SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[x] EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 28, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[x] EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file No. 33-98682
JD AMERICAN WORKWEAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 05-0460102
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification No.)
or organization)
46 Old Flat River Road
Coventry, Rhode Island 02816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 397-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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 __
Check if there is no disclosure of delinquent filings pursuant to Item
405 of Regulation S-K contained herein, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X].
State the issuer's revenues for its most recent fiscal year. $513,233.
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant at June 2, 1997 was approximately
$4,670,000 based upon the closing sale price of $4.75 for the Registrant's
Common Stock, $.002 par value, as reported by the National Association of
Securities Dealers OTC Bulletin Board on June 2, 1997.
As of June 11, 1997 the registrant had 1,783,407 shares of Common
Stock, $.002 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
JD AMERICAN WORKWEAR, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended February 28, 1997
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 4
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters 18
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 7. Financial Statements 22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 38
Item 10. Executive Compensation 40
Item 11. Security Ownership of Certain Beneficial Owners
and Management 45
Item 12. Certain Relationships and Related Transactions 46
PART IV
Item 13. Exhibit List and Reports on Form 8-K 48
PART I
ITEM 1. BUSINESS.
Recent Developments
On February 28, 1996 and April 10, 1996, respectively, closings were
held for the Company's initial public offering (the "Public Offering") which
was made pursuant to a Registration Statement filed with the Commission and
declared effective on January 11, 1996. Pursuant to the Public Offering,
the Company sold an aggregate of 327,768 units (the "Units"). The Public
Offering was underwritten on a best efforts basis by Merit Capital
Associates, Inc., Westport, Connecticut. Each Unit consisted of one (1)
share of Common Stock and one (1) redeemable Class A Common Stock Purchase
Warrant ("Class A Warrant"). Each Class A Warrant entitles the holder to
receive a unit of securities of the Company consisting of one (1) share of
Common Stock and one (1) redeemable Class B Common Stock Purchase Warrant
("Class B Warrant"). The exercise price of the Class A Warrants is $7.00
per unit, subject to adjustment, and $8.00 per share with respect to the
Class B Warrants, subject to adjustment. The Class A Warrants and the Class
B Warrants expire on January 10, 2001 and are subject to redemption under
certain conditions. Pursuant to the Public Offering, the Company received
gross offering proceeds of approximately $2,050,000. Following the second
closing of the Public Offering, the Company's Common Stock and Class A
Warrants commenced trading on the National Association of Securities
Dealers' OTC Bulletin Board under the symbols JDAW and JDAWW. See "Item 5 -
Market for the Registrant's Common Stock and Related Security Holder
Matters."
In addition, in connection with the Public Offering, holders of
various classes of the Company's debt agreed to convert the principal and
accrued interest of such indebtedness into shares of Common Stock of the
Company. Pursuant to these agreements (collectively the "Conversion
Agreements"), an aggregate of 349,225 shares of Common Stock were issued in
respect of approximately $943,575 aggregate principal and approximately
$190,425 of accrued interest. In addition, approximately $300,000 of the
proceeds of the offering were used to repay holders of classes of the
Company's indebtedness who did not agree to full conversion.
In July 1996, holders of the Company's 15% Purchase Order Financing
Note agreed to convert the principal of $195,571 and all accrued interest
thereon of $58,250 into Common Stock at a conversion price of $4.00 per
share, or an aggregate of 63,440 shares of Common Stock. From December 1996
through March 1997 the Company issued two investors $200,000 aggregate
principal amount of 10% Secured Convertible Notes due April 30, 1998.
Forward Looking Statements
When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Current stockholders
and prospective investors are cautioned that any forward-looking statements
are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various
factors. Such factors are described under the headings "Business-Certain
Considerations", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto.
General
The Company is primarily engaged in the business of designing,
manufacturing, marketing and selling commercial and industrial workwear
products. The Company was incorporated in Rhode Island in 1991 under the
name Jaque Dubois, Inc. and was re-incorporated in Delaware in 1994. In
July 1995, the Company's name was changed to JD American Workwear, Inc. The
Company's industrial workwear products consist of a complete line of
commercial and industrial footwear and workwear highlighted by it's two key
proprietary safety products, denim safety work jeans ("JD Safety Work
Jeans(TM)") and cotton/poly blend uniform style Safety Work Pants ("JD
Safety Uniform Pants(TM)"). The Company's initial product, JD Safety Work
Jeans, was designed and patented by David N. DeBaene, the Company's founder
and President. The Company was recently awarded a second patent with
respect to certain unique functional characteristics of its Safety Uniform
Pants. See "BUSINESS - Patents and Proprietary Rights." The Company
markets its products throughout the United States and internationally
principally for industrial and manufacturing applications.
The Industrial and Commercial Uniform Workwear Market
According to Moody's Industry Review (May 1995) the industrial and
commercial uniform work clothing market represents approximately $14.6
billion in annual sales. This market consists of thousands of businesses
with uniformed workers engaged in diverse fields such as agriculture,
chemicals, mining and exploration, manufacturing and fabrication,
transportation and shipping, pest control, utilities, flooring and
carpeting, construction and mechanical trades, and business and repair
services. There are approximately 45 million "blue collar" workers in the
United States in these industries. One common theme among these industries
is that they employ large work forces who spend a portion of their time
bending and kneeling on various surfaces, but do not spend enough time doing
so to make wearing external knee pads practical. In addition to being
impractical, external knee pads are cumbersome, and may cause circulation
problems.
Business Strategy
The Company's objective is to become a leading provider of safety
workwear products. To achieve this objective, the Company is pursuing a
business strategy which includes the following principal elements: (i)
expand product acceptance for its proprietary products - JD Safety Work
Jeans and JD Safety Uniform Pants; (ii) identify and pursue customers with
large manufacturing and construction bases of employees and safety
requirements, and (iii) offer a complete line of industrial workwear to
complement its proprietary core products.
Expand product acceptance for its proprietary products - JD Safety
Work Jeans, and JD Safety Uniform Pants To create brand awareness and
name recognition and ultimately achieve product acceptance of JD Safety Work
Jeans and JD Safety Uniform Pants, the Company will continue to attend
numerous tradeshows and safety seminars, advertise in targeted trade
journals and the general media, make direct mailings to customer lists and
develop its team of independent distributors and sales agents. The Company
has also commenced an awareness program with safety related agencies and
trade groups such as NIOSH, OSHA and the National Safety Council. The
Company also intends to strengthen its relationships with various labor
unions and contractors associations.
Identify and pursue customers with large manufacturing and
construction bases of employees and safety requirements. The Company's sales
and marketing efforts are focused primarily towards safety directors and
loss control and ergonomics specialists of industrial and commercial
businesses. Management believes that such sales and marketing efforts will
encourage the purchase and use of the Company's products by such businesses.
Offer a complete line of industrial workwear to complement its
proprietary core products. Due to the success of its Safety Work Pant and
Safety Work Jean the Company has identified an opportunity to fulfill the
greater needs of its customer base with an expanded line of products. The
Company has demonstrated it can deliver its customers nationally recognized
brand products at a competitive cost and greater personal service with a direct
sales force. The Company has entered into supply arrangements with several
manufacturers to supply a complete line of industrial workwear.
Products and Features
The Company offers two types of products. The first type is its JD
Proprietary Safety Workwear which is comprised of JD Safety Work Jeans and
JD Safety Uniform Pants. The second type is its Private Label Conventional
Workwear. The Company's private label conventional workwear line lacks the
proprietary safety features of the JD Safety Work Jeans and JD Safety
Uniform Pants, each described below. The conventional workwear line is not
fundamentally different from the products offered by its competitors. For
the fiscal year ended February 28, 1997, sales of the JD Safety Work Jeans
accounted for approximately 62%of revenues while sales of JD Safety Uniform
Pants accounted for approximately 31%. Nearly all of the Company's revenues
for fiscal 1995 and 1996 were attributable to sales of the JD Safety Work
Jeans. Sales of private label workwear and footwear have been
insignificant to date.
JD Proprietary Safety Workwear - The Company's has two patented safety
products, denim safety work jeans ("JD Safety Work Jeans(TM)") and
cotton/poly blend uniform style Safety Work Pants ("JD Safety Uniform
Pants(TM)"). Both JD Safety Work Jeans(TM) and JD Safety Uniform Pants are
offered fifty-five sizes. , JD Safety Uniform Pants are offered in 5
colors.
The Company has a manufacturing arrangement with Reed Manufacturing
Co., Inc. ("Reed") pursuant to which Reed manufactures both the JD Safety
Work Jeans and JD Safety Uniform Pants to the Company's specifications.
This arrangement should provide the Company with more operational
flexibility than the Company experienced with past manufacturers.
JD Safety Work Jeans. JD Safety Work Jeans are constructed of heavy
denim and leather, are designed for worker protection, durability and
comfort and are machine washable. They are produced from 100% American made
materials manufactured in America to the Company's strict design
specifications and typically retail in the $45 to $49 price range. The
Company's sales to catalogs and retailers are at a lower price than the
retail price. JD Safety Work Jeans feature a permanent built-in closed
cell polymer padding in the knee area secured in place by a moisture
resistant protective leather sheathing, providing a cushion between the knee
and any work surface. This feature offers protection and comfort when
kneeling or leaning on surfaces that are hard, damp, cold, slippery or
rough. JD Safety Work Jeans also feature high quality leather sheathing
strategically placed on the seat creating a surface which is extremely
durable, pliable and slip resistant. The Company believes that JD Safety
Work Jeans increase job productivity by offering the wearer a high level of
protection with much greater ease of movement than found in conventional
(external) knee pads. Independent lab tests performed at various times from
1993 through the date of this report have demonstrated that JD Safety Work
Jeans are more durable and more protective than most workwear, as measured
against accepted industry standards. Certain functional properties of JD
Safety Work Jeans are protected by a patent issued in 1991.
