U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- -- of 1934
For the quarterly period ended June 30, 1999
Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from __________ to ___________.
Commission file number 01-13470
BIG SMITH BRANDS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3005371
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1700 S. Powerline Road, Suite G, Deerfield, Florida 33442
(Address of Principal Executive Offices)
(954) 725-3770
(Issuer's Telephone Number, Including Area Code)
7100 West Camino Real, Suite 402, Boca Raton, Florida 33433
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ----
Number of shares of common stock outstanding as of August 13, 1999: 8,613,546
Transitional Small Business Disclosure Format (check one): Yes___ No X
---
<PAGE>
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet as of June 30, 1999 3
Statements of Operations for the three
month and six month periods ended
June 30, 1999 and 1998 4
Statement of Stockholders' Equity for the
six months ended June 30, 1999 5
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 14
Item 1.Legal Proceedings 14
Item 2.Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 18
EXHIBIT INDEX 19
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1999
(Unaudited)
ASSETS
CURRENT ASSETS
<TABLE>
<CAPTION>
<S> <C>
Cash $ 225,224
Temporary investments 7,991
Accounts receivable, less allowance for doubtful accounts of $24,883 649,047
Inventories 587,995
Prepaid expenses 60,904
-----------
Total current assets 1,531,161
PROPERTY AND EQUIPMENT, At Cost
Land 20,000
Buildings & leasehold improvements 563,154
Equipment 534,796
Vehicles 0
-----------
1,117,950
Less accumulated depreciation 472,913
Net property and equipment 645,037
OTHER ASSETS
Due from B/S Partners L.L.C. 26,277
Security deposits 34,214
Certificate of deposit 200,000
Deferred non-compete compensation, per agreement 3,800,000
Deferred non-compete expenses, less accumulated amortization of $7,535 255,326
Deferred finance charges, less accumulated amortization of $225,240 570,882
Trademarks, less accumulated amortization of $134,697 381,164
-----------
Total other assets 5,267,863
-----------
Total assets $ 7,444,061
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Revolving line-of-credit $ 276,102
Current maturities of long-term debt 92,899
Accounts payable 2,472,399
Accrued restructuring/litigation 96,848
Accrued expenses 435,957
-----------
Total current liabilities 3,374,205
LONG-TERM DEBT 1,028,546
STOCKHOLDERS' GAIN
Deferred non-compete income 3,800,000
Common stock, $.01 par value; authorized 10,000,000 shares:
issued and outstanding 8,613,546 shares 86,136
Additional paid-in capital 10,076,301
Accumulated deficit (10,921,127)
------------
Total stockholders' gain 3,041,310
-----------
Total liabilities and stockholders' deficit $ 7,444,061
===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 35,072 $295,298 $ 277,530 $ 570,288
COST OF GOOD SOLD 20,039 269,246 314,178 501,574
------------- ------------ ----------- -----------
GROSS PROFIT (LOSS) 15,033 26,052 (36,648) 68,714
OPERATING EXPENSES
Selling 68,008 150,030 68,986 297,254
----------
General and administrative 219,482 236,913 523,145 405,393
------------- ------------- ----------- -----------
287,490 386,943 592,131 702,647
------------- ------------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (272,457) (360,891) (628,779) (633,933)
------------- ------------ ----------- -----------
OTHER INCOME (EXPENSE)
Miscellaneous income 826,224 826,199
Miscellaneous expenses (123,899) (237,919) (123,988)
Interest expense (73,067) (137,158) (202,415) (258,944)
Discontinued operations loss
(non-retained items) (370,485) (46,885) (370,485) (664,917)
------------ ------------- ----------- -----------
Total other income/ (Expense) 258,773 (184,043) 15,380 (1,047,849)
------------ ------------- ----------- -----------
Income gain (loss) before taxes (13,684) (544,934) (613,399) (1,681,782)
PROVISION FOR INCOME TAXES 0 0 0 0
------------ ------------- ------------ ------------
NET INCOME (LOSS) $ (13,684) $ (544,934) $ (613,399) $ (1,681,742
============ ============= ============ ============
NET INCOME (LOSS) PER SHARE $ (0.00) ( 0.08) $ (0.00) $ (0.24)
