be expected for the full year for reasons including,
but not limited to, the consummation of the Walls Sale and License.
CHANGE IN INDEPENDENT AUDITORS
On January 16, 1998, the Company accepted the resignation of Baird,
Kurtz & Dobson ("BKD") as its principal auditors. The decision to accept the
resignation of BKD was approved by the Company's Board of Directors. BKD's
reports on the financial statements for the past two years contained no
qualification, adverse or disclaimer of opinion. Their report dated February 26,
1997, however, included a paragraph regarding substantial doubt about the
Company's ability to continue as a going concern. Through the date of the change
in auditors, there were no disagreements with BKD on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of such
accountants, would have caused them to make reference to the subject matter of
the disagreements in connection with their reports.
On February 11, 1998, the Company announced that it had engaged Daszkal,
Bolton & Manela, CPAs, of Boca Raton, Florida, as the Company's independent
auditors.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a Registration Statement on Form SB-2
(the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock being offered in this Prospectus. This Prospectus, which
forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information about us and the Common Stock being
offered by this Prospectus, you should read the Registration Statement and its
exhibits and schedules, which you may read without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New
York 10048. You can also obtain copies of these materials at prescribed rates
from the Public Reference Section of the Commission in Washington, D.C. 20549.
Any statements contained in the Prospectus as to the contents of any contract
and any such contracts or documents filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. We also file annual, quarterly and other reports and other
information with the Commission. These materials may be obtained at any of the
places mentioned above or at the Commission's Web site, the address of such site
is http://www.sec.gov.
- 47 -
<PAGE>
BIG SMITH BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Accountants' Report F-2
Balance Sheets as of March 31, 1999 and December 31, 1998 and 1997 F-3
Statements of Operations for the Three Months Ended March 31, 1999 and 1998 F-5
(Unaudited) and the Years Ended December 31, 1998 and 1997
Statements of Retained Earnings for the Three Months Ended March 31, 1999 and F-7
1998 (Unaudited) and the Years Ended December 31, 1998 and 1997
Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 F-8
(Unaudited) and the Years Ended December 31, 1998 and 1997
Notes to Financial Statements F-10
</TABLE>
<PAGE>
DASZKAL, BOLTON & MANELA
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
240 W. PALMETTO PARK ROAD, SUITE 300 BOCA RATON, FLORIDA 33432
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN, CPA, P.A.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Big Smith Brands, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Big Smith
Brands, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Big Smith Brands,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced a loss from operations
in 1998 and 1997 and had a working capital deficiency at December 31, 1998 and
1997. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management has completed an equity offering in the
first quarter of 1999 and has also entered into a contract to sell certain
assets of the Company, as described in Notes 14 and 16. Additionally, Management
contemplates additional funding from the exercise of warrants that are attached
to the equity offering. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Daszkal, Bolton & Manela, CPA's
Boca Raton, Florida
February 26, 1998
F-2
<PAGE>
BIG SMITH BRANDS, INC.
BALANCE SHEETS
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31,
ACTUAL 1998 1997
(unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash $33,647 $ 112,917 $ 111,190
Temporary investments 7,991 4,799 7,762
Accounts receivable, less allowance for doubtful
accounts; March 31, 1999--$56,917,
1998--$58,210, 1997-- $253,768 (Note 1) 1,302,918 2,327,240 2,004,176
Inventories (Notes 1,2,7) 3,648,718 3,340,741 3,265,983
Prepaid expenses 60,159 122,802 147,985
---------- ----------- -----------
Total current assets 5,053,431 5,908,499 5,537,096
PROPERTY AND EQUIPMENT, At Cost (Notes 1, 7)
Land 20,000 20,000 20,000
Buildings 600,317 557,289 497,978
Equipment 1,948,221 1,936,213 1,940,252
Vehicles 46,471 62,985 81,511
Leasehold improvements -- 43,028 --
---------- ----------- -----------
2,615,009 2,619,515 2,539,741
Less accumulated depreciation (1,662,673) (1,607,886) (1,361,754)
---------- ----------- -----------
Net property and equipment 952,336 1,011,629 1,177,987
OTHER ASSETS
Certificate of deposit (Note 12) 200,000 200,000 --
Trademarks, less accumulated amortizations:
March 31, 1999--$26,099, December 31, 1998--
$117,501, 1997--$34,391 389,761 398,359 432,749
Security deposits and non-compete expenses 154,194 42,280 26,139
Deferred finance changes, less accumulated --
amortization of March 31, 1999--$195,650,
December 31, 1998--$160,522; 1997--69,949
(Note 1) 555,573 527,285 352,504
---------- ----------- -----------
Total other assets 1,299,528 1,167,924 811,392
---------- ----------- -----------
Total assets $7,305,295 $8,088,052 $7,526,475
========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE>
BIG SMITH BRANDS
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31,
ACTUAL 1998 1997
(unaudited)
CURRENT LIABILITIES
<S> <C> <C> <C>
Revolving line of credit (Note 3) $ 2,784,28 $3,911,316 $2,595,088
Current maturities of long-term debt (Note 4) 284,176 379,176 429,609
Checks outstanding in excess of bank balance 67,821 181,596 277,284
Accounts payable 2,711,878 2,562,052 2,266,548
Accrued expenses 418,251 357,202 506,602
Accrued restructuring/litigation (Note 13) 81,053 130,291 330,863
Accrued royalties (Note 7) 664,587 664,587 665,674
Accrued expenses 250,000 250,000
------------ ---------- ----------
Total current liabilities 7,263,646 8,436,220 7,071,668
------------ ---------- ----------
Long-term debt (Note 4) 574,046 555,245 2,160,468
Note payable - stockholder (Note 12) 200,000 200,000 -
------------ ---------- ----------
Total long-term debt 774,046 755,245 2,160,486
------------ ---------- ----------
Stockholders' deficit (Note 4):
Common stock, $.01 par value; authorized
10,000,000
shares; issued and outstanding 8,613,546 actual
March 31, 1999, 7,354,683 December 31, 1998,
4,198,842, December 31, 1997 shares 86,136 73,547 41,998
Additional paid in capital 10,088,910 9,130,767 7,181,620
Accumulated deficit (10,907,442) (10,307,727 (8,929,297)
----------- ---------- ----------
Total stockholders' deficit (732,396) (1,103,413) (1,705,679)
----------- ---------- ----------
Total liabilities and stockholders' equity $ 7,305,294 $8,088,052 $7,526,475
=========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE>
BIG SMITH BRANDS, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
1999 1998 1998 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES (Notes 1, 7)
Net sales $ 2,132,322 $ 2,263,917 $ 13,210,107 $ 12,560,715
------------ ------------ ------------ ------------
Cost of goods sold 1,817,537 1,802,510 9,989,048 11,355,677
------------ ------------ ------------ ------------
Gross profit 314,785 461,407 3,221,059 1,205,038
Operating expenses
Selling 315,859 366,991 1,673,469 1,749,968
General and administrative 348,932 468,480 1,634,869 1,902,663
Restructuring and litigation charges
(Note 13) -- -- -- 1,007,897
Bad debts -- -- (7,652) 205,440
------------ ------------ ------------ ------------
Total operating expenses 664,791 835,471 3,300,686 4,865,968
Loss from operations (350,006) (374,064) (79,627) (3,660,930)
------------ ------------ ------------ ------------
Other income (expense):
Royalty income (Notes 4, 8) 50,000 --
Interest income -- -- 261 6,235
Interest expense (129,348) (121,786) (593,996) (644,192)
Amortization of debenture discount
(Note 4) (606,204) (606,204) (193,796)
Amortization of trademarks and loan fees (124,963) (104,340)
Foreign currency transaction gain (loss) -- -- (596) (10,693)
Loss on sale of equipment (19,363) (21,514)
Other income (expenses) (120,361) (34,754) (3,942) 2,807
------------ ------------ ------------ ------------
Total other (expense) (249,709) (762,744) (1,298,803) (965,493)
------------ ------------ ------------ ------------
Loss before income taxes (599,715) (1,136,808) (1,378,430) (4,626,423)
------------ ------------ ------------ ------------
Provision for income taxes (Note 6) -- --
------------ ------------
Net loss $ (599,715) $ (1,136,808) $ (1,378,430) $ (4,626,423)
------------ ------------ ------------ ------------
Net loss per share (basic and diluted)
(Note 1) $ (.07) $ (0.16) $ (.21) $ (1.16)
============ ============ ============ ============
Weighted average common shares
outstanding (Note 1) 8,613,546 4,829,844 6,530,366 3,985,484
============ ============ ============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE>
BIG SMITH BRANDS, INC.
STATEMENTS OF RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock,
$.01 par value
-------------------------
Additional
Common Paid-in Accumulated
Shares Stock capital deficit Total
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance (deficit), January 1, 1997 $ 39,300 $ 6,315,818 $ (4,302,874) $ 2,052,244
Discount on convertible debentures
(Note 4) -- 800,000 -- 800,000
Conversion of convertible debentures
(Note 4) 2,698 65,802 -- 68,500
Net loss - 1997 -- -- -- (4,626,423) (4,626,423)
--------- --------- ------------ ------------ ------------
Balance (deficit) December 31, 1997 41,998 7,181,620 (8,929,297) (1,705,679)
========= ============ ============ ============
Conversion of convertible debentures
into common shares (Note 4) 29,000 1,602,500 -- 1,631,500
Conversion of accounts payable
and interest costs into
common shares 2,549 378,743 -- 381,292
Debenture issuance cost -- (32,096) -- (32,096)
Net loss - 1998 -- -- (1,378,430) (1,378,430)
--------- --------- ------------ ------------ ------------
Balance (deficit), December 31, 1998 $ 73,547 $ 9,130,767 $(10,307,727) $ (1,103,413)
========= ============ ============ ============
Balance (deficit), January 1, 1998 4,198,842 $ 41,988 $ 7,181,620 $ (8,929,297) $ (1,705,679)
Conversion of convertible debentures
into common shares (Note 4) 2,900,000 29,000 1,602,500 1,631,500
Net loss - March 31, 1998 -- -- -- (1,136,808) (1,136,808)
--------- --------- ------------ ------------ ------------
Balance (deficit), March 31, 1998 7,099,842 $ 70,998 $ 8,784,120 $(10,066,105) $ (1,210,987)
========= ========= ============ ============ ============
Balance (deficit), January 1, 1999 7,354,683 $ 73,547 $ 9,130,767 $(10,307,727) $ (1,103,413)
</TABLE>
(continued on next page)
F-6
<PAGE>
BIG SMITH BRANDS, INC.