JD Safety Uniform Pants. JD Safety Uniform Pants are cotton/poly
blend uniform style work pants which incorporate many of the unique features
and concepts of JD Safety Work Jeans. JD Safety Uniform Pants were
developed following substantial materials research and testing and are
durable enough to withstand repeated high temperature industrial laundering.
Like JD Safety Work Jeans, they are designed for worker protection,
durability and comfort, are produced from 100% American made materials and
are manufactured in America to the Company's exact design specifications and
typically retail in the $39 to $49 price range. The Company's sales to
catalogs and retailers are at a lower price than the retail price. JD
Safety Uniform Pants also feature a permanent built-in closed cell polymer
padding in the knee area covered by a unique proprietary protective
sheathing material developed by the Company. This material will not absorb
most liquids commonly encountered by industrial workers, such as water,
pesticides, petroleum fuels, and many chemicals. In addition this sheathing
material is extremely durable, highly resistant to abrasion, punctures and
tears. The Company developed this product to meet what it believes is a
large and unmet need for work clothing with the protection, comfort and
durability of JD Safety Uniform Pants.
Private Label Conventional Workwear. In addition to its proprietary
work jeans and uniform pants described above, the Company also offers a
complete line of conventional workwear including plain uniform style pants,
utility shorts, jeans, industrial shirts, footwear, sportswear, activewear
and related products. These products are all quality products obtained from
leading vendors of manufactured to the COmpany's specifications, but do not
incorporate any of the proprietary features of the JD Safety Work Jeans of
JD Safety Uniform Pants.
Manufacturing and Sources of Supply
Proprietary Products The Company's JD Safety Work Jeans and JD Safety
Uniform Pants are manufactured in the United States exclusively from raw
materials produced in the United States. Some of the component parts and
subassemblies are manufactured by the Company, however, final assembly is
performed by Reed. The Company's proprietary products are manufactured to
strict Company specifications. The Company has a manufacturing arrangement
with Reed Manufacturing Co., Inc. ("Reed") pursuant to which Reed
manufactures both the JD Safety Work Jeans and JD Safety Uniform Pants to
the Company's specifications. This arrangement is not exclusive although
currently Reed is the Company's sole manufacturer. The Company believes
that Reed has the capacity to meet the Company's needs for the foreseeable
future. The Company has used other manufacturers in the past, but was
unable to continue these relationships because of the Company's capital
constraints and because initial production minimums required by such
manufacturers exceeded the Company's production needs and available
resources.
The Company's manufacturing arrangement with Reed provides more
operational flexibility than that offered by other manufacturers used by the
Company in the past. In particular, Reed's production line permits
significantly smaller minimum production runs in a given pant size. This
permits the Company to balance its inventory at a lower cost because Reed
will manufacture numerous sizes in a weekly batch run, rather than just one
size. This flexibility has been especially valuable in light of the
Company's limited resources. The absence of this flexibility plus the
Company's limited capital resources were the two factors which caused the
damaging inventory shortages experienced by the Company in 1994. These
shortages caused the back order problems described in "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Results of Operations."
In early 1996, the Company received notice from Reed that a $2.50 per
unit surcharge would be imposed by Reed as a result of erratic changes in
production schedules. As a result, the Company incurred surcharges for
production of safety uniform pants produced during the three months ended
April, 1996. Since April, 1996 the Company has sustained minimum production
levels required by Reed and has not incurred surcharges.
Presently, Reed manufactures one hundred percent of the Company's
proprietary products (JD Safety Work Jeans and JD Safety Uniform Pants).
The Company believes that its supply arrangement with Reed provides
consistency and quality of its products. While the Company believes that
the interruption of production of these products, by Reed, without
sufficient notice, would have a material adverse effect on the Company's
operations until alternative sources are secured, it also believes that
there are adequate alternative sources of manufacturing services. However,
if the Company were to receive sufficient notice, it believes that it can
obtain manufacturing services from a variety of sources.
The Company may in the future seek to establish relationships with
other manufacturing facilities having full scale capabilities to handle the
Company's product line. The non-proprietary products offered by the Company
are obtained from leading manufacturers, including Reed. Such products may
from time to time be manufactured outside the United States.
Raw Materials. Raw materials used in the manufacture of JD Safety Work
Jeans consist of denim fabric, leather sheathing and closed cell polymer
foam padding, each of which is supplied by several established sources. Raw
materials and components are supplied by both the Company and by Reed. The
raw materials used in the manufacture of JD Safety Uniform Pants consists of
twill fabrics (cotton/polyester blends), closed cell polymer foam padding,
and a proprietary mill fabric sheathing composed of products which are
commonly available. None of the principal raw materials used by the Company
in the manufacture of its products are limited by critical supply or single
origins. The Company's principal suppliers are Blackhawk Leather of
Milwaukee, Wisconsin (leather); Manufacturer's Rubber and Supply, Merrimac,
MA, (foam padding) and Brookwood Industries, New York, NY (sheathing).
Under the Company's arrangement with Reed , Reed obtains denim and twill
from its own sources. In addition, the Company has several of its own
sources of denim and twill.
The lead time between ordering and receipt of raw materials varies
with the materials involved, but generally ranges from three weeks to six
weeks. Generally, the Company must make advance purchases of most component
raw materials for the JD Safety Work Jeans and JD Safety Uniform Pants.
These raw materials include padding for the knees, sheathing for the knees
and buttocks as well as the twill fabric for the Safety Uniform Pants. The
Company has not experienced any difficulties in obtaining raw materials on
commercially reasonable terms, however, the disruption of its supply of
these materials would have a material adverse effect on the Company's
operations.
The Company's manufacturing activities are conducted in an
approximately 12,000 square foot facility which is leased by the Company.
See "Item 2 - Properties" below. The Company has 2 persons employed in
various manufacturing and assembly functions. See "Employees" below. The
Company cuts the knee pads and leather sheathing at its facility in
Coventry, Rhode Island and ships these components to Reed for integration
into Reed's production line. Reed purchases denim and twill directly from
major mills for manufacture of the Safety Work Jeans. Denim must be ordered
up to 12 weeks in advance, since it is typically manufactured quarterly.
Once the applicable materials are shipped to Reed, production time for
inventory of either JD Safety Work Jeans or Safety Uniform Pants is
approximately six to seven weeks including the time for delivery to the
Company.
Conventional Workwear and Footwear. The Company has agreements with two
suppliers for its conventional uniform workwear and footwear lines. The
Company's agreement for conventional workwear is with Reed, which
manufactures the Company's proprietary JD Safety Work Jeans and JD Safety
Uniform Pants. Pursuant to its arrangement with Reed, Reed has agreed to
supply, as a private label manufacturer, the various conventional workwear
product lines manufactured by Reed. The Company is obligated to affix its
own label to the goods before they may be resold. The entire line
manufactured by Reed is available for purchase and resale by the Company.
Reed has agreed to a fixed price schedule with the Company.
Mason Shoe of Chippewa Falls, Wisconsin is the Company's primary
footwear supplier and, pursuant to an agreement with the Company dated
October, 1995, has agreed to supply footwear products to the Company in
accordance with an agreed upon price schedule. Although the agreement
imposes "minimum limits" upon the number of styles and the volume of
purchases to be made by the Company, such limits have not been quantified by
Mason and to date Mason has not imposed any such minimums on the Company.
Neither of these agreements contain specified provisions regarding
term, and therefore are terminable by either party upon reasonable notice.
Quality Control
Management believes that maintaining high quality manufacturing
standards is important to its competitive position and also believes that
the Company has developed a reputation for high quality products. The
Company maintains quality control systems and procedures which it reviews
with its manufacturing personnel and which it modifies as appropriate. The
Company's quality control systems and procedures include inspection of each
fully assembled pant to verify performance and safety features.
Marketing and Sales
The Company's JD Safety Work Jeans and JD Safety Uniform Pants and its
private label conventional workwear are marketed and sold through a growing
network of independent sales representatives and distributors. In addition,
the Company's senior management devotes a substantial amount of time to the
overall coordination of the Company's sales to distributors, as well as to
the Company's direct sales.
Currently, the Company's marketing and sales efforts are segmented
into the following general categories (i) direct marketing sales, (ii)
catalog sales, (iii) distributor sales, and (iv) retail sales, each of which
is described below.
Direct Marketing Sales. The Company advertises and markets its
products through direct mailings, participation and exhibition of products
at industrial trade shows, personal solicitations at businesses which have
been identified as likely purchasers of the Company's products and industry
referrals. In April, 1996 and again in October, 1996, the Company's JD
Safety Work Jeans were featured in mailers sent by Mason Shoe Company as a
companion insert to Mason's own footwear catalog, to a significant portion
of Mason's retail customer base of approximately .8 million mechanics,
tradesmen and other blue collar workers. Based on the success of this
program, the Company's JD Safety Uniform Pants were featured in addition to
its JD Safety Jeans in major direct mail program in May, 1997. In
February, 1997, the Company's JD Safety Work Jeans were featured in a direct
mail marketing syndication with several major gasoline credit card
companies. For the fiscal years ended February 28, 1997 and 1996, direct
marketing sales accounted for approximately 20% and 37% of total sales,
respectively.