============ ============= ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 8,613,546 7,099,842 8,613,546 7,099,842
============ ============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock,
$.01 par value
Additional Retained
Common Paid-in earnings
Shares Stock capital (deficit) Total
------ --------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance (deficit), January 1, 1999 $7,354,683 $ 73,547 $ 9,130,767 $(10,307,727) $(1,103,413)
Debt issuance costs/registration (20,876) (20,876)
Private placement with warrants 1,100,000 11,000 968,000 979,000
Conversion of accounts payable
into common shares 158,863 1,589 (1,589) 0
Net loss - June 30, 1999 - - - (613,399) (613,399)
---------- -------- ----------- ------------- ------------
Balance (deficit) June 30, 1999 8,613,546 $ 86,136 $10,076,302 $(10,921,126) $ (758,688)
========== ======== =========== ============= ============
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
<TABLE>
<CAPTION>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED June 30, 1999 AND 1998
(Unaudited)
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (613,399) $(1,681,742)
Item not requiring cash:
Depreciation and amortization & accrued
property tax 215,335 185,093
Amortization of debenture discount 606,204
Changes in:
Accounts receivable 1,678,193 787,649
Inventories 2,752,746 (1,665,754)
Prepaid expenses 61,897 (73,731)
Other assets 297,203 (24,699)
Accounts payable and accrued expenses 1,426,801 582,463
----------- -----------
Net cash provided (used) in operating
activities 5,818,776 (1,284,517)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,501,565) (100,690)
Reductions temporary investments 3,192 (8,452)
----------- ------------
Net cash provided (used) in investing
activities (1,498,373) (109,142)
CASH FLOWS FROM FINANCING ACTIVITIES
Checks outstanding in excess of bank balance (181,596) 27,265
Net borrowings (repayments) under line-of-credit
agreement (3,635,214) 1,461,258
Net Proceeds from convertible debentures
Principal payments on long-term debt (391,286) (185,843)
Net cash provided (used) in financing
activities (4,208,096) 1,302,680
INCREASE (DECREASE) IN CASH 112,307 (90,979)
CASH, BEGINNING OF PERIOD 112,917 111,190
----------- -----------
CASH, END OF PERIOD $ 225,224 $ 20,211
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
Big Smith Brands, Inc. (the "Company") sells quality sportswear and
childrenswear under a variety of brand names, including Big Smith, Smith
Mountain Classics and Big Smith Vintage. The Company markets its products to
national chains and local stores worldwide.
Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements included in its Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998.
NOTE 2: INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-QSB of the Securities and Exchange
Commission and in accordance with generally accepted accounting principles
applicable to interim financial statements and do not include all of the
information and footnotes required by generally accepted accounting principles
for audited financial statements. The financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes of the Company for the year ended December 31, 1998, which are included in
its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
In the opinion of the management of the Company, the accompanying consolidated
financial statements reflect all adjustments necessary (consisting solely of
normal recurring adjustments) necessary to present fairly the financial position
of the Company as of June 30, 1999 and the results of its operations,
stockholders' equity and cash flows for the three month period and nine month
periods then ended.
The results of operations for the period ended June 30, 1999, are not
necessarily indicative of the results to be expected for the entire year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality."
NOTE 3: INCOME PER SHARE INFORMATION
Earnings per share are computed based on the weighted average number of common
shares outstanding during the period. Stock warrants and options outstanding are
common stock equivalents and are included in the calculation of earnings per
share to the extent they are dilutive using the treasury-stock method. Basic and
diluted earnings per share are the same.