STATEMENTS OF RETAINED EARNINGS (CONT'D)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Debit Issuance Costs (8,268) (8,268)
Private Placement (shares and warrants) 1,100,000 11,000 968,000 979,000
Conversion of accounts payable
into Common Stock 158,863 1,589 (1,589) 0
Net loss - March 31, 1999 -- -- -- (599,715) (599,715)
------------ ------------ ------------ ------------ ------------
Balance (deficit), March 31, 1999 8,613,546 $ 86,136 $ 10,088,910 $(10,907,442) $ (732,396)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-7
<PAGE>
BIG SMITH BRANDS, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998 (Unaudited)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998 1998 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (599,715) $(1,136,808) $(1,378,430) $(4,626,423)
Items not requiring cash:
Depreciation and amortization 119,026 97,119 395,062 375,364
Loss on sale or impairment of property and
equipment 19,363 26,457
Amortization of debenture discount 606,204 606,204 193,796
Allowance for doubtful accounts (195,558) (72,376)
Allowance for inventory obsolescence (127,096) 49,077
Changes in assets and liabilities:
Accounts receivable (1,025,815) 829,143 (127,506) 1,219,030
Royalties receivable -- 1,195,803
Inventories 307,977 (1,116,441) 52,338 829,704
Prepaid expenses (62,645) (125,514) 25,183 3,993
Other assets 131,604 14,559 (16,141) (14,009)
Accounts payable and accrued expenses 107,153 47,964 409,230 (378,439)
Accrued restructuring and litigation (200,572) (320,439)
----------- ----------- ----------- -----------
Net cash used in operating activities (1,022,415) (773,775) (537,923) (761,971)
Cash flows from investing activities:
Proceeds from the sale of property and
equipment 3,075 1,250
Purchase of property and equipment (4,506) (6,630) (126,179) (65,561)
Proceeds from temporary investments 3,192 70,649 2,963 137,144
----------- ----------- ----------- -----------
Net cash (used in) provided by in (1,314) (64,019) (120,141) 72,833
----------- ----------- ----------- -----------
investing activities
</TABLE>
(Continued on next page.)
See accompanying notes to Consolidated Financial Statements.
F-8
<PAGE>
BIG SMITH BRANDS, INC.
STATEMENTS OF CASH FLOWS (CONT'D)
Three Months Ended March 31, 1999 and 1998 (Unaudited)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998 1998 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Checks outstanding in excess of bank balance (113,775) (273,342) (95,688) (7,268)
Proceeds from long-term debt (50,433) 1,103,840
Net borrowings (repayments) under
line-of-credit agreement 1,127,035 (132,622) 1,316,228 (1,038,089)
Principal payments on long-term debt (18,801) (14,834) (579,945) (706,253)
Proceeds from issuance of convertible
debentures -- 1,700,000
Increase in deferred finance costs (180,371) (422,453)
Increase in loan from stockholder 250,000 --
----------- ----------- ----------- -----------
Net cash provided by financing activities 944,459 125,886 659,791 629,777
----------- ----------- ----------- -----------
Increase (decrease) in cash (79,270) (134,759) 1,727 (59,361)
Cash, beginning of period 112,917 170,551 111,190 170,551
----------- ----------- ----------- -----------
Cash, end of period $ 33,647 $ 35,792 $ 112,917 $ 111,190
=========== =========== =========== ===========
Supplemental schedule of non-cash investing
and financing activities:
Imputed discount on convertible debentures $ -- $ -- $ -- $ 800,000
Conversion of convertible debentures into
common stock $ -- $ -- $ 1,631,500 $ 68,500
Conversion of accounts payable and accrued
expenses into common stock $ -- $ -- $ 381,291 $ --
Additional cash payment information:
Interest paid $ 129,348 $ -- $ 594,604 $ 767,817
=========== =========== =========== ===========
Income taxes $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-9
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company's revenues are predominately earned from manufacture and sale of
quality work apparel under a variety of brand names, including Big Smith, Smith
Mountain Classics and Big Smith Vintage. During 1998, the Company also
introduced its new sportswear line with sales of approximately $1,137,000. The
Company extends unsecured credit principally to national chains and local stores
throughout the United States and certain manufacturers and distributors in
Europe. One unaffiliated customer (Wal-Mart Stores, Inc.), accounted for 55.4%
and 45.6% of the Company's operating revenues for the years ended December 31,
1998 and 1997. Accounts receivable for this customer totaled approximately
$1,325,550 and $1,023,000, at December 31, 1998 and 1997.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Big Smith Global Limited. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory Pricing
All inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are depreciated over the estimated useful life of each
asset. Annual depreciation is computed using the straight-line method.
Depreciation expense for the years ended December 31, 1998 and 1997 was $270,099
and $271,024.
F-10
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Intangibles and Deferred Finance Charges
Trademark acquisition costs are being amortized using the straight-line method
based upon the economic useful life of fifteen years. Deferred finance charges
are recognized using the straight-line method over the term of the related debt,
and are included in amortization of trademarks and loan fees. The Company
periodically evaluates the carrying value of intangible assets to determine
whether any impairment has occurred in the value of such assets. Impairments are
recognized when the present value of projected future cash flows is less than
their carrying value. See Note 7 regarding certain impairment write downs that
were recorded during 1997.
Earnings Per Share
Earnings per share are computed based on the weighted average number of common
shares outstanding during the year. Stock warrants and options outstanding are
common stock equivalents and are included in the calculation of earnings per
share to the extent they are dilutive using the treasury-stock method. Basic and
diluted earnings per share are the same.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1998 and 1997.
Revenue Recognition
Revenue from sales is recognized when title passes to the customer.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred approximately
$153,000 and $87,000 in advertising costs during the years ended December 31,
1998 and 1997.
Income Taxes
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
F-11
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of the following:
1998 1997
--------- ---------
Raw materials $ 656,913 $ 760,759
Work-in-process 358,784 440,591
Finished goods 2,325,044 2,064,633
--------- ---------
Total inventories $3,340,741 $3,265,983
========== ==========
NOTE 3 - REVOLVING LINE-OF-CREDIT
1998 1997
--------- ---------
Revolving line-of-credit $3,911,316 $2,595,088
========== ==========
At December 10, 1997, the Company secured a revolving loan and credit
accommodation allowing for maximum borrowing of $10,000,000 with borrowing
levels based upon a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks (see Note 4). The loan
bears interest at prime rate plus 1.875% (9.625% at December 31, 1998 and
10.375% at December 31, 1997), and matures in December 2000. At December 31,
1998, the Company has approximately $121,000 available under the entire
accommodation with $0 available under the revolving line-of-credit.
The agreement also provides for additional interest under certain circumstances
and other stated fees.
The loan is secured by the accounts receivable, inventories, property and
equipment, and trademarks. The loan agreement contains a restriction regarding a
capital expenditure limit.
F-12
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT
Long-term debt includes the following notes payable:
1998 1997
--------- ---------
6% convertible debentures due 2000 (a) $ -- $1,025,296
Facility loans (b) 743,840 1,103,840
Trademark note (c) 50,000 200,000
Equipment financing (d) 118,421 210,239
Other 22,160 50,720
---------- ----------
934,421 2,590,095
Less: current maturities 379,176 429,609
---------- ----------
$ 555,245 $2,160,486
========== ==========
Aggregate annual maturities of long-term debt at December 31, 1998 were:
1999 $ 379,176
2000 555,245
----------
Total future maturities $ 934,421
==========
(a) On April 2, 1997, the Company sold convertible debentures in the principal
amount of $1,700,000 to an offshore accredited investor in a private placement.
The debentures accrued interest at 6%, mature on March 31, 2000 and were
unsecured. After May 15, 1997, the debentures were convertible into common stock
of the Company at the option of the holder.
The conversion price for each share specified is the lesser of $2.80 or 70% of
the stock's market price on the conversion date if converted between May 16 and
July 10, 1997, and the lesser of $2.80 or 67.5% of the stock's market price on
the conversion date if converted after July 10, 1997. The Company paid fees
aggregating $280,000 and issued a warrant to purchase 100,000 shares of the
Company's common stock to the investment banker that arranged the transaction.
The warrant provides for a purchase price of $2.00 per share and expires March
31, 2002.
F-13
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT (Continued)
Because at the time of issuance the debenture holder's conversion rights allowed
a conversion into common shares with a market value in excess of the debenture
principal, this excess at the debenture issuance date of approximately $800,000,
was credited to additional paid-in capital. The resulting discount on the
debentures is charged to operations as imputed interest. During the year and
period ended December 31, 1998 and 1997, $1,631,500 and $68,500 of convertible
debt has been converted into 2,900,000 and 269,842 shares of common stock and
the un-amortized portion of the discount of $606,204 at December 31, 1997 has
been charged to expense in 1998.
(b) December 10, 1997, the Company obtained a facility loan in the amount of
$1,103,840 along with a revolving line-of-credit loan, (see Note 3). The
facility loan is secured by real estate, equipment and trademarks of the
Company. The loan provides for equal monthly payments over a five year period of
time and bears interest at prime plus 1.875% (9.625% and 10.375% at December 31,
1998 and 1997.)
(c) The trademark note is non-interest bearing, payable in annual installments
of $100,000 and due April 18, 1999. At December 18, 1998, an exclusive sales
territory agreement was granted to the creditor for purchase and sale of Big
Smith Branded apparel throughout Italy. In consideration of these rights and
privileges, the Company charged the creditor a one-time royalty fee of $50,000
and in return, the creditor reduced the outstanding balance of the debt by the
same amount (see Note 8).
(d) The equipment loan bears interest at 9.7% and is payable $7,921 per month
including interest through April 20, 2000 and secured by certain equipment.
NOTE 5 - OPERATING LEASES
The Company leases real property under noncancellable operating leases for
periods of 36 to 60 months. Rent expense for the years ended December 31, 1998
and 1997 was approximately $165,000 and $123,000.
Future minimum lease payments at December 1998 were:
- -----------------------------------------------------------------------
1999 $ 98,422
- -----------------------------------------------------------------------
2000 71,315
- -----------------------------------------------------------------------
2001 39,168
- -----------------------------------------------------------------------
2002 40,343
- -----------------------------------------------------------------------
2003 6,757
- -----------------------------------------------------------------------
Thereafter --
- -----------------------------------------------------------------------
Total future minimum lease payments $ 256,005
=========
- -----------------------------------------------------------------------
F-14
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes includes these components:
1998 1997
----------- -------------
Current $ -- $ --
Deferred -- --
Change in beginning of year valuation allowance -- --
----------- -------------
Total $ -- $ --
=========== =============
A reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below:
1998 1997
----------- -------------
Computed at the statutory rate (34%) $ (486,272) $(1,548,938)
Increase (decrease) resulting from:
Non-deductible expenses 17,446 19,333
State income taxes and other, net of federal
tax benefit (50,036) (163,289)
Change in deferred tax asset valuation allowance 518,862 1,692,894
----------- -------------
Actual tax provision $ -- $ --
=========== =============
The tax effects of temporary differences related to deferred taxes shown on the
balance sheets were:
Deferred tax assets: 1998 1997
----------- -----------
Allowance for doubtful accounts $ 22,702 $ 98,970
Inventories 653 85,050
Provision for impairment losses on property
and equipment 60,966 60,966
Accrued health insurance 69,462 71,757
Accrued compensated absences 3,738 --
Accrued stock option compensation 24,130 17,997
Accrued restructuring/litigation 50,813 129,037
Net operating loss carryforward 3,712,641 2,975,915
----------- -----------
3,945,105 3,439,692
Deferred tax liabilities:
Accumulated depreciation (119,596) (133,045)
----------- -----------
Net deferred tax asset before valuation allowance 3,825,509 3,306,647
----------- -----------
Valuation allowance:
Beginning balance (3,306,647) (1,613,753)
Increase during the period (518,862) (1,692,894)
----------- -----------
Ending balance (3,825,509) (3,306,647)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
F-15
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (Continued)
The above net deferred tax asset is presented on the balance sheets as follows:
1998 1997
----------- -----------
Deferred tax asset - current $ 96,555 $ 255,777
Deferred tax asset - long-term 3,728,954 3,050,870
Valuation allowance (3,825,509) (3,306,647)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The Company has unused operating loss carryforwards of approximately $9,520,000
and $7,630,000, at December 31, 1998 and 1997 which expire principally in 2013
and 2012.