The Company has entered into a service partner arrangement with
American Linen Supply / Ameripride Services. American Linen is a leader in
the uniform rental industry. This relationship will enable the Company to
service the needs of customers requiring rental programs for their
employees.
The Company maintains a proprietary mailing list derived from various
sources consisting of both established customers and persons responding to
advertisements in trade magazines and similar publications. The Company
makes several mailings to this list annually. The Company intends to
continue to aggressively pursue direct marketing opportunities as its
customer base and product line grow.
Catalog Sales. The Company's JD Safety Work Jeans and JD Safety
Uniform Pants are sold to several catalog merchants for resale to consumers.
The Company's Proprietary Safety Workwear are featured in current issues of
JC Penney Workwear Catalog, The Sportsmans' Guide, Delta Safety Products,
Ergo Shop, Masterman's and Uniforms Plus More. Three million copies of the
JC Penney Workwear Catalog displaying JD Safety Work Jeans and/or JD Safety
Uniform Pants are mailed annually. In addition, the Company is currently
negotiating with Wear Guard to be featured in its Holiday mailing in
November, 1997. Sales to catalog merchants accounted for approximately 42%
of revenues for the fiscal year ended February 28, 1997.and approximately
14% for fiscal 1996.
In January, 1996 the Company completed its own 28 page catalog
featuring its complete line of workwear. The Company is distributing this
catalog to the Company's existing customer base and is using it as a sales
tool for the Company's independent representatives for field sales to
commercial and industrial accounts.
Distributor sales. The Company's JD Safety Work Jeans and JD Safety
Uniform Pants are sold to several distributors for resale to consumers.
The Company's distributor network consists of five domestic distributors.
Typically, distributors maintain inventory in order to offer rapid delivery
to their customers. Sales to distributors accounted for approximtely 38% of
revenues for the fiscal year ended February 28, 1997.
In April 1995, the Company signed a five year agreement with Shawnmark
Industries, Inc. ("Shawnmark") giving Shawnmark exclusive rights to sell the
Company's JD Safety Uniform Pants to the golf course industry. Pursuant to
this agreement, which contains no minimum order requirements, the Company
received a blanket purchase order against which the Company has shipped
approximately 3,300 pairs during fiscal 1997. Based upon the favorable
response received by Shawnmark in connection with its initial sales and
promotional activities the Company agreed in July 1995 to expand the
coverage of the exclusivity with Shawnmark to companies in the following
industries throughout the United States: (1) country clubs, including pro
shops; (2) landscaping/nursery business; (3) federal, state and municipal
parks and recreation departments; (4) seed, sod and turf producers and
installers; and (5) irrigation and sprinkler systems.
Retail Sales. During Fiscal 1997, the Company added to its customer
base Wheatbelt, a chain of independently owned franchise stores specializing
in agricultural and farming supplies, as well as Mills Fleet Farm, a
department store chain with 23 stores. Because of the high level of customer
support required for retail sales, the Company has deferred aggressive pursuit
of retail accounts until it has adequate capital resources to properly service
this distribution channel. Sales to retail merchants accounted for
approximately 7% of revenues for the fiscal year ended February 28, 1997.and
approximately 49% for fiscal 1996.
The Company handles merchandise returns on a customer by customer
basis. To date, returns have not been significant.
Independent Sales Representatives and Sales Arrangements
Since January 1993, the Company has been building a team of
independent sales representatives, regional sales directors, and sales
agents. The Company has established a representative network based
principally upon industry grouping of the account types which the
representative may solicit. While certain agreements also restrict the
territory in which a representative can solicit designated accounts, most
agreements simply limit the type of accounts which may be solicited. Other
accounts cannot be solicited without the prior approval of the Company.
For instance, one sales representative covers building supply distributors,
while another representative covers discount chains and retail clothing
stores. All representatives receive a commission of between 5.75% and 7% of
collected sales. This commission rate is reduced on integrated accounts
(i.e., accounts where the representative makes the introduction but
management assists in closing the sale). Currently, the Company has a
total of eleven active independent representatives covering a broad
spectrum of industries. In addition, certain of the Company's
representatives have been given exclusivity with respect to particular
industries.
Competition
The principal competitive factors in the Company's markets include
innovative product design, product quality, value, product performance,
durability, availability, established customer relationships, name
recognition, distribution and price. The Company competes principally on
the basis of innovative product design, quality, product performance and
value.
The Company competes against a number of companies, many of which have
longer operating histories, established markets and far greater financial,
advertising, research and development, manufacturing, marketing, personnel
and other resources than the Company currently has or may reasonably be
expected to have in the foreseeable future. This competition may have an
adverse effect on the ability of the Company to scale up and expand its
operations or operate profitability. Dominant competitors of conventional
workwear include Carhart Industries, Red Kap Industries a division of VF
Corp., Cintas Corp. and Angelica Corp. The Company believes that its
competitors may be engaged in the development and marketing of products
similar to those being developed and marketed by the Company. Accordingly,
some of these companies may launch products competitive with those currently
offered or under development by the Company.
Patents and Proprietary Rights
Certain functional features of the JD Safety Work Jeans are covered by
a U.S. Patent issued in 1991 (the "Jean Patent"). While the Jean Patent
offers a certain degree of protection, there can be no assurance that it
will provide the Company with any meaningful competitive advantages. The
Jean Patent was issued to David N. DeBaene and was thereupon assigned to the
Company in January 1995. In connection with the assignment the Company
agreed to pay Mr. DeBaene $50,000 for the Jean Patent. The Jean Patent
expires in the year 2008, seventeen years from the date of issuance.
In June 1997, the Company was granted a patent covering certain
functional features of its JD Safety Uniform Pants, While the Uniform Patent
offers a certain degree of protection, there can be no assurance that it
will provide the Company with any meaningful competitive advantages. The
Uniform Patent will expire in the year 2008. The functional features of the
invention on which patent protection has been granted under the Jean Patent
and Uniform Patent include wear and protective abrasion resistant
reinforcing panels that are strategically positioned onto work pant garments
in the seat and knee portions thereof, the wear and abrasion resistant
panels being formed of specially fabricated materials.
The Company has used several identifying trademarks in connection with
the sale of its products. The registered trademarks using the mark Jaque
Duboisr (the original name of the Company) are being gradually discontinued
due to the Company's name change. The Company has applied with the U.S.
Patent and Trademark office to register the name "JD American Workwear" and
certain other proprietary trademarks that are used to identify its
proprietary products. There can be no assurance that third parties will not
assert infringement claims in the future, the defense costs of which could
be extensive.
Customer Dependence
For fiscal 1997, the Company's four largest customers accounted for
approximately $300,000 or 60% of the Company's net sales for the fiscal
year, 21% to the largest customer (Mason Shoe Company), 17% to Shawnmark
Industries and 11% each to JC Penney and American Linen Supply. For fiscal
1996, the Company's three largest customers accounted for approximately
$45,500 or 46% of the Company's net sales for the fiscal year. Mills Fleet
Farm, the single largest customer, accounted for 32% of the Company's 1996
net sales. No other customers accounted for 10% or more of such sales.
Seasonality
The Company's business has been subject to seasonal trends based upon
climate, because the highly durable denim in JD Safety Work Jeans is heavier
(and consequently warmer) than the materials used in conventional work
jeans. Sales volume for JD Safety Work Jeans has been higher during the
fall and winter seasons and lower during the spring and summer seasons. The
Company believes that sales of JD Safety Uniform Pants and the conventional
workwear now offered by the Company will be less sensitive to the seasonal
trends which affect JD Safety Work Jeans. The Company believes, therefore,
that as its revenue mix changes to include greater uniform sales volume,
overall seasonality will be reduced.
Employees
At June 1, 1997, the Company had ten employees, eight of which are
full-time. Of the employees, three are performing executive and marketing
functions, two performing accounting and financial functions, two performing
production and fulfillment functions, and two performing general office
administration functions. With the exception of the Chief Financial Officer
and one person involved in production, all employees are full time. As
business conditions and available resources dictate, the Company expects to
hire additional employees to staff increased production, marketing and sales
efforts.
Certain Considerations
This Form 10-KSB, other documents of the Company and statements made
by members of management of the Company, in each case, may contain forward-
looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in such
forward-looking statements. Factors that might cause such a difference
include the following:
Accumulated Deficit and Operating Losses and Anticipated Continuing
Losses; Explanatory Language in Auditor's Report Regarding Ability to
Continue as Going Concern. The Company had an accumulated deficit at
February 28, 1997 of $3,334,457 and a incurred a net loss of $804,208
for the fiscal year ended February 28, 1997. Because the Company has
recently emerged from the development stage and is attempting to scale
up its operations, it is expected that the Company will continue to
sustain losses for part if not all of the fiscal year ending February
28, 1998 and perhaps thereafter. The Company had significant negative
cash flow from operations during each of fiscal 1995, 1996 and 1997
and the Company continues to experience negative cash flow as it
builds inventory to position itself to aggressively pursue market
opportunities. Additionally, the Company's financial statements are
presented on the basis that the Company is a going concern, which
contemplates the realization of assets and the satisfaction of
liabilities in the ordinary course of business. The report of the
Company's auditors concerning the Company's financial statements for
the two years ended February 28, 1997 includes an explanatory
paragraph expressing substantial doubt with respect to the Company's
ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. See Note A[1] to the Financial Statements and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Definite Need for Additional Financing. The Company will be required
to seek additional financing to meet its business strategy of
achieving significant market penetration of its JD Uniform Safety
Pants. Also, additional capital may be required if adequate levels of
revenue are not realized, if higher than anticipated costs are
incurred in the expansion of the Company's manufacturing and marketing
activities, or if product demand exceeds expected levels. There can
be no assurance that any additional financing thereby necessitated
will be available on acceptable terms to the Company, if at all.