NOTE 4: CONVERTIBLE DEBENTURES
In March 1998, the convertible long-term debt was converted into 2,900,000
shares of common stock. At the date of conversion there was $606,204 remaining
of unamortized discount which had been netted against the principal amount at
December 31, 1997. Upon conversion this unamortized portion resulted in a
non-cash, non-recurring charge against income of $606,204 in the period ended
March 31, 1998.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
Forward Looking-Statements. When used in this report, press releases and
elsewhere by the management of the Company from time to time, the words
"believes", "anticipates", and "expects" and similar expressions are intended to
identify forward-looking statements that involve certain risks and
uncertainties. Additionally, certain statements contained in this discussion may
be deemed forward-looking statements that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: the ability of the Company to meet its working
capital and liquidity needs, the status of relations between the Company, its
primary customers and distributors, the availability of long-term credit,
unanticipated changes in the U.S. and international economies, business
conditions and growth in the sportswear industry and the level of growth in
retail sales generally, the timely development and acceptance of new products,
the impact of competitive products and pricing, changes in the cost of raw
materials, changes in product mix, the outcome of litigation in which the
Company is involved, along with product delays and other risks detailed from
time to time in the Company's SEC reports. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Going Concern. The Company's viability as a going concern is dependent
upon its ability to raise sufficient working capital and to meet any liquidity
needs that may exceed the availability under the revolving loan and credit
facility. The Company experienced a loss from operations in 1998 and had a
working capital deficit at December 31, 1998. The Company experienced a loss
from operations of $613,399 for the six months ended June 30, 1999, and had a
working capital deficit of $1.84 million at June 30, 1999. Also, our liquidity
needs could exceed the amount of borrowings available under our Credit Facility.
See "--Liquidity and Capital Resources."
General
The discussion and analysis set forth below is for the three months
ended June 30, 1999 and June 30, 1998. It should be read in conjunction with our
Financial Statements and the related Notes thereto appearing elsewhere in this
quarterly report. The information presented for the six months ended June 30,
1999, and June 30, 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.
Overview
On April 22, 1999, we sold to Walls Industries, Inc., Cleburne, Texas
("Walls") 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 "Walls Sale and License"). The consummation of the Walls Sale and
License has changed our business substantially, primarily in that we no longer
manufacture, hold inventory or market workwear products. 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,
- 8 -
<PAGE>
o licensing Amita, srl, an Italian company, for the production, sale and
marketing of sweaters and outergarments to complement our sportswear
products,
o occupying on August 13, 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.
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."
A significant portion of our sales of sportswear for the six months
ended June 30, 1998 were to Gadzooks and Jean Country, representing 30% and 14%,
respectively. In the six months ended June 30, 1999, the Company's sales of
sportswear were to Gadzooks, representing 31% of sales, and to Marshall's,
representing 69% of sales. The sale to Marshall's was a discounted sale of last
season's inventory. Sales from the Company's retail store are reported
separately below in "Results of Operations." A significant portion of our sales
of childrenswear are to three customers. Sales to Busy Bee, Midstates, Inc and
Whealtbelt of children's line products represented approximately 2%, 14% and 7%,
respectively, of our net sales of childrenswear for the six months ended June
30, 1999 and 4%, 19% and 8%, respectively, for the three months ended June 30,
1998.
If any one or more of the Company's sportswear or childrenswear
customers were to cease or materially reduce its purchases from us, the
financial condition of the Company might be materially adversely affected. The
Company intends to continue to broaden the customer base for our products,
lessening the concentration in any one customer or small group of customers. As
of July 14, 1999, the Company entered into a sublicense with Do Duds, Inc. for
the design, manufacture and distribution of Big Smith branded childrenswear. The
sublicense terminates on July 31, 2002 and provides for royalties to the
Company.
In July 1999, the Company entered into an agreement with J & E Sales
Corp. and Sumida Corp. relating to the formation and operation of B/S Partners,
L.L.C. ("B/S Partners") to design, manufacture and distribute Big Smith branded
sportswear and streetwear. Pursuant to this agreement, the Company expects to
grant a sublicense to B/S Partners for the use of the Big Smith brand and to be
responsible for design and distribution of the Big Smith branded sportswear and
streetwear produced by B/S Partners.
On August 13, 1999, the Company occupied its new facility in Deerfield,
Florida. The new facility will serve as warehouse and distribution space as well
as the Company's executive offices. In addition, the Company intends to open a
retail outlet at the new facility. The Company's direct retail sales in South
Beach, Florida are higher margin sales than sales to wholesale customers and are
reported separately in the discussion and analysis below.