NOTE 7 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
Royalties Receivable and Payable
At December 31, 1998 and 1997, the Company has recorded accrued royalties
payable of $664,587 and $665,674 for 1998 and 1997 as a current liability. As
discussed in Note 13 the Company is currently involved in various litigation
involving purported termination of the Caterpillar licensing agreement,
including amounts to be received from licenses for sale of Caterpillar goods
manufactured abroad and royalties to be paid to Caterpillar. Management's
position is that there will be no payment made regarding the amount of recorded
royalties payable. Because the payable is involved in litigation, events could
occur in the near term that would materially affect the amount and timing of
payments of this account.
Provision for Inventory Obsolescence and Marketability
At December 31, 1997, the Company had quantities of certain fabric, trim and
finished goods that exceeded the current year volume of sales or use. Management
reduced the carrying value of these items by approximately $218,000, through a
charge included in the 1997 cost of goods sold. The Company sold these goods
during 1998.
Reduction of Value of Long-Lived Assets
In connection with the restructuring/litigation described in Note 13, the
Company had reduced the carrying value of certain building improvements and
equipment by approximately $156,000 at December 31, 1997.
F-16
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS (Continued)
Self Insurance
The Company maintains a self-insured health program covering substantially all
of its employees. The Company retains the liability for claims amounts up to
$25,000 annually for each covered employee and has reinsured the liability for
annual claim amounts in excess thereof and $1,000,000 in aggregate with a
commercial insurer. Provisions for claims costs are recorded based upon
management's estimates of the Company's aggregate liability for claims incurred.
Claims payments based on actual claims ultimately filed could differ materially
from these estimates.
Litigation - Related Obligations
As discussed in Note 13, the Company is a defendant in several lawsuits. The
Company intends to defend against these lawsuits and pursue counterclaims, if
available. The financial statements include estimates of the costs of defense;
they include no accruals of any amounts receivable for counterclaims. The
amounts of ultimate costs related to these lawsuits and amounts which may be
recoverable through counterclaims could differ materially in the near term.
Major Customers
Current vulnerabilities due to concentrations of major customers are discussed
in Note 1.
Revenues from Major Products.
Net sales of overalls accounted for approximately $6.4 million and $7.7 million
in 1998 and 1997.
NOTE 8 - LICENSING AGREEMENTS
The Company has entered into a one year licensing agreement at December 18,
1998, with a company in Italy that will design, manufacture and distribute,
throughout Italy, sweaters and jackets bearing the Big Smith trademark, label
and/or brand. During the term of this agreement, the company in Italy will also
have the exclusive right to sell other apparel products purchased from Big Smith
Brands, Inc.
As discussed in Note 13, the Company's license with Caterpillar purportedly has
been terminated.
F-17
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS AND WARRANTS
Stock Option Plan
Under the Company's stock option plan, 500,000 shares of common stock were
reserved for issuance upon exercise of options granted to directors, officers
and employees of the Company. Options issued through December 31, 1998 carry
exercise prices ranging from 27% to 75% of the quoted market price on the date
of the grant. The options vest equally over a period of four years following the
date of grant and the unexercised portion of the options expires and ceases to
be exercisable on the earlier of the fifth year after the date of the grant or
specified date following termination of employment.
In 1996, the Company elected to continue measuring compensation cost using the
intrinsic value based method of accounting prescribed in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees." Compensation
(benefit) cost recognized for the stock option plan amounted to $(24,575) and
$40,300 for 1998 and 1997. Disclosures about the fair value of options and pro
forma disclosures of the effect of measuring compensation based on the fair
value method of accounting have not been presented because management believes
such values do not have a material effect.
On February 11, 1998, the Board of Directors granted each non-employee member of
the Board of Directors an option to purchase 10,000 shares of common stock of
the Company. Also, the President of the Company was granted options to purchase
1,000,000 shares of the Company's common stock. A senior advisor to the Company
was granted options to purchase 50,000 shares of the Company's stock. The option
exercise price at the date of grants is equal to the fair market value of the
common stock.
Information related to options is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price
Options Per Option
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996 (24,413 exercisable) 202,650 $2.77
Granted 110,100 .47
Exercised -- --
Forfeited (17,050) 3.18
---------- -----
Outstanding at December 31, 1997 (67,850 exercisable) 295,700 2.04
---------- -----
Granted 1,112,000 .55
Exercised -- --
Forfeited (63,900) 1.97
---------- -----
Outstanding at December 31, 1998 (108,850) exercisable 1,343,800 $ .81
========== =====
</TABLE>
F-18
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS AND WARRANTS (Continued)
Information related to options outstanding at December 31, 1998:
Exercise price range $0.42 - $4.00
Number of options:
Outstanding 1,343,800
Exercisable 108,850
Weighted average exercise price:
Outstanding $ .81
Exercisable $2.50
Weighted average remaining contractual life 4 years
At December 31, 1997, the Company had 1,955,000 warrants outstanding that allows
the holder to purchase one share of common stock, par value $.01 per share until
February 8, 1998 at an exercise price of $4.60 per share. None of the warrants
were exercised.
At August 10, 1998, the Company granted 20,000 warrants to accredited investors
to purchase the common stock of the Company at an exercise price of $1.00 for a
period of five years.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments:
Cash and Checks Outstanding in Excess of Bank Balance
The carrying amount is a reasonable estimate of fair value.
Cash - Foreign
The carrying amount of cash held in foreign bank accounts is a reasonable
estimate of their fair value.
Certificate of Deposit
The carrying amount of the certificate of deposit is a reasonable estimate of
its face value.
F-19
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Notes Payable and Long-term Debt
Fair value is estimated based on the borrowing rates currently available to the
Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 112,917 $ 112,917 $ 111,190 $ 111,190
Temporary investments 4,799 4,799 7,761 7,761
Certificate of deposit 200,000 200,000 -- --
Financial liabilities:
Checks outstanding in
excess of bank balance 181,596 181,596 277,284 277,284
Line-of-credit 3,911,316 3,911,316 2,595,088 2,595,088
Long-term debt 934,421 934,421 2,590,095 2,590,095
</TABLE>
NOTE 11 - COMMITMENTS
The Company has existing significant purchase commitments of approximately
$1,304,000 for raw materials with various scheduled delivery dates in 1999.
These obligations will be assigned to Walls Industries, Inc. (see Note 16).
The Company is committed to pay an annual $50,000 facility fee on the revolving
loans and credit accommodations to the bank.
NOTE 12 - RELATED-PARTY TRANSACTIONS
The Company purchases some of its raw materials from a corporation whose
President is the Secretary of the Company. Such purchases for the years ended
December 31, 1998 and 1997 were $468,354 and $224,916.
In July 1998, a $200,000 certificate of deposit was pledged as collateral for
the revolving line-of-credit lender by the Chairman of the Board of Directors.
The Company issued a note payable to the Chairman for the repayment of the
collateral and has reflected the certificate of deposit and note payable in the
December 31, 1998 Balance Sheet.
In December 1998, the Chairman also loaned the Company $250,000 and the Company
issued an 8% demand note payable to the Chairman.
F-20
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LITIGATION AND RESTRUCTURING
Caterpillar Litigation and Other Related Matters
The Company is currently engaged in litigation in the United States and in Great
Britain with Caterpillar, Inc., with respect to the Company's rights to continue
to manufacture and sell Caterpillar branded products through December 31, 1999,
the expiration date of the license.
There can be no assurance that the outcome of the litigation will be favorable
to the Company. If the outcome of the litigation is not favorable, such outcome
could have a material adverse effect on the financial condition of the Company.
The Company is involved in pending or threatened litigation in foreign
jurisdictions with a number of its foreign distributors in connection with their
refusal to pay royalties and accounts receivable for the sales of goods to such
distributors. Certain of these distributors have made claims against the Company
relating to the effects of the purported termination of the Caterpillar license
on their arrangements with the Company.
The Company's attorneys have advised the Company that it has valid claims in
these actions for royalties and accounts receivable owing. There can be no
assurance that the outcome of these litigations will be favorable to the
Company. Additionally, the Company believes that the outcome of these actions,
and particularly with respect to any claims against it in these actions, may
depend, in part, on the outcome of the Caterpillar litigation.
Restructuring
Because of the purported termination of the Caterpillar licensing agreement and
the resulting litigation discussed above, management adopted a plan to downsize
and restructure the Company's operations. This plan included liquidation of the
remaining inventory of Caterpillar goods, closure of two manufacturing
facilities, sale or transfer of equipment at those facilities, termination or
relocation of certain employees and reorganization of the remaining personnel
and business structure.
Provisions were accrued in 1997 and 1996 for costs associated with the
litigation arising from the Caterpillar agreement and the subsequent
restructuring of the Company. Provision with respect to inventory write downs
and closeouts were accrued during 1997 and 1996 in cost of goods sold.
F-21
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LITIGATION AND RESTRUCTURING (Continued)
Restructuring (Continued)
Operating expenses were accrued in 1997 and 1996 for the costs of closing
domestic and foreign facilities and impairment of property and equipment and
other long-lived assets, as well as the costs of litigation and collection of
disputed amounts receivable related to the Caterpillar matters.
Activity in the accrued restructuring/litigation liability account during 1998
and 1997 is summarized as follows:
1998 1997
----------- -----------
Beginning balance $ 330,863 $ 651,302
Subsequent adjustments of costs and losses
recognized -- 1,007,897
Cash paid and noncash amounts utilized (200,572) (1,328,336)
----------- -----------
Ending balance $ 130,291 $ 330,863
=========== ===========
NOTE 14 - MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As discussed in Notes 3 and 13, the Company's liquidity needs could exceed the
amount of borrowings available under the existing agreement. The Company has
commenced steps to obtain additional sources of liquidity including the sale of
additional common stock of $1,100,000 in January 1999. The Company also signed
an agreement dated February 26, 1999 to sell certain assets and inventory
relating to its' workwear line and grant a license to manufacture workwear under
the Big Smith label (see Note 16). Management also plans to raise additional
equity during 1999. Management believes these actions will provide the necessary
capital and cash requirements to ensure the Company's ability to continue as a
going concern.