Manufacturing, Distribution and Scale Up Risks. Although the Company
has established numerous customer relationships as well as
relationships with suppliers and manufacturers to conduct operations
at higher unit volumes, difficulties may be experienced in inventory
management, product distribution and other areas until the Company's
operations have been scaled up for some period of time. Since the
Company's manufacturing arrangement with Reed Manufacturing Co., Inc.
is relatively new, difficulties such as production delays and quality
control problems may be encountered. In the past, the Company
switched manufacturers on two occasions, once because of the Company's
capital constraints in meeting minimum production levels and once
because of the manufacturer's quality control problems. These
problems could recur. These past incidents caused an inventory
shortage which adversely affected the Company's operations. During
fiscal 1996, the Company was unable, due to capital constraints, to
maintain its production schedule with Reed, and thereby incurred
production surcharges of approximately $30,000. If production delays
or similar problems are encountered with Reed, the Company could be
similarly adversely affected. Stockholders should be aware that
unanticipated problems, many of which may be beyond the Company's
control, could be encountered. These include, but are not limited to,
product development, marketing and customer support problems,
increased competition, new manufacturer learning curve, and lack of
credibility with suppliers and customers. There can be no assurance
that the Company's products will achieve broad based market acceptance
or that in view of the extensive manufacturing, sales and marketing
and general overhead costs expected to be incurred by the Company,
that any sales will result in positive cash flow or profitable
operations.
Dependence on Existing Management; Part Time Chief Financial Officer.
The success of the Company is substantially dependent on the efforts
and abilities of its founder David N. DeBaene, Thomas A. Lisi, its
Vice President of Sales and Marketing and a Director of the Company,
and Anthony P. Santucci, its Chief Financial Officer. Decisions
concerning the Company's business and its management are and will
continue to be made or significantly influenced by Messrs. DeBaene,
Lisi and Santucci. The loss or interruption of their continued
services would have a materially adverse effect on the Company's
business operations and prospects. Messrs. Lisi and Santucci are
not required to devote full time to the Company. Mr. Santucci's
verbal employment agreement with the Company does not require him to
devote any minimum amount of time to the Company's business, although
it does require him to perform activities related to his office as he
shall be reasonably directed and use his best efforts, skills and
abilities to promote the best interests of the Company. In the event
that the Company's growth is rapid and sustained, the Company may be
forced to seek the services of a full time Chief Financial Officer if
Mr. Santucci is not in a position to render such services to the
Company. See "MANAGEMENT."
Control by Current Stockholders, Officers and Directors. Management
and affiliates of the Company currently beneficially own (including
shares they have the right to acquire) approximately 40% of the
outstanding Common Stock. These persons are and will continue to be
able to exercise control over the election of the Company's directors
and the appointment of officers. See "PRINCIPAL STOCKHOLDERS."
Limited Customer Base; Seasonality. A significant amount of the
Company's past sales have been derived from a relatively small number
of customers. Failure of the Company to expand its customer base
could have material adverse effect on the Company's results of
operations. The Company's business has been subject to seasonal
trends based upon climate, because the highly durable denim in JD
Safety Work Jeans is heavier (and consequently warmer) than the
materials used in conventional work jeans. Sales volume for JD Safety
Work Jeans is higher during the fall and winter seasons and declines
to lower levels during the spring and summer seasons. The Company
believes that sales of JD Safety Uniform Pants and the conventional
workwear now offered by the Company will be somewhat less sensitive to
the seasonal trends which affect JD Safety Work Jeans. The Company
believes, therefore, that as its revenue mix changes to include
greater uniform sales volume, overall seasonality will be reduced, but
not eliminated.
Dividend Policy. The Company has never declared or paid a dividend on
its Common Stock, and management expects that a substantial portion of
any future earnings will be retained for expansion or development of
the Company's business. The decision to pay dividends, if any, in the
future is within the discretion of the Board of Directors and will
depend upon the Company's earnings, capital requirements, financial
condition and other relevant factors such as contractual obligations.
Management, therefore, does not anticipate that the Company will pay
dividends on the Common Stock in the foreseeable future.
Significant Competition. The work clothing industry is highly
competitive and dominated by several large companies with
substantially greater financial resources and name recognition than
the Company. Many of these companies are well established and possess
substantially greater financial, technological and personnel resources
than the Company. The Company's ability to compete with such
competition will depend on the features, quality and price of its
products, customer service, effective sales and marketing programs and
upon its ability to design innovative products which meet the needs of
the marketplace. No assurances can be given that the Company will be
able to compete successfully. See "BUSINESS - Competition."
Sales and Marketing. The Company has a network of non-exclusive sales
representatives. The Company's future growth and profitability will
depend in part, on the expansion of this representative network and
later upon the building of an internal sales force, the hiring of a
sufficient number of qualified sales agents and upon their ability to
develop and continue relationships with commercial accounts. See
"BUSINESS - Sales and Marketing."
Limited Proprietary Protection. The Company holds two patents issued
by the United States Patent and Trademark Office ("PTO") on its
proprietary products - JD Safety Work Jeans and uniform style JD
Safety Uniform Pant. No assurance can be given that these patents
will provide any meaningful protection. The Company also has
registered trademarks in the United States on the names Jaque Duboisr,
The Original Jaque Dubois Carpenter Jeanr and The Original Jaque
Dubois Construction Jeanr which the Company is in the process of
discontinuing because of its name change. The Company does not
currently have any registered trademarks for the name JD American
Workwear, but has filed applications with the PTO to register that
name and certain proprietary trademarks that are currently and will in
the future be used to identify the Company's principal products. The
Company regards the non-patented and the non-copyrighted technology
and know-how related to its products as proprietary trade secrets and
attempts to protect them with confidentiality agreements and
confidentiality provisions in its employee handbook and in its various
agreements. Confidentiality agreements, however, may be difficult to
enforce, and, despite the precautions the Company has taken, it may be
possible for third parties to copy aspects of the Company's products
or, without authorization, to obtain and use information which the
Company regards as proprietary. See "BUSINESS - Patents and
Proprietary Rights."
Underwriter's Unit Purchase Option and Additional Options and
Warrants. In connection with the Public Offering the Company issued
to the Underwriter an option to purchase 32,777 Units exercisable at
$8.4375 per unit for a term of three years commencing two years from
the effective date of the Public Offering (the "Unit Purchase
Option"). In addition, the Company has reserved shares of its Common
Stock for issuance upon exercise of common stock purchase warrants,
including warrants issued to investors in connection with the
Company's 1995 private placements (collectively, the "Placement
Warrants") as well as warrants issued to an outside Director. None of
the Placement Warrants or other warrants have been exercised. The
holders of the Placement Warrants have certain registration rights
with respect to the public resale of the Common Stock underlying the
Placement Warrants. In addition, the Company has agreed with the
Underwriter, under certain circumstances, to register the Shares and
Class A Warrants subject to the Unit Purchase Option for distribution
to the public. Exercise of these registration rights could involve a
substantial expense to the Company and could prove a hindrance to
future financings.
The Company has reserved an aggregate of 465,648 shares of Common
Stock for issuance of Warrants to purchase Common Stock issued to
certain financial consultants associated with the underwriter of its
Public Offering. The Company has also reserved 250,000 shares of its
Common Stock for issuance upon exercise of stock options or similar
awards which may be granted pursuant to the Company's 1995 Stock
Option Plan (hereinafter the "Plan"), of which options to purchase an
aggregate of 240,500 shares have been issued. See "Certain
Relationships and Related Transactions." Exercise of the Unit
Purchase Option, the Placement Warrants, the outstanding warrants and
stock options, and those which may be granted under the Plan
(collectively, the "Convertible Securities"), will reduce the
percentage of Common Stock held by the public stockholders. Further,
the terms on which the Company could obtain additional capital during
the life of the Convertible Securities may be adversely affected, and
it should be expected that the holders of the Convertible Securities
would exercise them at a time when the Company would be able to obtain
equity capital on terms more favorable than those provided for by such
Convertible Securities.