Results of Operations
The following discussion and analysis should be read in conjunction with
our financial statements appearing elsewhere in this Quarterly Report on Form
10-QSB. In the following discussion and analysis, references to "Retained Lines"
include the product lines retained by the Company after the Walls Sale and
License. Prior to the Walls Sale and License, childrenswear records did not
differentiate between younger childrenswear (sizes 9 months to children's size
7) and student sizes (children's sizes 8-16). The Company only retained the
younger childrenswear. In the discussion and analysis below, historical numbers
related to childrenswear reflect all childrenswear, whereas current quarter
numbers reflect only the retained younger childrenswear products. This change
may have a significant effect on the comparison of historical numbers to current
numbers.
Additionally, due to the Walls Sale and License the Company has
discontinued the operation of its workwear business and realized non-recurring
income from the sale of the workwear business.
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<PAGE>
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Net sales for the three months ended June 30, 1999 decreased by
$260,000, or 88.1%, to $35,000 from $290,000 for the three months ended June 30,
1999. Net sales for the three months ended June 30, 1999 of Big Smith
sportswear, childrenswear and Big Smith store products were $5,000, $17,000 and
$13,000 respectively, as compared with $236,000, $38,000 and $3,000,
respectively, for the three months ended June 30, 1998 The decrease in sales
resulted primarily from the Company's lack of sportswear product development for
1999. The Company expects to present its new sportswear product lines for the
spring 2000 season at the annual Men's Apparel Guild In California trade show
(the "MAGIC Show") in August 1999.
Cost of goods sold for the three months ended June 30, 1999 decreased by
$249,000, or 92.6% to $20,000 from, $269,000 for the three months ended June 30,
1998. The decrease resulted from the decrease in sales and the corresponding
decrease in inventory purchases of the sportswear line.
Gross profit for the three months ended June 30, 1999 was $15,000, or
42.9% of net sales, compared to $26,000, or 8.9% of net sales, for the three
months ended June 30, 1998 The increase in gross profit percentage was primarily
due to relatively higher gross margins on the Retained Lines and the even higher
margins realized on the sales at our retail store. For the three months ended
June 30, 1999, Big Smith sportswear, childrenswear and Big Smith store products
accounted for 14.1%, 49.2% and 36.7% of net sales, respectively, as compared
with 84.9%, 13.8% and 1.3% of net sales, respectively, for the three months
ended June 30, 1998.
Selling expenses decreased by $82,000 to $68,000, for the three months
ended June 30, 1999, from $150,000, for the three months ended June 30, 1998
This decrease in selling expenses resulted from decrease in the production of
samples, design charges and travel expenses. General and administrative expenses
were $219,000 for the three months ended June 30, 1999, compared with $237,000,
for the three months ended June 30, 1998, The decrease in the general and
administrative expenses was due to the re-organization of the Company after the
Walls Sales and License.
The Company's interest expense for the three months ended June 30, 1999
was $73,000 as compared with $137,000, for the three months ended June 30, 1998.
The decrease in interest expense was primarily due to decrease in borrowings and
loan fees.
As a result of the foregoing, the Company's net loss for the three
months ended June 30, 1999 was $14,000 compared to a net loss of $545,000 for
the three months ended June 30, 1998.
For the three months ended June 30, 1999, the Company had a loss from
discontinued operations of $370,000. This loss was comprised of non-recurring
income from the sale of assets of $177,000, loss from discontinued workwear
operations of $46,000, discontinued global operations of $47,000 and loss from
litigation relating to the Caterpillar Termination (as defined hereafter) of
$100,000. Loss from discontinued operations for the three months ended June 30,
1998 was $47,000 entirely related to litigation relating to the Caterpillar
Termination.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Net sales, for the six months ended June 30, 1999 decreased by $293,000,
or 51.4%, to $277,000 from $570,000 for the three months ended June 30, 1998.
Net sales for the three months ended June 30, 1999 of Big Smith sportswear,
childrenswear and Big Smith store products were $195,000, $50,000 and $32,000
respectively, as compared with $473,000, $94,000 and $3,000, respectively, for
the three months ended June 30, 1998 The decrease in sales resulted primarily
from the Company's lack of sportswear product development for 1999. The Company
expects to present its new sportswear product lines for the spring 2000 season
at the annual Men's Apparel Guild In California trade show (the "MAGIC Show") in
August 1999.