F-22
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED, NOT REVIEWED BY
INDEPENDENT AUDITORS)
<TABLE>
<CAPTION>
Provision
Total Operating (Credit) for Earnings
Calendar Operating Income Other Income (Loss) per
Quarter Revenues (Loss) Expenses Taxes Share
-------- ----------- ----------- ----------- -------- ------
1998
<S> <C> <C> <C> <C> <C>
First (1) $ 2,263,917 $ (374,064) $ 762,744 $ -- $ (.23)
Second (1) 2,541,746 (380,536) 164,398 -- (.08)
Third 4,123,616 430,306 180,860 -- .04
Fourth 4,280,828 244,667 190,801 .06
----------- ----------- ----------- -------- ------
$13,210,107 $ (79,627) $ 1,298,803(2) $ -- $ (.21)
=========== =========== =========== ======== ======
1997
First $ 1,743,823 $ (491,941) $ 134,151 $ -- $ (.16)
Second 2,365,784 (488,872) 247,818 -- (.19)
Third (3) 4,232,496 (603,061) 217,792 -- (.21)
Fourth (3) 4,218,612 (2,077,056) 365,732 -- (.60)
----------- ----------- ----------- -------- ------
$12,560,715 $(3,660,930) $ 965,493(2) $ -- $ (1.16)
=========== =========== =========== ======== ======
</TABLE>
(1) The first and second quarter operating (loss) is attributable to the
increases of selling and administrative expenses associated with the new Big
Smith Sportswear line.
(2) Other expenses are comprised primarily of interest and amortization of the
debenture discount expense in the amounts of $1,200,200 and $837,987 for 1998
and 1997. The first quarter of 1998 included $606,204 of converting debenture
discount expense arising as a result of the retirement of all of the outstanding
convertible debentures.
(3) Operating (loss) reflects provisions approximately of $650,000 and $358,000
for the fourth and third quarters for restructuring and litigation costs. Also
included in fourth quarter operating results are approximately $304,000 of
inventory write downs and accounts payable adjustments charged to costs of goods
sold and additional allowance for doubtful accounts of approximately $169,000
charged to bad debts expense.
F-23
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
At February 18, 1999, the Company completed a $1,100,000 private placement for
1,100,000 shares of the Company's common stock with two warrants to purchase a
share of the Company's common stock at $1.50 and $1.75. The warrants will have a
three-year term. After the completion of the offering, the Company will effect a
three-to-one reverse stock split. The number and exercise prices of the warrants
will not be adjusted by such stock split.
Upon completion of the exercise of the warrants, the Company will pay the
placement agent a consulting fee of $5,000 per month for a period of two years,
payable annually in advance. The Company has also agreed to prepare and file a
registration statement covering all of the securities in the units including the
placement agents securities.
On February 26, 1999, the Company entered into a series of agreements with Walls
Industries, Inc. to sell to Walls its workwear manufacturing machinery and
entire workwear inventory and raw materials. The Company also will grant Walls a
license to manufacture workwear under the Big Smith label.
The purchase price will be computed based upon the appraised value of certain
machinery and equipment and the book value of inventory and raw materials at
closing. The Company will receive the majority of the purchase price at closing
with the remaining amount within thirty-five days after closing. In
consideration for a ten-year non-competition agreement, Walls will pay the
Company $4,600,000 over an eight-year period with $400,000 due at closing and
400,000 six months thereafter. The transaction is contingent upon stockholder
and lender approval.
The following financial information assumes the transaction occurred at December
31, 1998 and represents the assets that would be sold pursuant to the agreement
(in thousands):
---------------------------------------------------------------
Inventory $2,809
---------------------------------------------------------------
Property and equipment, net 321
---------------------------------------------------------------
The majority of the proceeds will be applied to the revolving line-of-credit and
long-term debt. Workwear represented 86% of the Company's sales in 1998.
Management has not estimated pro-forma affect the proposed sale would have had
on 1998 operations had the transaction occurred on January 1, 1998 or the effect
on the carrying value of the remaining assets and liabilities.
NOTE 17 - RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 financial statement presentation. These reclassifications
had no effect on reported net loss.
F-24
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offering made hereby and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, any of the securities offered hereby to
anyone in any jurisdiction to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to the dates as of which such information is furnished.
----------
TABLE OF CONTENTS
Page
Prospectus Summary..........................................................5
Risk Factors................................................................7
Selling Securityholders....................................................13
Plan of Distribution.......................................................15
Price Range of Common Stock................................................15
Dividend Policy............................................................17
Capitalization.............................................................17
Management's Discussion and Analysis of Results
of Operations and Financial Condition....................................18
Business...................................................................31
Management.................................................................39
Certain Relationships and Related Transactions.............................43
Principal Stockholders.....................................................43
Description of Securities..................................................45
Shares Eligible for Future Sale............................................46
Legal Matters..............................................................47
Experts....................................................................47
Change in Independent Auditors.............................................47
Where You Can Find More Information........................................47
Index to Financial Statements..............................................F-1
================================================================================
================================================================================
403,334 Shares
2,420,000 Warrants
2,420,000 Shares Underlying
the Warrants
of
Common Stock
Big Smith Brands, Inc.
----------
PROSPECTUS
----------
_________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which permits a corporation in its certificate of
incorporation to eliminate or limit the personal liability of a director for
violations of the director's fiduciary duty, except (i) for any breach of the
director's fiduciary duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
DGCL (providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions), or (iv) for any transaction from which
a director derived an improper personal benefit.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such director, officer, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his or her conduct was unlawful. A Delaware corporation
may indemnify directors and/or officers in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the director or officer is adjudged to be
liable to the corporation. Where a director or officer is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him or her against the expenses which such director
or officer actually and reasonably incurred.
The Registrant's Certificate of Incorporation, filed as Exhibit 3(b) to
this Registration Statement, provides indemnification of directors and officers
of the Registrant to the fullest extent permitted by the DGCL.
The Registrant may provide liability insurance for its directors and
officers for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Registrant.
II - 1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this Registration Statement (other
than the underwriting discounts and commission) will be as follows:
TOTAL*
SEC registration fee $2,238
Blue Sky fees and expenses (including counsel fees) $10,000
Accounting fees and expenses $5,000
Legal fees and expenses $135,000
Printing and engraving expenses $7,000
Transfer Agent, Warrant Agent and Registrar fees and expenses $3,600
Miscellaneous $2,500
Total $165,338
* All expenses are estimated, except for filing fees.
Item 26. Recent Sales of Unregistered Securities.
Unless otherwise noted, all share information set forth below, has been
adjusted to reflect a one-for-three reverse stock split to be effected by the
Company.
Since February 8, 1995, the Registrant has issued or sold unregistered
securities as set forth below.
On April 9, 1995, Barington Capital Group, Inc. exercised warrants to
purchase 255,000 shares of Common Stock issued to it by the Company in
connection with its function as underwriter for the Company's initial public
offering.
On April 2, 1997, the Company closed an offshore placement (the
"Placement") of $1,700,000 of its 6% Convertible Preferred Debentures due March
31, 2000 ("Debentures") to a single accredited investor. Beginning 45 days after
such closing, the Debentures were convertible into Common Stock of the Company
at a conversion ratio of one share for the lesser of (i) $2.80 or (ii) 70% (or
67.5% if converted more than 100 days after the closing of the offering) of the
Market Price (as defined in the Debentures) of the Common Stock on the
conversion date. The Debentures were converted over a period of nine months into
an aggregate of 1,056,614 shares of Common Stock.
Goodbody International, Inc. served as introducing agent in connection
with the Placement and received in consideration of it services $255,000 and
warrants to purchase 33,334 shares of Common Stock of the Company at any time
prior to March 31, 2002, exercisable at $2.00 per share, subject to adjustment,
based upon the bid price of the Common Stock for the five trading days ending on
each anniversary of the date of issuance of the warrants. On December 1, 1998,
the Company issued 6,058 shares of Common Stock to a representative of Goodbody
International in consideration of the cashless exercise of 8,334 of the warrants
described above.
II - 2
<PAGE>
The Placement was a private transaction not involving a public offering
and was exempt from the registration provisions of the Securities Act, pursuant
to section 4(2) thereof, and pursuant to Regulation S promulgated under the
Securities Act.
The Debentures were converted on the following dates into the number of
shares and at the per share price as set forth below:
Number of Shares Per Share Price
---------------- ---------------
June 10, 1997 8,860 $1.12875
June 23, 1997 13,137 $1.5225
November 25, 1997 55,951 $0.54423
November 26, 1997 12,001 $0.67077
March 11, 1998 966,667(1) $5.3325
- -------------------------
(1) Such shares of Common Stock were issued in connection with the
negotiated retirement of the Debentures in March 1998 pursuant to which
the remaining $1,631,500 in principal amount of Debentures were
converted into an aggregate of 966,667 shares of Common Stock at the
negotiated conversion price of $5.3325 per share. In connection with
such conversion the Registrant received the representation of D.L.
Cromwell Investments, Inc. ("Cromwell") acting as agent for the
beneficial holders for whose benefit the shares were issued that such
beneficial owners included fifteen or fewer "accredited investors" (as
defined in Rule 501(a) of Regulation D under Securities Act of 1933, as
amended (the "Securities Act")) or "qualified institutional buyers (as
such term is defined in Rule 144A under the Securities Act), who were
not "US Persons" (as such term is defined under Rule 902 of Regulation S
under the Securities Act), and that any nominee to whom shares of Common
Stock were issued for the account of such beneficial holders was not a
US Person, and a certificate from the nominee on behalf of the
beneficial owners for whose account the shares were issued, representing
and warranting, in addition to the above and certain other
representations, that such beneficial holders were acquiring the shares
not with a view to or for sale in connection with any distribution of
the shares or with any present intention of distributing the shares or
selling the shares in any manner not in compliance with applicable
securities laws.
On or about August 10, 1998, the Company sold Units to accredited
investors including warrants to purchase 6,667 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 to accredited investors without registration under the Securities Act
or the securities laws of any state in reliance on the exemptions contained in
section 4(2) of the Securities Act and in Rule 506 of Regulation D promulgated
under the Securities Act. As of the date hereof, warrants issued in connection
with this private placement have not been exercised. In December 1998, the
Company repurchased the notes placed in this private offering.
On December 22, 1998, in full payment of debt and interest related to
services previously rendered in connection to various private placements, the
Company issued to Willora Company Limited ("Willora") an aggregate of 78,853
shares of Common Stock. These securities were issued in reliance on Section 4(2)
of the Securities Act.
On March 24, 1999, the Company issued 52,955 shares of Common Stock to
Kramer Levin Naftalis & Frankel LLP in partial payment of past due legal fees.
These securities were issued in reliance on Section 4(2) of the Securities Act.
On May 26, 1999, the Company issued share certificates for 366,667
shares of Common Stock to the Investors in the Private Placement, which shares
are being offered by the Selling Securityholders pursuant to the prospectus
which is a part of this Registration Statement.
II - 3
<PAGE>
The Company has granted an aggregate of 447,000 options, each to
purchase one share of our common stock, to key employees, officers, directors
and consultants under our 1994 Stock Incentive Plan. Of these options, options
to purchase 142,167 shares are exercisable within 60 days of the date hereof.