ITEM 2. PROPERTIES
The Company currently leases 12,000 square feet of space of a 19,600
square foot facility in Coventry, Rhode Island pursuant to a lease expiring
August 1999. The monthly lease cost is approximately $2,000. The lease
contains an option, expiring on October 31, 1999, enabling the Company to
purchase the entire facility (including 3.5 acres of surrounding land) for
$150,000, provided the Company gives notice of exercise of the option by
September 30, 1999, and a purchase and sale agreement is executed by the
parties by November 10, 1999. Management believes that its current facility
will be satisfactory to meet the Company's needs for at least the next three
years. In the event the Company exercises its purchase option, the
surrounding land included in the purchase would enable the Company to expand
the size of its facility.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report,
no matters were submitted to a vote of security holders, though the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
(a) Market Information. Since the April 1996 closing of the Public
Offering, the Company's Common Stock has traded in the over-the-counter
market on the National Association of Securities Dealers, Inc. OTC Bulletin
Board System ("OTCBB") under the symbol "JDAW". The following table sets
forth the range of high and low closing bid quotations of the Common Stock
as reported by the OTCBB for each fiscal quarter since the Common Stock
commenced trading in April 1996. High and low bid quotations represent
prices between dealers without adjustment for retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices
-----------------
High Low
---- ---
<S> <C> <C>
FISCAL 1996
Fourth Quarter (February 29, 1996) No trading No trading
FISCAL 1997
First Quarter (April 12, 1996 through May 30, 1996) $6.750 $5.250
Second Quarter (June 1, 1996 through August 31, 1996) 6.500 4.000
Third Quarter (September 1, 1996 through November 30, 1996) 6.000 2.375
Fourth Quarter (December 1, 1996 through February 28, 1997) 5.000 3.500
</TABLE>
The closing bid price of the Company's Common Stock as reported by the
OTCBB was $4.75 on June 2, 1997.
(b) Holders. As of June 11, 1997 there were approximately 125 record
holders of the Company's Common Stock.
(c) Dividends. The Company has never declared or paid a dividend on
its Common Stock, and management expects that all or a substantial portion
of the Company's future earnings will be retained for expansion or
development of the Company's business. The decision to pay dividends, if
any, in the future is within the discretion of the Board of Directors and
will depend upon the Company's earnings, capital requirements, financial
condition and other relevant factors such as contractual obligations.
Management does not anticipate that the Company will pay dividends on the
Common Stock in the foreseeable future. Moreover, there can be no assurance
that dividends can or will ever be paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company has recently emerged from the development stage and
intends to scale up its operations. Since its inception, the Company has
been involved in the design and development of its products, the development
of its relationships with its suppliers and manufacturing contractors and
the marketing of its products through various distribution channels. First
commercial shipments of JD Safety Work Jeans were made in September 1992.
First commercial shipments of an early version of JD Safety Uniform Pants
were made during 1994. In March 1995, relatively small quantities of a
later version of JD Safety Uniform Pants were sold, and this version became
the working prototype for the JD Safety Uniform Pants currently manufactured
by the Company. The Company experienced during fiscal 1997, and may
experience during all or a portion of fiscal 1998, substantial fluctuations
in production volume, order receipt and shipments due to overall product
demand, inventory levels, working capital availability and ordering and
payment patterns of new and existing customers.
The Company's losses to date have principally been the result of
product design, testing and development expenses, marketing expenses,
initial production and administrative costs and professional fees. In
addition, the Company incurred higher than expected costs of goods sold
because of the low level of production (and commensurately low volume of raw
materials purchases), a higher proportion of sample goods to goods available
for sale, and the initial sewing and cutting of garments at prices
significantly higher than are now available to the Company. In November
1994, the Company lost its then current manufacturer because capital
constraints precluded the Company from meeting that manufacturer's minimum
production levels. Loss of the manufacturer resulted in inventory shortages
as goods were sold and caused the Company to back-order various sizes of JD
Safety Work Jeans to most of its customers, who thereupon refused to place
additional orders until existing back-orders were filled. Most of these
back orders were never filled. The Company was unable to procure a new
manufacturer until February 1995, with regular production commencing in
March, 1995. This manufacturer had difficulty sewing the Company's products
to its design specifications, forcing the Company to seek a replacement.
This second switch of manufacturers caused the Company to be unable to
obtain new finished goods inventory from May 1995 until October 1995. The
inventory shortage resulting from these interruptions is still affecting the
Company, and will continue to affect its operations until the Company's
operations are scaled up to higher volume levels. In September 1995, the
Company obtained a new manufacturing arrangement with Reed. This
arrangement provides more operational flexibility than that offered by prior
manufacturers of the Company. In particular, Reed's production line permits
significantly smaller minimum production runs in a given pant size. This
permits the Company to balance its inventory at a lower cost because Reed
will manufacture numerous sizes in a weekly batch run, rather than just one
size. This flexibility is especially valuable in light of the Company's
limited resources. The absence of this flexibility plus the Company's
limited capital resources were the two factors which caused the damaging
inventory shortages experienced by the Company.
The Company's business has been subject to seasonal trends based upon
climate, because the highly durable denim in JD Safety Work Jeans is heavier
(and consequently warmer) than the materials used in conventional work
jeans. Sales volume for JD Safety Work Jeans is higher during the fall and
winter seasons and declines to lower levels during the spring and summer
seasons. The Company believes that sales of JD Safety Uniform Pants and the
conventional workwear now offered by the Company will be less sensitive to
the seasonal trends which affect JD Safety Work Jeans. The Company
believes, therefore, that as its revenue mix changes to include greater
uniform sales volume, overall seasonality will be reduced.
For the reasons stated above, the Company believes that its results of
operations for the years ended February 28, 1997 are not necessarily
indicative of the Company's future results of operations. Following the
Public Offering, the Company significantly increased its expenditures for
inventory, salaries, advertising and marketing expenditures and other costs
to increase its level of production.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net sales for the year ended February 28, 1997 ("fiscal 1997")
increased 418.8% to $513,233 from $98,935 for the year ended February 29,
1996 ("fiscal 1996"). This increase was directly attributable to increases
in unit sales volume.
Gross margin during fiscal 1997 was 38% of net sales compared to 31%
of net sales for fiscal 1996.
Selling, general and administrative ("SG&A") expenses increased 3.6%
to $844,490 for fiscal 1997 from $815,171 for fiscal 1996. Increases in
payroll, research and development and consulting expenses were partially
offset by decreases in amortization of debt discount, amortization of loan
fees and advertising expenses. Interest expense for fiscal 1997 decreased
56.8% to $167,263 from $387,227 during fiscal 1996 due primarily to the
reduction on outstanding debt resulting from the conversion of several
classes of notes.
The net loss for fiscal 1997 was $804,208, compared to a net loss of
$1,171,988 for fiscal 1996. This decreased loss is directly attributable to
the increase in sales and gross profit from operations as well as the
decrease in interest costs.
Accounts receivable increased more than 20 fold to $221, 983 from
1996 to 1997 as a result of increased sales. Inventory increased to
$828,891 in fiscal 1997 due to a continuous flow of production throughout
the year. Finished goods inventory increased 54.3% to $623,171 at February
28, 1997 from $403,784 a year earlier. In January 1996, the Company began
production of its patented JD Safety Uniform Pants in anticipation of a
product launch in early fiscal 1997. The decrease in current liabilities in
fiscal 1997 was largely due to repayments of short-term borrowings and
accrued interest following the second closing of the IPO. Long-term debt
was reduced significantly to $840,199 at February 28, 1997 from
$1,002,565, primarily as a result of noteholders converting their notes to
common stock.
Fiscal Year 1996 Compared to Fiscal Year 1995
Net sales for the year ended February 29, 1996 ("fiscal 1996")
decreased 66.1% to $98,935 from $291,703 for the year ended February 28,
1995 ("fiscal 1995"). This decrease was directly attributable to decreases
in unit sales volume described in the following sentences. During fiscal
1996 and part of fiscal 1995, commencing in November of 1994, the Company
lost manufacturing capability and was precluded from aggressively seeking
orders for shipment. Spring orders are solicited during the preceding Fall
season. Although the Company temporarily resumed with a new manufacturer in
March 1995, this arrangement was terminated at the end of April 1995 due to
quality control problems. During this two month period approximately 10,000
pairs of finished goods were produced. Therefore, because the Company was
not assured of a continuous flow of new inventory, it did not aggressively
pursue sales. The Company's new manufacturing arrangement with Reed did
not commence until September 1995 and the Company did not begin to receive
finished goods until late November 1995. After November 1995 and during a
portion of the last quarter of fiscal 1996, the Company switched production
from JD Safety Work Jeans to Safety Uniforms to build inventory to commence
Uniform marketing. Therefore, although total year end inventory values were
higher at the end of fiscal 1996 than at the end of fiscal 1995, there were
smaller quantities of JD Safety Jeans available for sale. Gross margin
during fiscal 1996 was 30.7% of net sales compared to 25% of net sales for
fiscal 1995.
Selling, general and administrative ("SG&A") expenses increased 73.5%
to $815,172 for fiscal 1996 from $469,923 for fiscal 1995 due to increases
in amortization of debt discount ($141,947), amortization of loan fees
($86,790), professional fees related, among other things, to the Company's
private placement offering preceding this Public Offering ($58,803), selling
expenses ($45,117), consultants ($88,930), travel expenses associated with
finding a new manufacturer ($12,149) and payroll ($41,592). Interest
expense for fiscal 1996 increased 106% to $387,227 from $188,008 during
fiscal 1995 due to increased borrowing in an attempt to finance inventory
increases and fund expenses.
The net loss for fiscal 1996 was $1,171,988, compared to a net loss of
$585,047 for fiscal 1995. This increased loss is attributable to the
shortfall in sales and the increased SG&A and interest expenses discussed
above.
Inventory increased in fiscal 1996 due to raw materials acquisitions
of $147,026. Also, during fiscal 1996, finished goods inventory increased
by $225,058 as the Company was seeking to recover from the inventory
shortage caused by the loss of its manufacturer in November 1994. The
increase in liabilities in fiscal 1996 was largely due to an increase in
notes payable of $178,081, accrued expenses of $101,787, and accounts
payable of $86,776, all of which were used to fund procurement of raw
materials and finished goods.