Cost of goods, sold for the six months ended June 30, 1999 decreased by
188,000, or 37.5% to $314,000 from, $502,000 for the six months ended June 30,
1998. The decrease was primarily due to the sale of prior season's sportswear
inventory at cost or at a smaller profit margin and the decrease in sales of the
sportswear line.
Gross loss for the six months ended June 30, 1999 was ($37,000),
compared to gross profit of $69,000, or 12.1% of net sales, for the six months
ended June 30, 1998 For the six months ended June 30, 1999, Big Smith
sportswear, childrenswear and Big Smith store products accounted for 70.3%,
17.9% and 11.8% of net sales, respectively, as compared with 83.0%, 16.4% and
0.6% of net sales, respectively, for the six months ended June 30, 1998.
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<PAGE>
Selling expenses decreased by $228,000 to $70,000, for the six months
ended June 30, 1999, from $298,000, for the six months ended June 30, 1998 This
decrease in selling expenses resulted from a decrease in the production of
samples, design charges and travel expenses. General and administrative expenses
were $523,000, for the six months ended June 30, 1999, compared with
$405,000,for the six months ended June 30, 1998, The increase in the general and
administrative expenses was due to the decrease in sales of the retained lines
and the reclassification of discontinued operations.
The Company's interest expense for the six months ended June 30, 1999
was $202,000 as compared with $259,000, for the six months ended June 30, 1998.
The decrease in interest expense was primarily due to decrease in borrowings and
loan fees, due to the Walls Sales and License.
As a result of the foregoing, the Company's net loss for the six months
ended June 30, 1999 was $614,000 compared to a net loss of $1,682,000 for the
six months ended June 30, 1998. Excluding the non- recurring convertible
amortization discount of $606,000, the Company's net loss for the six months
ended June 30, 1998 was $1,076,000.
For the six months ended June 30, 1999, the Company had a loss from
discontinued operations of $370,000. This loss was comprised of non-recurring
income from the sale of assets of $177,000, loss from discontinued workwear
operations of $46,000, discontinued global operations of $47,000 and loss from
litigation relating to the Caterpillar Termination (as defined hereafter) of
$100,000. Loss from discontinued operations for the six months ended June 30,
1998 was $665,000 related to loss from discontinued workwear operations. The
loss from operations in the six months ended June 30, 1998 included a $606,000
amortization of debenture discount. Excluding the non- recurring convertible
amortization discount of $606,000, the loss from discontinued operations for the
six months ended June 30, 1998 was $59,000.
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 its 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/payroll software is Y2K compliant. In addition, the Electronic
Data Information system, through which major customers electronically order
merchandise and invoices are electronically issued, is pending installation and
will be Y2K compliant. The Company's hardware is being replaced in connection
with our move to our new executive office and warehouse facility in Deerfield,
Florida. We estimate the total cost of the hardware upgrade to be approximately
$95,000.
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 (as defined below). The Company
experienced a loss from operations during the three months ended June 30, 1999
and June 30, 1998 and had a working capital deficiency at June 30, 1999. Also,
the Company's liquidity needs could exceed the amount of borrowings available
under the Credit Facility. At June 30, 1999, working capital deficiency was
approximately $1.84 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.
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.
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 $7 million after an amendment related to
the consummation of the Walls Sale and License, based
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<PAGE>
on a specified percentage of eligible accounts receivable, inventories and real
property. The amount outstanding under the Credit Facility as of June 30, 1999
was $385,000, with $276,000 on the revolving line-of-credit and 109,000 under
the term loan portion of the Credit Facility. At June 30, 1999 we had
approximately $53,000 of unused availability under the total credit facility.
The loan bears interest at prime rate plus 1.875% (9.625% at June 30, 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 20,000 shares of the Company's Common
Stock, and $200,000 of the Company's 12% promissory notes in a private placement
through D.L. Cromwell Investments, Inc. ("Cromwell"). Cromwell was paid a total
commission of $16,000. The units were sold to accredited investors without
registration under the 1933 Act, or the securities laws of any state, in
reliance on the exemptions contained in Rule 506 of Regulation D promulgated
under the 1933 Act. In December, 1998, the Company redeemed the 12% promissory
notes using funds borrowed from S. Peter Lebowitz.