The Company issued 2,200,000 Warrants being registered under this
prospectus in connection with a private placement. Each Warrant is exercisable
for the purchase of one share of Common Stock for a period of three years ending
January 31, 2002. The Company also issued to Cromwell warrants to purchase
110,000 Units in connection with the private placement. Each Unit contains one
share of Common Stock (subject to the one-for-three reverse stock split) and two
Warrants (not subject to the reverse stock split). None of the Warrants or the
number of shares underlying the Warrants will be affected by the reverse stock
split.
Item 27. Exhibits.
Exhibit
No. Description
--- -----------
3(a) Form of Amended Restated Certificate of Incorporation.*
(b) By-laws.*
5 Opinion of Kramer Levin Naftalis & Frankel LLP.
10(a) Amended and Restated 1994 Stock Incentive Plan, dated as of
February 11, 1998 (amended June 11, 1998).**
(b) Loan and Security Agreement, dated December __, 1997, between the
Company and National Credit Commercial Funding, Inc., a NationsBank
Company.***
(c) First Amendment to Loan and Security Agreement dated
December __, 1997.**
(d) Consent and Second Amendment to Loan and Security Agreement dated
April 22, 1999.**
(e) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(f) Warrant to Purchase Common Stock, dated as of April 2, 1997.****
(g) Promissory Note by the Company to S. Peter Lebowitz, dated
December 23, 1998, for $200,000.**
(h) Promissory Note by the Company to S. Peter Lebowitz, dated December
23, 1998, for $250,000.**
(i) Form of Warrant to Purchase Common Stock, dated May __, 1998,
relating to Bridge Financing.*****
(j) Form of Subscription Agreement with respect to the 1999 private
placement offering through D.L. Cromwell Investments, Inc.******
(k) Form of Warrant to Purchase Common Stock with respect to the 1999
private placement offering through Cromwell.******
(l) Form of Placement Agent's Agreement with respect to the 1999 private
placement offering through Cromwell.******
(m) Asset Purchase Agreement, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.******
(n) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.******
(o) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and S. Peter Lebowitz.******
23 Consent of Daszkal, Bolton & Manela, CPAs**
- --------------------------
II - 4
<PAGE>
* 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.
** Filed herewith.
*** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1997, filed on April 15, 1998.
**** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1996, filed on April 15, 1997.
***** Previously filed with, and incorporated herein by reference to, the
Registrant's Quarterly Report on Form 10-QSB for the three months
ended September 30, 1998, filed on November 13, 1998.
****** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1998, filed on March 29, 1999.
(b) Reports on Form 8-K.
None.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the latter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby further undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to the registration statement;
(i) To include any prospectus required by Section 10
(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and
II - 5
<PAGE>
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II - 6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on July 15, 1999.
Big Smith Brands, Inc.
By: /s/ S. Peter Lebowitz
--------------------------
S. Peter Lebowitz
(President and Chief Executive Officer)
In accordance with the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
/s/ S. Peter Lebowitz President and Chief Executive Officer July 15, 1999
S. Peter Lebowitz and Director (Principal Executive
Officer)
/s/ Susan A. Leonhardt Director of Accounting and July 15, 1999
Susan A. Leonhardt Administration (Principal Accounting
Officer)
/s/ Glen Freeman Director July 15, 1999
Glen Freeman
/s/ Theodore L. Listerman Director July 15, 1999
Theodore L. Listerman
/s/ Julian H. Shaps Director July 15, 1999
Julian H. Shaps
/s/ Jack Schultz Director July 15, 1999
Jack Schultz
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3(a) Form of Amended Restated Certificate of Incorporation.*
(b) By-laws.*
5 Opinion of Kramer Levin Naftalis & Frankel LLP.
10(a) Amended and Restated 1994 Stock Incentive Plan, dated as of
February 11, 1998 (amended June 11, 1998).**
(b) Loan and Security Agreement, dated December __, 1997, between the
Company and National Credit Commercial Funding, Inc., a NationsBank
Company.***
(c) First Amendment to Loan and Security Agreement dated
December __, 1997.**
(d) Consent and Second Amendment to Loan and Security Agreement dated
April 22, 1999.**
(e) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(f) Warrant to Purchase Common Stock, dated as of April 2, 1997.****
(g) Promissory Note by the Company to S. Peter Lebowitz, dated
December 23, 1998, for $200,000.**
(h) Promissory Note by the Company to S. Peter Lebowitz, dated December
23, 1998, for $250,000.**
(i) Form of Warrant to Purchase Common Stock, dated May __, 1998,
relating to Bridge Financing.*****
(j) Form of Subscription Agreement with respect to the 1999 private
placement offering through D.L. Cromwell Investments, Inc.******
(k) Form of Warrant to Purchase Common Stock with respect to the 1999
private placement offering through Cromwell.******
(l) Form of Placement Agent's Agreement with respect to the 1999 private
placement offering through Cromwell.******
(m) Asset Purchase Agreement, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.******
(n) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.******
(o) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and S. Peter Lebowitz.******
23 Consent of Daszkal, Bolton & Manela, CPAs**
- --------------------------
* 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.
** Filed herewith.
*** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1997, filed on April 15, 1998.
**** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1996, filed on April 15, 1997.
<PAGE>
***** Previously filed with, and incorporated herein by reference to, the
Registrant's Quarterly Report on Form 10-QSB for the three months
ended September 30, 1998, filed on November 13, 1998.
****** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1998, filed on March 29, 1999.
(b) Reports on Form 8-K.
None.
BIG SMITH BRANDS, INC.
AMENDED AND RESTATED
1994 STOCK INCENTIVE PLAN
<PAGE>
Table of Contents
Page
----
ARTICLE I
GENERAL
1.1 Purpose............................................................ 1
1.2 Administration..................................................... 1
1.3 Persons Eligible for Awards........................................ 3
1.4 Types of Awards Under Plan......................................... 3
1.5 Shares Available for Awards........................................ 3
1.6 Automatic Grants of Nonqualified
Stock Options to Outside Directors............................... 5
1.7 Definitions of Certain Terms....................................... 6
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards....................................... 8
2.2 Grant of Stock Options............................................. 8
2.3 Exercise of Options................................................ 10
2.4 Termination of Employment; Death................................... 13
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification
of Awards........................................................ 14
3.2 Restrictions....................................................... 16
3.3 Nonassignability................................................... 17
3.4 Requirement of Notification of Election
Under Section 83(b) of the Code.................................. 17
3.5 Requirement of Notification Upon
Disqualifying Disposition Under
Section 421(b) of the Code....................................... 17
3.6 Withholding Taxes.................................................. 18
3.7 Right of Discharge Reserved........................................ 19
3.8 Nature of Payments................................................. 19
3.9 Non-Uniform Determinations......................................... 20
3.10 Other Payments or Awards........................................... 21
3.11 Section Headings................................................... 21
3.12 Effective Date and Term of Plan.................................... 21
3.13 Governing Law...................................................... 22
-i-
<PAGE>
ARTICLE I
GENERAL
1.1 Purpose
The purpose of the Big Smith Brands, Inc. 1994 Stock Incentive Plan
(the "Plan") is to provide for officers and other employees (including directors
who are employees) of, and consultants to, Big Smith Brands, Inc. (the
"Company") an incentive (a) to enter into and remain in the service of the
Company, (b) to enhance the long-term performance of the Company, and (c) to
acquire a proprietary interest in the success of the Company.
1.2 Administration
1.2.1 Subject to Section 1.2.6, the Plan shall be administered by the
Stock Option Committee (the "Committee") of the board of directors of the
Company (the "Board"), which shall consist of not less than two directors and to
which the Board shall grant power to authorize the issuance of the Company's
capital stock pursuant to awards granted under the Plan. The members of the
Committee shall be appointed by, and serve at the pleasure of, the Board. To the
extent required for transactions under the Plan to qualify for the exemptions
available under Rule 16b-3 ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934 (the "1934 Act"), all actions relating to awards to persons
subject to Section 16 of the 1934 Act shall be
<PAGE>
taken by the Board unless each person who serves on a Committee is a
"non-employee director" within the meaning of Rule 16b-3 or such actions are
taken by a sub-committee of the Committee (or the Board) comprised solely of
"non-employee directors." To the extent required for compensation realized from
awards under the Plan to be deductible by the Company pursuant to section 162(m)
of the Internal Revenue Code of 1986, the members of the Committee shall be
"outside directors" within the meaning of section 162(m).
1.2.2 The Committee shall have the authority (a) to exercise all of
the powers granted to it under the Plan, (b) to construe, interpret and
implement the Plan and any Plan Agreements executed pursuant to Section 2.1, (c)
to prescribe, amend and rescind rules and regulations relating to the Plan,
including rules governing its own operations, (d) to make all determinations
necessary or advisable in administering the Plan, (e) to correct any defect,
supply any omission and reconcile any inconsistency in the Plan, and (f) to
amend the Plan to reflect changes in applicable law.
1.2.3 Actions of the Committee shall be taken by the vote of a
majority of its members. Any action may be taken by a written instrument signed
by a majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting.
-2-
<PAGE>
1.2.4 The determination of the Committee on all matters relating to
the Plan or any Plan Agreement shall be final, binding and conclusive.
1.2.5 No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.
1.2.6 Notwithstanding anything to the contrary contained herein: (a)
until the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board; and (b) the Board may, in its sole discretion, at any
time and from time to time, resolve to administer the Plan. In either of the
foregoing events, the term "Committee" as used herein shall be deemed to mean
the Board.
1.3 Persons Eligible for Awards
Awards under the Plan may be made to such officers, directors and
employees of the Company, and to such consultants to the Company (collectively,
"key persons"), as the Committee shall in its sole discretion select, except as
otherwise provided in Section 1.6 hereof.
1.4 Types of Awards Under Plan
Awards may be made under the Plan in the form of (a) incentive stock
options, and/or (b) nonqualified stock options, all as more fully set forth in
Article II. The term
-3-
<PAGE>
"award" means any of the foregoing. No incentive stock option may be granted to
a person who is not an employee of the Company on the date of grant.
1.5 Shares Available for Awards
1.5.1 The total number of shares of common stock of the Company, par
value $.01 per share ("Common Stock"), with respect to which awards may be
granted pursuant to the Plan shall not exceed 1,800,000 shares. Such shares may
be authorized but unissued Common Stock or authorized and issued Common Stock
held in the Company's treasury or acquired by the Company for the purposes of
the Plan. The Committee may direct that any stock certificate evidencing shares
issued pursuant to the Plan shall bear a legend setting forth such restrictions
on transferability as may apply to such shares pursuant to the Plan.
1.5.2 If there is any change in the outstanding shares of Common Stock
by reason of a stock dividend or distribution, stock split-up, recapitalization,
combination or exchange of shares, or by reason of any merger, consolidation,
spinoff or other corporate reorganization in which the Company is the surviving
corporation, the number of shares available for issuance both in the aggregate
and with respect to each outstanding award, and the purchase price per share
under outstanding awards, shall be equitably adjusted by the Committee, whose
determination shall be final, binding and conclusive. After any adjustment
-4-
<PAGE>
made pursuant to this Section 1.5.2, the number of shares subject to each
outstanding award shall be rounded to the nearest whole number.