Liquidity and Capital Resources
From its inception, the Company's principal sources of capital have
been provided by private placements of the Company's securities as well as
loans and capital contributions from the Company's principal stockholders.
In 1992, the Company obtained an SBA guaranteed loan due August 2002,
secured by real estate owned by a corporation controlled by one of the
Company's principal stockholders. At February 28, 1997, the principal
amount of such loan was approximately $276,706. The Company has no
revolving credit facility but has in the past, financed certain purchase
orders. The Company received approximately $1,044,000 of net proceeds from
the first closing of the Public Offering. At February 28, 1997, the Company
had working capital of $498,059. The report of the Company's independent
auditors on the Company's financial statements for each of the two years
ended February 28, 1997 contains an explanatory paragraph expressing
substantial doubt with respect to the Company's ability to continue as a
going concern. The Company anticipates meeting its future cash requirements
through the sale of products and obtaining additional financing. There can
be no assurance that sufficient cash can be generated from operations or
financing activities or that the Company will be able to operate profitably
in the future.
Net cash used in operating activities was $1,383,676 in fiscal 1997
compared to $1,223,341 in fiscal 1996. This increase was attributable to
the increase in losses from operations discussed above and a $201,411
increase in inventory, consisting mostly of finished goods. The increase in
the use of funds was partially offset by increases in accounts payable
($86,776) and accrued expenses ($101,787). Capital expenditures for fiscal
1997 were $28,773 and in fiscal 1996 were $31,738.
The Company utilized a significant portion of the proceeds of the
Public Offering in order to finance inventory buildup and to fund the
manufacture and marketing of its products. These expenditures were
necessary in order to purchase raw material inventory, finance manufacturing
costs in connection with cutting, sewing and constructing the products, and
in connection with promoting and marketing the Company's product line.
Inflation
The Company does not believe that inflation has had a material effect
on its results of operations during the past three fiscal years. There can
be no assurance that the Company's business will not be affected by
inflation in the future.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is included as a separate section of this
report commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
JD AMERICAN WORKWEAR, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
February 28, 1997
- ----------------------------------------------------------------------
<S> <C>
Assets
Cash and cash equivalents $ 7,634
Accounts receivable 221,983
Inventory (Note B) 828,891
Notes receivable 3,170
Prepaid expenses and other current assets 5,924
- ----------------------------------------------------------------
Total current assets 1,067,602
Property and equipment at cost, less accumulated
depreciation of $ 106,976 100,559
Intangible assets, at cost, less accumulated
amortization of $ 192,725 91,483
Other assets, net 9,928
- ----------------------------------------------------------------
$ 1,269,572
================================================================
Liabilities and Capital Deficit
Current portion of notes payable $ 277,134
Accounts payable and accrued expenses 219,529
Accrued interest on notes payable (Note D) 57,497
Short-term loans 15,024
- ----------------------------------------------------------------
Total current liabilities 569,184
Notes payable, less current portion 840,199
- ----------------------------------------------------------------
Total liabilities 1,409,383
- ----------------------------------------------------------------
Capital Deficit
Preferred stock, $ .001 par value; authorized, 1,000,000
shares, issued and outstanding, 0 shares
Common stock, $ .002 par value; authorized, 4,500,000
shares, issued and outstanding, 1,708,433 shares 3,417
Additional paid- in capital 3,191,229
Accumulated deficit (3,334,457)
- ----------------------------------------------------------------
Total capital deficit (139,811)
- ----------------------------------------------------------------
$ 1,269,572
================================================================
</TABLE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year ended February 28, 1997 February 29, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 513,233 $ 98,935
- ---------------------------------------------------------------------------------
Costs of goods sold 316,350 68,524
- ---------------------------------------------------------------------------------
196,883 30,411
Selling, general and administrative expenses 844,490 815,172
- ---------------------------------------------------------------------------------
Loss from operations (647,607) (784,761)
- ---------------------------------------------------------------------------------
Other income (expense)
Interest income 10,662 0
Interest expense (167,263) (387,227)
Other income 0 0
- ---------------------------------------------------------------------------------
(156,601) (387,227)
- ---------------------------------------------------------------------------------
Net loss $ (804,208) $(1,171,988)
=================================================================================
Net loss per common share (0.48) (1.21)
Weighted average number of shares
outstanding 1,676,305 969,762
</TABLE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
- ---------------------------------------------------------------------------------------
Year ended February 28, 1997 February 29, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (804,208) $(1,171,988)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 47,959 121,720
(Increase) decrease in assets
Accounts receivable (213,552) 13,279
Inventory (201,411) (376,345)
Prepaid expenses and other current assets (5,603) 0
Other assets (3,170) 1,430
Increase (decrease) in liabilities
Accounts payable and accrued expenses (203,691) 188,563
- ---------------------------------------------------------------------------------
Net cash used by operating activities (1,383,676) (1,223,341)
- ---------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (28,773) (31,738)
- ---------------------------------------------------------------------------------
Net cash used in investing activities (28,773) (31,738)
- ---------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from the issuance of common stock 544,888 1,562,500
Principal advances on notes payable and
long-term debt 15,024 1,380,000
Costs of raising capital (6,600) (299,880)
Repayments on notes payable and long-term debt (345,602) (173,599)
- ---------------------------------------------------------------------------------
Net cash provided by financing activities 207,710 2,469,021
- ---------------------------------------------------------------------------------
Increase (decrease) in cash (1,213,124) 1,213,942
Cash and cash equivalents, beginning of year 1,220,758 6,816
- ---------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 7,634 $ 1,220,758
=================================================================================
Supplemental information:
Interest paid $ 58,300 $ 48,486
See Note G-6 with respect to conversion of
debt.
</TABLE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
Common stock Additional
$ .002 Par Value Paid-in Accumulated
Shares Amount Capital Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1995 972,500 1,945 87,527 (1,358,261) (1,268,789)
Common stock warrants issued in conjunction with
notes payable 210,551 210,551
Costs related to private placement (24,152) (24,152)
Surrender and cancellation of shares issued in a
prior period (7,500) (15) 15 0
Initial public offering of stock, net of offering
costs (1st) 250,000 500 1,043,638 1,044,138
Shares issued to retire debt (12% notes) 349,225 698 1,133,121 1,133,819
Net loss for the year (1,171,988) (1,171,988)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, February 29, 1996 1,564,225 3,128 $2,450,700 ($2,530,249) ($ 76,421)
Initial public offering of stock, net of offering
costs 77,768 156 422,401 422,557
Shares issued to retire debt (15% notes) 63,440 127 253,634 253,761
Shares issued for services 3,000 6 4,494 4,500
Warrants issued for services 60,000 60,000
Net loss for the year (804,208) (804,208)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, February 28, 1997 1,708,433 $3,417 $3,191,229 ($3,334,457) ($ 139,811)
===========================================================================================================================
</TABLE>
JD AMERCAN WORKWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and its Significant Accounting Policies:
None.
(NOTE A) - The Company and its Significant Accounting Policies:
[1] The Company:
JD American Workwear, Inc. (the "Company") was incorporated in May of
1991. The Company designs, markets and distributes commercial and
industrial workwear.
Substantial losses have been incurred since inception and additional
future losses are anticipated as the Company continues to expand operations
and establish itself in the market. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty. As more fully described in Note G,
during the year ended February 28, 1997, the Company completed an initial
public offering of units consisting of one share of common stock and one
redeemable Class A common stock purchase warrant. Management believes that
these proceeds will enable the Company to meet its cash requirements in the
short term, but additional capital will be required to sustain operations
through February, 28, 1998. The Company anticipates meeting its future cash
requirements through the sale of products and obtaining additional
financing. There can be no assurance that sufficient cash can be generated
from operations or financing activities or that the Company will be able to
operate profitably in the future.
[2] Property and equipment:
Property and equipment are stated at cost. Depreciation is computed
using the straight-line and accelerated methods over the estimated useful
lives of the assets. Leasehold improvements are stated at cost and are
amortized over the shorter of the term of the lease or the estimated useful
life of the asset.
[3] Intangible assets:
Organization costs are stated at cost and are being amortized over 60
months. Loan origination fees are stated at cost and are amortized over the
life of the loan. Patent costs are stated at cost and are being amortized
over the estimated useful life of the patent. If the sum of the expected
future undiscounted cash flows related to patent costs is less than the
carrying amount of such costs, a loss will be recognized.
[4] Inventory:
Inventory is stated at the lower of cost or market value using the
first-in, first-out (FIFO) method.
[5] Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less, when acquired, to be cash equivalents.
[6] Revenue recognition:
Revenues are recognized when products are shipped. The Company
provides for returns and allowances, which have not been significant to
date, on a customer-by -customer basis when incurred. The Company will
provide for returns and allowances when it is determined that such an amount
would be significant.
[7] Loss per share:
Loss per share is calculated based on the average number of shares of
common stock outstanding during the period. For the years ended February
28, 1997 and February 29, 1996, options and warrants have not been
considered as they are anti-dilutive. Pursuant to the requirements of the
Securities and Exchange Commission, common shares, or other potentially
dilutive instruments issued by the Company during the twelve months
immediately preceding the initial filing of the registration statement for
the Company's initial public offering at prices below the expected public
offering price have been included in the calculation for the year ended
February 29, 1996 as if they were outstanding for that year.
[8] 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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
[9] Stock-based compensation:
The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123"). SFAS No. 123 establishes a fair-
value-based method of accounting for stock-based compensation plans. The
Company adopted the disclosure only alternative in 1996 which required
disclosure of the pro-forma effects on loss and loss per share as if SFAS
No. 123 had been adopted, as well as certain other information.