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 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 $5.82 million for the six months ended June 30, 1999 as compared with
cash used in operating activities of $1.28 million for the six months ended June
30, 1998. This increase reflected primarily the $3,531,217 received from Walls,
for the assets ($270,000), inventory ($2,858,000), rent ($2,500) and non-compete
agreement (first payment $400,000). Excluding the payments received from Walls,
the cash used in operating activities was $2.29 million for the six months ended
June 30, 1999. 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.
Capital Expenditures
Capital expenditures totaled $726 for the three months ended June 30,
1999, primarily for computer programs needed for the Y2K compliance. The Company
anticipates further capital expenditures relating to the occupation in August
1999 of the Deerfield, Florida facility of approximately $61,000 consisting of
the following: air- condition system ($20,000), cable for the new computer
network ($9,000), security systems ($5,000), additional telephone equipment
($3,000), additional computers ($10,000), racks and display fixtures ($9,000)
and miscellaneous items ($5,000).
Intangible Assets
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
appointed one member of the Board of Directors of this subsidiary, and we
appointed all other directors. The Certificate of Incorporation of Holdings
restricts its activities solely to owning and licensing these trademarks.
Holdings 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.
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.
- 12 -
<PAGE>
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. As of July 14, 1999, we entered into a
sublicense with Do Duds, Inc. for the design, manufacture and distribution of
Big Smith branded childrenswear. The sublicense terminates on July 31, 2002 and
provides for royalties to the Company. We maintain quality and design control
over the products produced under these sublicenses.
Seasonality
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.
- 13 -
<PAGE>
PART II
OTHER INFORMATION
Item 1. 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.
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.
- 14 -
<PAGE>
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.
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.
Item 2. Changes in Securities.
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 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. The securities were issued without registration
in reliance on Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Stockholders held on April 20, 1999, 6,951,682
of the 7,354,683 shares eligible to vote at the meeting were present at the
meeting. Of the 6,951,682 shares present at the meeting, 4,021,771 were voted in
favor of the Walls Sale and License, 32,400 shares were voted against the Walls
Sale and License and 2,897,611 shares were withheld.
Of the 6,951,682 shares present at the meeting, 6,946,682 shares were
voted in favor of the election of each of the following persons to serve on the
Board of Directors of the Company: Julian Shaps, Glen Freeman and Theodore
Listerman. 5,000 shares were voted against the election of each of such nominees
and no shares were withheld. Of the 6,951,682 shares present at the meeting,
6,951,682 shares were voted in favor of the election of each of S. Peter
Lebowitz and Jack Schultz. No shares eligible to vote at the meeting were cast
against the election of these two nominees as directors or were withheld.
Of the 6,951,682 shares present at the meeting, 6,951,382 shares were
voted in favor of the ratification of the appointment of the firm of Daszkal,
Bolton & Manela, CPAs, as the Company's independent auditors for the fiscal year
ending December 31, 1999. 300 shares eligible to vote at the meeting were cast
against the approval of the appointment of Daszkal, Bolton & Manela, CPAs, and
no shares were withheld.
No other business was brought before the Annual Meeting of Stockholders.
Item 5. Other Information.
None.
- 15 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
EXHIBIT TABLE
Exhibit
No. Description
--- -----------
3(a) Form of 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**
27 Financial Data Schedule*******
- --------------------------
* Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2 (no. 33-85302), as
amended, declared effective on February 8, 1995.
** Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2, as filed on July
15, 1999.
*** 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.
- 16 -
<PAGE>
**** 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.
******* Filed herewith.
(b) Reports on Form 8-K
None.
- 17 -
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIG SMITH BRANDS, INC.
Date: August 16, 1998
/s/ Susan A. Leonhardt
------------------------------------
By: Susan A. Leonhardt
Director -- Accounting/
Administration and
Authorized Registrant Signer
(Principal Accounting and
Financial Officer)
- 18 -
<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**
27 Financial Data Schedule*******
- 19 -
<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.
** Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2, as filed on July
15, 1999.
*** 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.
******* Filed herewith.
- 20 -
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