1.5.3 Any shares subject to an award under the Plan that remain
unissued upon the cancellation or termination of such award for any reason
whatsoever shall again become available for awards under the Plan. Except as
provided in this Section 1.5 and in Section 2.2.4, there shall be no limit on
the number or the value of the shares of Common Stock issuable to any individual
under the Plan.
1.5.4 Subject to adjustment as provided in Section 1.5.2, the total
number of shares of Common Stock with respect to which stock options may be
granted to any one employee of the Company or any subsidiary during any one
calender year shall not exceed 1,000,000 shares.
1.6 Automatic Grants of Nonqualified Stock Options to Outside Directors
Each member of the Board of Directors who is not also an employee of
the Company on the date of grant ("Outside Director"), who is appointed to fill
a vacancy in the Board by action of the Board subsequent to January 1, 1995 will
automatically receive a grant of a nonqualified stock option to purchase 20,000
shares, such grant to be effective as of the last day of the
-5-
<PAGE>
fiscal quarter of the Company in which the Outside Director was so appointed. At
each annual stockholders' meeting commencing with the 1995 annual meeting of
stockholders, each Outside Director elected to serve at such annual meeting will
also automatically receive a grant of a nonqualified stock option to purchase
10,000 shares, to be effective as of the date of the annual meeting. The
exercise price for each nonqualified stock option granted to an Outside Director
will be the fair market value of the shares subject to the option on the date
the option is granted.
1.7 Definitions of Certain Terms
1.7.1 The "Fair Market Value" of a share of Common Stock on any day
shall be determined as follows.
(a) If the principal market for the Common Stock (the "Market")
is a national securities exchange or the Nasdaq National Market, the last sale
price or, if no reported sales take place on the applicable date, the average of
the high bid and low asked price of Common Stock as reported for such Market on
such date or, if no such quotation is made on such date, on the next preceding
day on which there were quotations, provided that such quotations shall have
been made within the ten (10) business days preceding the applicable date;
(b) If the Market is the Nasdaq Small Cap Market or another
market, the average of the high bid and low asked
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<PAGE>
price for Common Stock on the applicable date, or, if no such quotations shall
have been made on such date, on the next preceding day on which there were
quotations, provided that such quotations shall have been made within the ten
(10) business days preceding the applicable date; or,
(c) In the event that neither paragraph (a) nor (b) shall apply,
the Fair Market Value of a share of Common Stock on any day shall be determined
by the Committee.
1.7.2 The term "incentive stock option" means an option that is
intended to qualify for special federal income tax treatment pursuant to
sections 421 and 422 of the Internal Revenue Code of 1986, as now constituted or
subsequently amended (the "Code"), or pursuant to a successor provision of the
Code, and which is so designated in the applicable Plan Agreement. Any option
that is not specifically designated as an incentive stock option shall under no
circumstances be considered an incentive stock option. Any option that is not an
incentive stock option is referred to herein as a "nonqualified stock option."
1.7.3 The term "employment" means, in the case of a grantee of an
award under the Plan who is not an employee of the Company, the grantee's
association with the Company as a director, consultant or otherwise.
1.7.4 A grantee shall be deemed to have a "termination of
employment" upon ceasing to be employed by the Company and all
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<PAGE>
of its subsidiaries or by a corporation assuming awards in a transaction to
which section 425(a) of the Code applies. The Committee may in its discretion
determine (a) whether any leave of absence constitutes a termination of
employment for purposes of the Plan, (b) the impact, if any, of any such leave
of absence on awards theretofore made under the Plan, and (c) when a change in a
non-employee's association with the Company constitutes a termination of
employment for purposes of the Plan. The Committee shall have the right to
determine whether the termination of a grantee's employment is a dismissal for
cause and the date of termination in such case, which date the Committee may
retroactively deem to be the date of the action that is cause for dismissal.
Such determinations of the Committee shall be final, binding and conclusive.
1.7.5 The terms "parent corporation" and "subsidiary corporation"
have the meanings given them in section 425(e) and (f) of the Code,
respectively.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each award granted under the Plan shall be evidenced by a written
agreement ("Plan Agreement") which shall contain such provisions as the
Committee may in its sole discretion deem necessary or desirable. By accepting
an award pursuant to the
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<PAGE>
Plan, a grantee thereby agrees that the award shall be subject to all of the
terms and provisions of the Plan and the applicable Plan Agreement.
2.2 Grant of Stock Options
2.2.1 The Committee may grant incentive stock options and nonqualified
stock options (collectively, "options") to purchase shares of Common Stock from
the Company, to such key persons, and in such amounts and subject to such terms
and conditions, as the Committee shall determine in its sole discretion, subject
to the provisions of the Plan.
2.2.2 Each Plan Agreement with respect to an option shall set forth
the amount (the "option exercise price") payable by the grantee to the Company
upon exercise of the option evidenced thereby. The option exercise price per
share shall be determined by the Committee in its sole discretion; provided,
however, that the option exercise price of an incentive stock option shall be at
least 100% of the Fair Market Value of a share of Common Stock on the date the
option is granted, and provided further that in no event shall the option
exercise price be less than the par value of a share of Common Stock.
2.2.3 Each Plan Agreement with respect to an option shall set forth
the periods during which the award evidenced thereby shall be exercisable,
whether in whole or in part. Such periods shall be determined by the Committee
in its sole discre-
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<PAGE>
tion; provided, however, that no incentive stock option shall be exercisable
more than 10 years after the date of grant, and provided further that except as
and to the extent that the Committee may otherwise provide pursuant to Section
3.1.3, no option shall be exercisable prior to the first anniversary of the date
of grant.
2.2.4 To the extent that the aggregate Fair Market Value (determined
as of the time the option is granted) of the stock with respect to which
incentive stock options are first exercisable by any employee during any
calendar year shall exceed $100,000, or such higher amount as may be permitted
from time to time under section 422 of the Code, such options shall be treated
as nonqualified stock options. In applying this provision, there shall be taken
into account solely incentive stock options granted after December 31, 1986 to
the employee under this Plan and under all other plans of the Company and any
subsidiary thereof.
2.2.5 Notwithstanding the provisions of Section 2.2.2 and 2.2.3, an
incentive stock option may not be granted under the Plan to an individual who,
at the time the option is granted, owns stock possessing more than 10% of the
total combined voting power of all classes of stock of his employer corporation
or of its parent or subsidiary corporations (as such ownership may be determined
for purposes of section 422(b)(6) of the Code) unless (a) at the time such
incentive stock option is granted the option
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<PAGE>
exercise price is at least 110% of the Fair Market Value of the shares subject
thereto and (b) the incentive stock option by its terms is not exercisable after
the expiration of 5 years from the date it is granted.
2.3 Exercise of Options
Subject to the provisions of this Article II, each option granted
under the Plan shall be exercisable as follows:
2.3.1 Unless the applicable Plan Agreement otherwise provides, an
option shall become exercisable in four substantially equal installments, the
first of which shall become exercisable on the first anniversary of the date of
grant and the remaining three of which shall become exercisable, respectively,
on the second, third and fourth anniversaries of the date of grant.
2.3.2 Unless the applicable Plan Agreement otherwise provides, once an
installment becomes exercisable, it shall remain exercisable until expiration,
cancellation or termination of the award.
2.3.3 Unless the applicable Plan Agreement otherwise provides, an
option may be exercised from time to time as to all or part of the shares as to
which such award is then exercisable.
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<PAGE>
2.3.4 An option shall be exercised by the filing of a written notice
with the Company, on such form and in such manner as the Committee shall in its
sole discretion prescribe.
2.3.5 Any written notice of exercise of an option shall be accompanied
by payment for the shares being purchased. Such payment shall be made: (a) by
certified or official bank check (or the equivalent thereof acceptable to the
Company) for the full option exercise price; or (b) with the consent of the
Committee, by delivery of shares of Common Stock having a Fair Market Value
(determined as of the exercise date) equal to all or part of the option exercise
price and a certified or official bank check (or the equivalent thereof
acceptable to the Company) for any remaining portion of the full option exercise
price; or (c) at the discretion of the Committee and to the extent permitted by
law, by such other provision, consistent with the terms of the Plan, as the
Committee may from time to time prescribe.
2.3.6 Promptly after receiving payment of the full option exercise
price, the Company shall, subject to the provisions of Section 3.2, deliver to
the grantee or to such other person as may then have the right to exercise the
award, a certificate or certificates for the shares of Common Stock for which
the award has been exercised. If the method of payment employed upon option
exercise so requires, and if applicable law permits, an optionee may direct the
Company to deliver the certificate(s) to the optionee's stockbroker.
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<PAGE>
2.3.7 No grantee of an option (or other person having the right to
exercise such award) shall have any of the rights of a stockholder of the
Company with respect to shares subject to such award until the issuance of a
stock certificate to such person for such shares. Except as otherwise provided
in Section 1.5.2, no adjustment shall be made for dividends, distributions or
other rights (whether ordinary or extraordinary, and whether in cash, securities
or other property) for which the record date is prior to the date such stock
certificate is issued.
2.4 Termination of Employment; Death
2.4.1 Except to the extent otherwise provided in Section 2.4.2 or
2.4.3 or in the applicable Plan Agreement, all options not theretofore exercised
shall terminate upon termination of the grantee's employment for any reason
(including death).
2.4.2 If a grantee's employment terminates for any reason other than
death or dismissal for cause, the grantee may exercise any outstanding option on
the following terms and conditions: (a) exercise may be made only to the extent
that the grantee was entitled to exercise the award on the date of employment
termination; and (b) exercise must occur within three months after employment
terminates, except that the three-month period shall be increased to one year if
the termination is by reason of disability, but in no event after the expiration
date of the
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<PAGE>
award as set forth in the Plan Agreement. In the case of an incentive stock
option, the term "disability" for purposes of the preceding sentence shall have
the meaning given to it by section 422(c)(7) of the Code.
2.4.3 If a grantee dies while employed by the Company or any
subsidiary, or after employment termination but during the period in which the
grantee's awards are exercisable pursuant to Section 2.4.2, any outstanding
option shall be exercisable on the following terms and conditions: (a) exercise
may be made only to the extent that the grantee was entitled to exercise the
award on the date of death; and (b) exercise must occur by the earlier of the
first anniversary of the grantee's death or the expiration date of the award.
Any such exercise of an award following a grantee's death shall be made only by
the grantee's executor or administrator, unless the grantee's will specifically
disposes of such award, in which case such exercise shall be made only by the
recipient of such specific disposition. If a grantee's personal representative
or the recipient of a specific disposition under the grantee's will shall be
entitled to exercise any award pursuant to the preceding sentence, such
representative or recipient shall be bound by all the terms and conditions of
the Plan and the applicable Plan Agreement which would have applied to the
grantee including, without limitation, the provisions of Sections 3.2 and 3.7
hereof.
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<PAGE>
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards
3.1.1 The Board may from time to time suspend, discon- tinue, revise
or amend the Plan in any respect whatsoever, except that no such amendment shall
materially impair any rights or materially increase any obligations under any
award theretofore made under the Plan without the consent of the grantee (or,
upon the grantee's death, the person having the right to exercise the award).