[10] New Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128 establishes new standards for computing and
presenting earnings per share. SFAS 128 is effective for periods ending
after December 15, 1997. The Company has not quantified what effect, if
any, the adoption of SFAS 128 will have on its net loss per share of
common stock.
(NOTE B) - Inventories:
The components of inventories at February 28, 1997 are as follows:
<TABLE>
<S> <C>
Raw materials $140,746
Finished goods 623,171
Work-in-process 64,974
--------
Total $828,891
========
</TABLE>
(NOTE C) - Property, Equipment and Intangible Assets:
Property and equipment at February 28, 1997 is summarized as follows:
<TABLE>
<CAPTION>
Amount Estimated Lives
in Years
---------------------------------------------------------------
<S> <C> <S>
Leasehold improvements $ 73,788 Five to ten
Furniture and fixtures 25,182 Five to seven
Machinery and equipment 91,119 Five to seven
Motor vehicle 17,446 Five
--------
Total 207,535
Less accumulated depreciation
and amortization (106,976)
--------
Balance $100,559
========
</TABLE>
Intangible assets at February 28, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Amount Estimated
Lives in Years
---------------------------
<S> <C> <C>
Loan origination fees $221,638 One to eight
Patent costs 52,070 Seventeen
Organization costs 10,500 Five to seven
--------
284,208
Less accumulated amortization (192,725)
--------
Balance $ 91,483
========
</TABLE>
(NOTE D) - Notes payable and long-term debt:
Details of the Company's notes payable and long-term debt as of
February 28, 1997 are as follows:
<TABLE>
<S> <C>
Note Payable to a bank at the prime rate plus 2 3/4%.
Payable in monthly installments of $8,000 principal,
plus accrued interest through August 2002,
The note is collateraized by all Company assets and
real estate owned by certain stockholders. The note is
guaranteed in part by the U.S. Small Business Administration.
In addition, the note is personnally guaranteed by certain
stockholders of the Company. $ 276,706
Note payable to the Small Business Loan Fund Corporation,
due in April, 1994 bearing interest at 5.4% annually.
The note is collateralized by the corporate assets of the
Company and is personnally guaranteed by the President
of the Company. 7,303
11% convertible subordinated notes due to investors.
The notes mature on September 30, 1998. The notes are
subordinate in right of payment to all indebtedness of the
Company outstanding as of August 15, 1995 or to be incurred
in the future. In conjunction with these notes, the Company
issued warrants to purchase 112,500 shares of the Company's
common stock at a price of $2.00 per share. The warrants
expire on September 30, 2000. The value assigned to the
warrants, amounting to $112,500. is being accounted for
as a debt discount and is being amortized over the
period of time the notes are outstanding. The effective
interest rate, including amrtization of the discount is
approximately 17%. These notes, including accrued interest
are convertible at the option of the holder, into common
stock at $5.40 per share, subject to adjustment as defined
in the agreement. 479,493
10% note due to an investor. The note is due on December
31, 1997. The note is collateralided by a mortgage on real
estate owned by the parents of the President of the Company. 40,000
12% note due to an investor. The note is due on December
31, 1997. The note is collateralided by a mortgage on real
estate owned by the parents of the President of the Company. 60,000
10% note issued to investors due on April 30, 1998. The
notes are subordinated in right of payment to all
indebtedness of the Company outstanding as of February
1997 or to be incurred in the future.
The notes are collateralized by a first priority
security interest in all inventory of the Company. 170,000
Loan payable due to an investor, due on February 11, 1997.
In addtion to principal and interest, the Company is to
pay a fee of $1,000 at maturity. 28,300
Non-interest bearing demand note due to a company owned by
the parents of the President of the Company. 3,000
Non-interest bearing demand note due to the parents
of the President of the Company. 37,980
Non-interest bearing demand note due to the President
of the Company. 4,551
Non-interest bearing note due to a nursing home owned
by the parents of the President of the Company
due October 1, 2000. The Company is to pay the lender
1% of annual net profits commencing October 1, 1993
until the note is paid in full. 10,000
----------
Total 1,117,333
Less current portion 277,134
----------
NET LONG-TERM DEBT $ 840,199
==========
</TABLE>
Interest expense charged to operations related to these notes for the years
ended February 28, 1997 and February 29, 1996 and February 28, 1995 was
$167,263 and $387,227, respectively.
See Note G with respect to the conversion of debt.
(NOTE D) - Notes Payable and Long-Term Debt: (continued)
The scheduled repayment of debt at February 28, 1997 is as follows:
<TABLE>
<CAPTION>
Year Ending
February 28, Amount
----------------------------------------------
<S> <C>
1998 $ 277,134
1999 745,493
2000 84,706
2001 10,000
----------
Total $1,117,333
==========
</TABLE>
Through February 28, 1996, the Company has not received any waivers
from the noteholders of past due notes. See Note J for payments of debt
subsequent to February 28, 1997.
(NOTE E) - Related Party Transactions:
As stated in NOTE D, the Company has had certain borrowing
transactions with related parties. Certain of these related party
obligations are not formalized by any written agreements and per management
and the related parties, are noninterest bearing. Accordingly, for the
years ended February 28, 1997 and February 29, 1996 there has been no
interest expense charged to operations related to these obligations.
Two of the Company's stockholders, one of whom is a director of the
Company, are the principal stockholders in a corporation that has provided
consulting services to the Company pursuant to various agreements.
The latest agreement gives the corporation the right to bid on future
overseas production of the Company, but does not contain any minimum
payments. See Note F [3] with regards to a consulting agreement between
the Company and the aforementioned director of the Company.
A director of the Company, who is also a warrant holder, is a partner
of a law firm that provides various legal services to the Company. During
fiscal 1997, fees of approximately $39,000 were incurred. During fiscal
1996, legal fees incurred to the law firm were approximately $220,000, which
amount included fees for two private placement and the public offering of
stock in 1996
(NOTE F) - Commitments and Contingency:
[1] Employment agreement:
The Company has an employment agreement with one key employee which
calls for minimum annual compensation of approximately $85,000 through
February 1998, with annual increases of $20,000 through February 2000.
This agreement also contains bonus stipulations based upon a percentage
of the Company's pre-tax income (as defined) for each fiscal year
in accordance with a sliding scale schedule contained in the agreements. No
bonus is earned unless and until the Company earns pre-tax income in excess
of $5 million.
[2] Leases:
During 1996. the Company leased facilities in West Warwick and
Coventry which expire through April 30, 1999. The Company may continue to
occupy the facilities under a tenant at will agreement upon the expiration
of the lease, until 30 days notice from either party, at a rate of $2,000
per month. The lease agreement contains an option which expires on October
30, 1999 whereby the Company may purchase the facility for $150,000.
Future annual rent under this lease is as follows:
<TABLE>
<CAPTION>
Year Ending
February 28,
------------
<S> <C>
1998 24,000
1999 24,000
2000 4,000
------
Total 52,000
</TABLE>
Rent expense charged to operations for the years ended February 28,
1997 and February 29, 1996, was $32,400 and $24,000, respectively.
[3] Consulting agreement:
The Company has entered into a consulting agreements with one of its
directors, whereby, the Company will pay the director a minimum of $10,000
annually until February 28, 1998. The agreement renews automatically for
periods of one year until terminated by either party.
In connection with their agreement to provide financial consulting
services to the Company for a three (3) year period commencing August 1996,
the Company issued on August 6, 1996 to each of Messrs. Joseph Lussier and
William Durkin, warrants to purchase 232,824 shares of Common Stock expiring
August 7, 2003, or a total of 465,648 shares. The warrants are divided into
two (2) classes, time warrants which contain vesting provisions based solely
on the expiration of time, and performance warrants, containing vesting
provisions based upon the price of the Company's Common Stock during various
periods. Messrs. Durkin and Lussier received 136,200 time warrants and
96,624 performance warrants each. As of the date of this report, none of
the performance warrants have vested, but a portion of such warrants may
potentially vest, depending on satisfaction of the vesting conditions
contained therein. At the date hereof, an aggregate of 217,920 (or 108,960
per holder) of the time warrants have vested and are exercisable. The
exercise price of all of the warrants is $4.00 per share, subject to
adjustment under certain circumstances. Messrs. Lussier and Durkin are
affiliated with Merit Capital Associates, Inc., the underwriter of the
Company's Public Offering. In connection with the issuance of the warrants,
the Company recorded an expense in its financial statements in accordance
with FASB No. 123 in the amount of $60,000 for the fiscal year ended
February 28, 1997.
[4] Settlement of dispute:
During the year ended February 29, 1996, the Company entered into an
agreement whereby a dispute over fees charged by a financial consultant was
settled. The Company agreed to pay the consultant $52,000 in settlement of
all past services. The financial statements as of February 29, 1996 reflect
this settlement.
(NOTE G) - Capitalization:
[1] Public offering of securities:
In February 1996, the Company completed a first closing of its initial
public offering of units (as defined below) whereby the Company sold 250,000
units for net proceeds, after offering costs, of approximately $1,044,000.
Each unit consists of one share of common stock and one redeemable Class A
common stock purchase warrant. The Class A warrants, which expire in January
2001, enable the holder to purchase a unit for $7, subject to adjustments,
consisting of one share of common stock and one redeemable Class B warrant.