For purposes of this Section 3.1, any action of the Board or the Committee that
alters or affects the tax treatment of any award shall not be considered to
materially impair any rights of any grantee.
3.1.2 Shareholder approval of any amendment shall be required with
respect to any amendment: (a) which increases the aggregate number of shares
which may be issued pursuant to incentive stock options or changes the class of
employees eligible to receive such options; or (b) for which stockholder
approval is required by other applicable law or regulation.
3.1.3 The Committee may amend any outstanding Plan Agreement,
including, without limitation, by amendment which would (a) accelerate the time
or times at which the award may be exercised, or (b) waive or amend any goals,
restrictions or conditions set forth in the Plan Agreement, or (c) extend the
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<PAGE>
scheduled expiration date of the award. However, any such cancellation or
amendment that materially impairs the rights or materially increases the
obligations of a grantee under an outstanding award shall be made only with the
consent of the grantee (or, upon the grantee's death, the person having the
right to exercise the award).
3.2 Restrictions
3.2.1 If the Committee shall at any time determine that any Consent
(as hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Committee.
3.2.2 The term "Consent" as used herein with respect to any Plan
Action means (a) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state or
local law, rule or regulation, (b) any and all written agreements and
representations by the grantee with respect to the disposition of shares, or
with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such
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<PAGE>
listing, registration or qualification or to obtain an exemption from the
requirement that any such listing, qualification or registration be made and (c)
any and all consents, clearances and approvals in respect of a Plan Action by
any governmental or other regulatory bodies.
3.3 Nonassignability
No award or right granted to any person under the Plan or under any
Plan Agreement shall be assignable or transferable other than by will or by the
laws of descent and distribution. All rights granted under the Plan or any Plan
Agreement shall be exercisable during the life of the grantee only by the
grantee or the grantee's legal representative.
3.4 Requirement of Notification of
Election Under Section 83(b) of the Code
If any grantee shall, in connection with the acquisition of shares of
Common Stock under the Plan, make the election permitted under section 83(b) of
the Code (i.e., an election to include in gross income in the year of transfer
the amounts specified in section 83(b)), such grantee shall notify the Company
of such election within 10 days of filing notice of the election with the
Internal Revenue Service, in addition to any filing and notification required
pursuant to regulations issued under the authority of Code section 83(b).
3.5 Requirement of Notification Upon Disqualifying
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<PAGE>
Disposition Under Section 421(b) of the Code
Each Plan Agreement with respect to an incentive stock option shall
require the grantee to notify the Company of any disposition of shares of Common
Stock issued pursuant to the exercise of such option under the circumstances
described in section 421(b) of the Code (relating to certain disqualifying
dispositions), within 10 days of such disposition.
3.6 Withholding Taxes
3.6.1 Whenever shares of Common Stock are to be delivered pursuant to
an award under the Plan, the Company shall be entitled to require as a condition
of delivery that the grantee remit to the Company an amount sufficient in the
opinion of the Company to satisfy all federal, state and other governmental tax
withholding requirements related thereto. With the approval of the Committee,
which it shall have sole discretion to grant, the grantee may satisfy the
foregoing condition by electing to have the Company withhold from delivery
shares having a value equal to the amount of tax to be withheld. Such shares
shall be valued at their Fair Market Value on the date as of which the amount of
tax to be withheld is determined. Fractional share amounts shall be settled in
cash. Such a withholding election may be made with respect to all or any portion
of the shares to be delivered pursuant to an award. To the extent required for
such a withholding of stock to qualify for the exemption available under
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<PAGE>
Rule 16b-3, such an election by a grantee whose transactions in Common Stock are
subject to Section 16(b) of the 1934 Act shall be: (a) subject to the approval
of the Committee in its sole discretion; (b) irrevocable; (c) made no sooner
than six months after the grant of the award with respect to which the election
is made; and (d) made at least six months prior to the Tax Date unless such
withholding election is in connection with exercise of an option and both the
election and the exercise occur prior to the Tax Date in a "window period" of 10
business days beginning on the third day following release of the Company's
quarterly or annual summary statement of sales and earnings.
3.6.2 Whenever cash is to be paid pursuant to an award under the Plan,
the Company shall be entitled to deduct therefrom an amount sufficient in its
opinion to satisfy all federal, state and other governmental tax withholding
requirements related to such payment.
3.7 Right of Discharge Reserved
Nothing in the Plan or in any Plan Agreement shall confer upon any
grantee the right to continue in the employ of the Company or affect any right
which the Company may have to terminate such employment.
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<PAGE>
3.8 Nature of Payments
3.8.1 Any and all grants of awards and issuances of shares of Common
Stock under the Plan shall be in consideration of services performed for the
Company by the grantee.
3.8.2 All such grants and issuances shall constitute a special
incentive payment to the grantee and shall not be taken into account in
computing the amount of salary or compensation of the grantee for the purpose of
determining any benefits under any pension, retirement, profit-sharing, bonus,
life insurance or other benefit plan of the Company or under any agreement
between the Company and the grantee, unless such plan or agreement specifically
provides otherwise.
3.9 Non-Uniform Determinations
The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Committee shall
be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-uniform and selective Plan Agreements, as
to (a) the persons to receive awards under the Plan, (b) the terms and
provisions of awards under the Plan, and (c) the treatment of leaves of absence
pursuant to Section 1.7.4.
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<PAGE>
3.10 Other Payments or Awards
Nothing contained in the Plan shall be deemed in any way to limit or
restrict the Company from making any award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
3.11 Section Headings
The section headings contained herein are for the purpose of
convenience only and are not intended to define or limit the contents of said
sections.
3.12 Effective Date and Term of Plan
3.12.1 The Plan was adopted by the Board in October 1994, subject to
approval by the Company's shareholders. All awards under the Plan prior to such
shareholder approval are subject in their entirety to such approval. If such
approval is not obtained prior to the first anniversary of the date of adoption
of the Plan, the Plan and all awards thereunder shall terminate on that date.
3.12.2 Unless sooner terminated by the Board, the provisions of the
Plan respecting the grant of incentive stock options shall terminate on the
tenth anniversary of the adoption of the Plan by the Board, and no incentive
stock option awards shall thereafter be made under the Plan. All such awards
made under the Plan prior to its termination shall remain in effect
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<PAGE>
until such awards have been satisfied or terminated in accordance with the terms
and provisions of the Plan and the applicable Plan Agreements.
3.13 Governing Law
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of Delaware, without giving
effect to principles of conflict of laws.
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FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT (this "Amendment") is entered into as of
December __, 1997, between BIG SMITH BRANDS, INC., a Delaware corporation
("Borrower"), and NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS
NATIONSCREDIT COMMERCIAL FUNDING DIVISION ("Lender").
WHEREAS, Borrower has requested that Lender amend the Loan and
Security Agreement dated December __, 1997 (the "Loan Agreement") in various
respects, and Lender has agreed to do so subject to the terms contained herein;
NOW THEREFORE, in consideration of the premises and mutual
agreements herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Amendments to Loan Agreement
(a) Section 1(e)(ii) of Schedule A to the Loan Agreement is hereby
amended and restated in its entirety as follows:
"1. Loan Limits for Revolving Loans:
(e) Additional Advance Rates:
(ii) Real Property Advance
Rate: N/A"
3. Other Amendments. This Amendment shall constitute an amendment to
the Loan Agreement and all of the other Loan Documents as appropriate to express
the agreements contained herein. In all other respects, the Loan Agreement and
the other Loan Documents shall remain unchanged and in full force and effect in
accordance with their original terms.
4. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce Lender to
enter into this Amendment, Borrower hereby warrants to Lender, as of the date
hereof, that:
(i) The representations and warranties of Borrower contained
in the Loan Agreement are true and correct as of the date hereof as
if made on the date hereof.
<PAGE>
(ii) All information, reports and other papers and data
heretofore furnished to Lender by Borrower in connection with this
Amendment, the Loan Agreement and the other Loan Documents are
accurate and correct in all material respects and complete insofar
as may be necessary to give Lender true and accurate knowledge of
the subject matter thereof. Borrower has disclosed to Lender every
fact of which it is aware which might adversely affect the business,
operations or financial condition of Borrower or the ability of
Borrower to perform its obligations under this Amendment, the Loan
Agreement or under any of the other Loan Documents. None of the
information furnished to Lender by or on behalf of Borrower
contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained
herein or therein not materially misleading.
(iii) No Event of Default or Default exists as of the date
hereof.
(b) Expenses. Borrower agrees to pay on demand all costs and
expenses of Lender (including the reasonable fees and expenses of outside
counsel for Lender) in connection with the preparation, negotiation, execution,
delivery and administration of this Amendment and all other instruments or
documents provided for herein or delivered in connection herewith. In addition,
Borrower agrees to pay, and save Lender harmless from all liability for, any
stamp or other taxes which may be payable in connection with the execution or
delivery of this Amendment or the Loan Agreement, as amended hereby, and the
execution and delivery of any instruments or documents provided for herein or
delivered or to be delivered hereunder or in connection herewith. All
obligations provided in this Section 4(b) shall survive any termination of this
Amendment and the Loan Agreement as amended hereby.
(c) Governing Law. This Amendment shall be a contract made under and
governed by the internal laws of the State of New York.
(d) Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
(e) Reference to Loan Agreement. On and after the effectiveness of
the amendment to the Loan Agreement accomplished hereby, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
like import, and each reference to the Loan Agreement in any other Loan
Documents, or other agreements, documents or other instruments executed and
delivered pursuant to the Loan Agreement, shall mean and be a reference to the
Loan Agreement, as amended by this Amendment.
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<PAGE>
(f) Successors. This Amendment shall be binding upon Borrower,
Lender and their respective successors and assigns, and shall inure to the
benefit of Borrower, Lender and the successors and assigns of Lenders.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
as of the date first above written.
BIG SMITH BRANDS, INC.
By ______________________
Its _____________________
NATIONSCREDIT COMMERCIAL
CORPORATION, THROUGH
ITS NATIONSCREDIT
COMMERCIAL FUNDING DIVISION
By ______________________
Its _____________________
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CONSENT AND SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS CONSENT AND SECOND AMENDMENT (this "Consent and
Amendment") is entered into as of April 22, 1999, between BIG SMITH BRANDS,
INC., a Delaware corporation ("Borrower"), and NATIONSCREDIT COMMERCIAL
CORPORATION, THROUGH ITS NATIONSCREDIT COMMERCIAL FUNDING DIVISION ("Lender").
WHEREAS, Borrower has advised Lender that it has entered into
an agreement to (a) sell substantially all of its assets relating to its
workwear products business, including machinery and equipment, raw materials,
work-in-process, trims and finished goods related thereto (other than real
property and certain intellectual property), to Walls Industries ("Buyer") and
(b) transfer all of its trademarks to a new entity known as Big Smith Holdings,
Inc., which will, among other things, license the trademarks to Buyer
(collectively, the "Transaction"); and
WHEREAS, Borrower has requested that Lender consent to the
Transaction and release its liens on the assets being sold and on the trademarks
being transferred, and Lender is willing to do so on the terms and conditions
set forth herein; and
WHEREAS, Borrower has requested that Lender amend the Loan and
Security Agreement between Borrower and Lender dated December 10, 1997, as
amended (the "Loan Agreement") in various respects, and Lender has agreed to do
so subject to the terms contained herein;
NOW THEREFORE, in consideration of the premises and mutual
agreements herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Consent. Subject to the terms and conditions set forth
herein, Lender hereby consents to the Transaction and agrees to release its
liens on the assets of Borrower being sold to Buyer and on the trademarks being
transferred to Big Smith Holdings, Inc.
3. Amendments to Loan Agreement
(a) Section 1(a) of Schedule A to the Loan Agreement is hereby
amended and restated in its entirety as follows:
"1. Loan Limits for Revolving Loans:
(a) Maximum Facility
Amount: $7,000,000"
<PAGE>
(b) Section 1(b)(ii) of Schedule A to the Loan Agreement
is hereby amended and restated in its entirety as follows:
"(ii) Inventory Advance Rate(s):
(A) Finished goods: 40%
(B) Raw materials: N/A
(C) Piece goods, work in process and trim: N/A"
(c) Section 1(d) of Schedule A to the Loan Agreement is
hereby amended and restated in its entirety as follows:
"(d) Inventory Sublimit(s):
(i) Overall sublimit on advances against
Eligible Inventory $2,000,000
(ii) Sublimit on advances against piece goods N/A
(iii) Sublimit on advances against raw materials N/A
(iv) Sublimit on advances against work in process N/A
(v) Sublimit on advances against trim N/A
(vi) Sublimit on advances against Inventory
in outlet stores N/A
(d) Section 1(e) of Schedule A to the Loan Agreement is
hereby amended and restated in its entirety as follows:
"(e) Additional Advance Rates
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<PAGE>
(i) Equipment Advance Rate: N/A
(ii) Real Property Advance Rate: $114,000, which advance rate
will be reduced to 0 in monthly
increments of $2,600 on the
first day of each calendar month
commencing May 1, 1999
(iii) Trademark Advance Rate: N/A"
(e) Section 6(h) of Schedule A to the Loan Agreement is
hereby amended and restated in its entirety as follows:
"(h) Early Termination Fee: 2.5% of the Maximum Facility
Amount if terminated on or prior
to December 10, 1999 and 2% of
the Maximum Facility Amount if
terminated after December 10,
1999 but before December 10,
2001"
(f) Section 7 of Schedule A to the Loan Agreement is
hereby amended and restated in its entirety as follows:
"7. Initial Maturity Date: December 10, 2001"
(g) Section 8(e) of Schedule A to the Loan Agreement is
hereby amended and restated in its entirety as follows:
"(e) Maximum Cumulative Net Loss: $450,000; if exceeded, Lender
shall have the right to reduce
the Accounts Advance Rate to
80%"
(h) Section 9 of Schedule A to the Loan Agreement is
hereby amended and restated in its entirety as follows:
"9. Borrower Information:
(a) Prior Names of Borrower: Gemini Marketing Associates,
Inc.
(b) Prior Trade Names of
Borrower: N/A
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<PAGE>
(c) Existing Trade Names of Big Smith Brands, Inc., Big
Borrower: Smith, Big Smith Mountain
Classics, Big Smith Vintage,
Big Smith Kids
(d) Inventory Locations: Big Smith Brands, Inc. (retail
store)
231 8th Street
Miami Beach, Florida 33139
(e) Other Locations: Big Smith Brands, Inc.
(Administrative Office)
7100 W. Camino Real, Suite 402
Boca Raton, Florida 33433
(f) Litigation: See attached
(g) Ownership of Borrower: N/A
(h) Subsidiaries (and ownership Big Smith Global, Ltd. (100%)
thereof): Big Smith Holdings Corp. (60%)
(i) Facsimile Numbers:
Borrower: (561) 367-8986
Lender: (212) 597-1666"
4. Conditions to Effectiveness. This Consent and Amendment
shall be effective from the date hereof upon receipt by Lender of (i) a fully
executed copy of this Consent and Amendment; (ii) proceeds of the sale of assets
to Buyer in an amount not less than $3,157,000, which amount shall be applied to
repayment of the Obligations as provided in the Loan Agreement; (iii) a duly
executed Consent and Amendment to the Deed of Trust in form and substance
satisfactory to Lender; and (iv) an accommodation fee of $45,000.
5. Other Amendments. This Consent and Amendment shall
constitute an amendment to the Loan Agreement and all of the other Loan
Documents as appropriate to express the agreements contained herein. In all
other respects, the Loan Agreement and the other Loan Documents shall remain
unchanged and in full force and effect in accordance with their original terms.
6. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce
Lender to enter into this Consent and Amendment, Borrower hereby warrants to
Lender, as of the date hereof, that:
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<PAGE>
(i) The representations and warranties of Borrower contained in the
Loan Agreement are true and correct as of the date hereof as if
made on the date hereof.
(ii) All information, reports and other papers and data heretofore
furnished to Lender by Borrower in connection with this Consent
and Amendment, the Loan Agreement and the other Loan Documents are
accurate and correct in all material respects and complete insofar
as may be necessary to give Lender true and accurate knowledge of
the subject matter thereof. Borrower has disclosed to Lender every
fact of which it is aware which might adversely affect the
business, operations or financial condition of Borrower or the
ability of Borrower to perform its obligations under this Consent
and Amendment, the Loan Agreement or under any of the other Loan
Documents. None of the information furnished to Lender by or on
behalf of Borrower contained any material misstatement of fact or
omitted to state a material fact or any fact necessary to make the
statements contained herein or therein not materially misleading.
(iii) No Event of Default or Default exists as of the date hereof.
(b) Expenses. Borrower agrees to pay on demand all costs and
expenses of Lender (including the reasonable fees and expenses of outside
counsel for Lender) in connection with the preparation, negotiation, execution,
delivery and administration of this Consent and Amendment and all other
instruments or documents provided for herein or delivered in connection
herewith. In addition, Borrower agrees to pay, and save Lender harmless from all
liability for, any stamp or other taxes which may be payable in connection with
the execution or delivery of this Consent and Amendment or the Loan Agreement,
as amended hereby, and the execution and delivery of any instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. All obligations provided in this Section 4(b) shall survive
any termination of this Consent and Amendment and the Loan Agreement as amended
hereby.
(c) Governing Law. This Consent and Amendment shall be a
contract made under and governed by the internal laws of the State of New York.
(d) Counterparts. This Consent and Amendment may be executed
in any number of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Consent and Amendment.
(e) Reference to Loan Agreement. On and after the
effectiveness of the amendment to the Loan Agreement accomplished hereby, each
reference in the Loan Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import, and each reference to the Loan Agreement in
any other Loan Documents, or other agreements,
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<PAGE>
documents or other instruments executed and delivered pursuant to the Loan
Agreement, shall mean and be a reference to the Loan Agreement, as amended by
this Consent and Amendment.
(f) Successors. This Consent and Amendment shall be binding
upon Borrower, Lender and their respective successors and assigns, and shall
inure to the benefit of Borrower, Lender and the successors and assigns of
Lender.
[Balance of Page Intentionally Left Blank}
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Consent and Amendment to
be executed by their respective officers thereunto duly authorized and delivered
as of the date first above written.
BIG SMITH BRANDS, INC.
By______________________________
Its_____________________________
NATIONSCREDIT COMMERCIAL
CORPORATION, THROUGH ITS
NATIONSCREDIT COMMERCIAL FUNDING
DIVISION
By______________________________
Its_____________________________
ACKNOWLEDGEMENT AND REAFFIRMATION OF INDIVIDUAL GUARANTY
The undersigned hereby acknowledges that he has received and
reviewed a copy of the foregoing Consent and Amendment to Loan and Security
Agreement between Big Smith Brands, Inc. and NationsCredit Commercial
Corporation, through its NationsCredit Commercial Funding Division of even date
herewith. The undersigned hereby reaffirms his obligations to Lender under and
as defined in that certain Individual Guaranty issued by the undersigned in
favor of Lender and dated December 5, 1997.
------------------------------------------
S. PETER LEBOWITZ
Dated: March ___, 1999
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DEMAND PROMISSORY NOTE
$200,000 DECEMBER 23, 1998
FOR VALUE RECEIVED, the undersigned Corporation promises to pay to the
order of S. Peter Lebowitz, the sum of Two Hundred Thousand Dollars
($200,000.00), together with interest of 8% per annum on the unpaid balance. The
entire unpaid principal and any accrued interest shall be fully and immediately
payable upon termination of The Big Smith Brands, Inc. "Revolving Credit
Facility and Term Loan" or January 1, 2000, whichever occurs sooner.
Upon default in making payment within fourteen days of demand, and provided
this note is turned over for collection, the undersigned Corporation agrees to
pay all reasonable legal fees and costs of collection to the extent permitted by
law. This note shall take effect as a sealed instrument and be enforced in
accordance with the laws of the State of Florida. All parties to this note waive
presentment, notice of non-payment, protest and notice of protest, and agree to
remain fully bound notwithstanding the release of any party, extension or
modification of any terms, or discharge of any collateral for this note.
In the presence of:
/s/ Howard H. Ward BIG SMITH BRANDS, INC.
- ---------------------
BY: /s/ Howard Kaplan
---------------------
HOWARD KAPLAN
DEMAND PROMISSORY NOTE
$250,000 DECEMBER 23, 1998
FOR VALUE RECEIVED, the undersigned Corporation promises to pay to the
order of S. Peter Lebowitz, the sum of Two Hundred and Fifty Thousand Dollars
($250,000.00), together with interest of 8% per annum on the unpaid balance. The
entire unpaid principal and any accrued interest shall be fully and immediately
payable UPON DEMAND of any holder thereof.
Upon default in making payment within fourteen days of demand, and
provided this note is turned over for collection, the undersigned Corporation
agrees to pay all reasonable legal fees and costs of collection to the extent
permitted by law. This note shall take effect as a sealed instrument and be
enforced in accordance with the laws of the State of Florida. All parties to
this note waive presentment, notice of non-payment, protest and notice of
protest, and agree to remain fully bound notwithstanding the release of any
party, extension or modification of any terms, or discharge of any collateral
for this note.
In the presence of:
/s/ Howard H. Ward BIG SMITH BRANDS, INC.
- ---------------------
BY: /s/ Howard Kaplan
---------------------
HOWARD KAPLAN
DASZKAL, BOLTON & MANELA
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
240 W. PALMETTO PARK ROAD, SUITE 300 BOCA RATON, FLORIDA 33432
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN, CPA, P.A.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the incorporation by reference in this Registration
Statement on Form SB-2 of Big Smith Brands, Inc., and Subsidiary for the years
ended December 31, 1998 and 1997, to our report dated February 26,1999,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us as "Experts" in such Prospectus.
/s/ Daszkal, Bolton & Manela CPAs
Boca Raton, Florida Daszkal, Bolton & Manela CPAs
July 14, 1999