Each Class B warrant will enable the holder to purchase one share of common
stock for $8, subject to adjustment. The Class B warrants also expire in
January 2001.
In April 1996, the Company has a second closing of its initial public
offering of units whereby the Company sold an additional 77,768 units for
net proceeds, after offering costs, of approximately $425,000.
In February 1996, the underwriter of the public offering, pursuant to
the underwriting agreement, received an option to purchase 25,000 units at a
price of $8.4375 per unit. The option becomes exercisable in January 1998
and expires in January 2001. In April 1996, the underwriter of the public
offering, pursuant to the underwriting agreement, received an option to
purchase an additional 7,768 units at a price of $8.4375 per unit. The
option becomes exercisable in January 1998 and expires in January 2001.
In conjunction with the offering, the holders of certain notes payable
exercised their right of conversion and converted approximately $1,134,000
of notes and accrued interest thereon into 349,225 shares of common stock.
[2] Common stock options:
The Company has established a stock option plan which provides for the
granting of options to purchase up to 250,000 shares of common stock.
Options activity for the years ended February 28, 1997 and February 29, 1996
is summarized as follows:
<TABLE>
<CAPTION>
Number Weighted-Average
of Option
Shares Price Per Share
----------------------------
<S> <C> <C>
Balance - February 29, 1995 12,500 $1.50
Granted 12,500 $2.00
-----------------
Balance - February 29, 1996 25,000 $1.75
Cancelled 12,500 $2.00
-----------------
Balance - February 28, 1997 12,500 $1.50
</TABLE>
Subsequent to the close of fiscal year ended February 28, 1997,
options to purchase 200,000 were granted to a consult at exercise price of
between $2.50-$3.25 per share.
Options for 12,500 shares are exercisable at February 28, 1997 at an
exercise price and a weighted average exercise price of $1.50 per share,
with a weighted average remaining contractual life of 9 years. At February
28, 1997, options to purchase 237,500 shares were available for
grants under the plan. See Note G [1] with respect to an option to
purchase units granted to the underwriter of the public offering.
The Company adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" but applies Accounting Principles
Board Opinion No. 25, and related interpretations in accounting for its
plans. There was no compensation expense recognised in fiscal 1996 or 1995.
If the Company had elected to recognise compensation cost for the plans based
on the fair value at the grant date for awqards under the plans, consistent
with the method prescribed by SFAS No. 123, net loss per share would have
been changed to the pro-forma amounts indicated below.
<TABLE>
<CAPTION>
Year ended February 28,
1997 1996
-----------------------
<S> <C> <C> <C>
Net loss As reported ($804,208) ($1,171,987)
Pro forma ($804,208) ($1,178,987)
Loss per share As reported ($0.48) ($1.21)
Pro forma ($0.48) ($1.21)
</TABLE>
The fair value of the Company's stock options used to compute pro
forma net loss and net loss per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1997 and 1996: dividend yield of
0 %; expected volitility of 30%; and risk free interest rate of 6.1%; and an
expected holding period of ten years.
[3] Warrants:
The Company has issued warrants to purchase common stock in connection
with the issuance of notes payable, the sale of units (Note G) [1], and as
compensation for professional service providers. Warrants outstanding at
February 28, 1997 are as follows:
<TABLE>
<CAPTION>
Number of
Underlying Exercise Price
Warrants to Purchase Shares Per Security Expiration Date
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock and Class B warrant 250,000 $7.00 January 3, 2001
Common stock 112,500 $2.00 September 30, 2000
Common stock 465,648 $4.00 August 7, 2003
</TABLE>
Additionally, the Company has reserved 327,768 shares of common stock
for conversion of Class B warrants.
[4] Repurchase of securities:
A noteholder and stockholder of the Company exchanged his note and
shares for a cash payment of $22,000. The amount due the noteholder,
including accrued interest, approximated $24,000. The Company recognized a
gain of approximately $2,000 in the year ended February 29, 1996.
[5] Reverse stock split:
On October 1, 1995, the Company's Board of Directors authorized a one
for two reverse stock split and changed the par value per share of common
stock from $.001 to $.002. Stockholders' equity at that date was restated
to give retroactive recognition to the reverse stock split and change in par
value for all periods presented. In addition, all references in the
financial statements to number of shares, per share amounts, stock option
data, and stock warrant data have also been restated.
[6] Conversion of 15% P.O. Financing Note:
In July 1996, holders of the Company's 15% Purchase Order Financing
Note agreed to convert the principal of $195,571 and all accrued interest
thereon of $58,250 into Common Stock at a conversion price of $4.00 per
share, or an aggregate of 63,440 shares of Common Stock.
(NOTE H) - Income Taxes:
At February 28, 1997, the Company had no current or deferred tax
liability.
At February 28, 1997, the Company had net operating losses for federal
income tax purposes amounting to approximately $2,700,000 that expire
through 2012 and had deferred tax assets due to the net operating loss
carryovers and temporary differences amounting to approximately $1,070,000,
all of which have been fully reserved since the likelihood of the realization
of the benefits cannot be established.
The Internal Revenue Code contains provisions which may limit the net
operating loss carryover available for use in any given year if significant
changes in ownership interest of the Company occur.
(NOTE I) - Major Customers:
For fiscal 1997, the Company's four largest customers accounted for
approximately $300,000 or 60% of the Company's net sales for the fiscal
year, 21% to the largest customer (Mason Shoe Company), 17% to Shawnmark
Industries and 11% each to JC Penney and American Linen Supply. For fiscal
1996, the Company's three largest customers accounted for approximately
$45,500 or 46% of the Company's net sales for the fiscal year. Mills Fleet
Farm, the single largest customer, accounted for 32% of the Company's 1996
net sales. No other customers accounted for 10% or more of such sales.
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors
JD American Workwear, Inc.
Coventry, Rhode Island 02186
We have audited the accompanying balance sheet of JD American
Workwear, Inc. as at February 28, 1997, and the related statements of
operations, changes in capital deficiency and cash flows for each of the
years in the two year period ended February 28, 1997. 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 audits 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 financial statements enumerated above present
fairly, in all material respects, the financial position of JD American
Workwear, Inc. as at February 28, 1997, and the results of its operations
and its cash flows for each of the years in the two year period ended
February 28, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, at February 28, 1997,
the Company had a working capital deficiency and a capital deficiency which
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are discussed in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
May 30, 1997
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company and their ages and
positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions with the Company
---- --- --------------------------
<S> <C> <C>
David N. DeBaene 38 Chairman of the Board, President and
Chief Executive Officer
Thomas A. Lisi 52 Vice President/Marketing, Director and
Consultant
Anthony P. Santucci 34 Chief Financial Officer
Gerard S. DiFiore 37 Assistant Secretary and Director
Elizabeth Cotter 35 Director
Dean M. Denuccio 31 Director
</TABLE>
David N. DeBaene, Chairman of the Board, President, and Chief
Executive Officer. Mr. DeBaene is the founder of the Company and was
responsible for obtaining the patent on the original Jaque Dubois
Construction Jean. Mr. DeBaene is responsible for all executive level
functions regarding the Company's operations and also shares responsibility
for raw materials sourcing and procurement, manufacturing arrangements,
product development, marketing and sales. Prior to founding the Company,
for 14 years Mr. DeBaene was an owner and/or foreman of a construction
company headquartered in West Warwick, Rhode Island, and also was involved
in nursing home administration from 1984 to 1990.
Elizabeth Cotter, Director. Prior to joining the Company in January
1991, Ms. Cotter was a mortgage consultant for Providence Funding Corp. from
1989 through 1991. From March 1985 to 1989, Ms. Cotter was the director of
New England sales for Ready Capital Corp., a mortgage banking company. Ms.
Cotter holds a dual B.A./B.S. Bachelors degree from Boston University School
of Management (marketing and organizational behavior), and has taken
graduate level courses in the MBA program of the University of Rhode Island.
Ms. Cotter is the wife of David N. DeBaene.
Anthony P. Santucci, Chief Financial Officer. Mr. Santucci became the
Company's Chief Financial Officer in September 1996. Mr. Santucci is also
President of Bevco Plastics Company ("Bevco") a privately held corporation
engaged in manufacturing and distribution of flexible vinyl products. From
1992 to 1995, Mr. Santucci was Chief Financial Officer of South Pointe
Enterprises, Inc., a publicly held company engaged in distribution of home
videos. While at South Pointe, Mr. Santucci's's responsibilities included
all accounting, financial reporting, financial planning, risk management,
tax functions, and managing a staff of 160 20 persons. During 1990 and
1991, Mr. Santucci was Controller of Weingeroff Enterprises, Inc., a
privately held jewelry manufacturing company. From 1988 to 1990, Mr.
Santucci was Finance Manager of A. Santucci Wholesale, Inc., a family owned
and operated wholesale food service distributor. From 1984 to 1988, Mr.
Santucci was a senior accountant with Ernst & Young, LLP (formerly Arthur
Young and Company). In 1985 Mr. Santucci received a B.S. in Business
Administration from Bryant College.
Thomas A. Lisi, Vice President/Marketing, Director and Consultant.
Mr. Lisi became a director of the Company in January 1994, and became Vice
President of Marketing in June 1996. Mr. Lisi brings 25 years of experience
in the apparel industry to the Company. Mr. Lisi is a principal stockholder
and Chief Executive Officer of Geronimo Leathers, Inc. ("Geronimo"), a
manufacturer of mens leather apparel and outerwear with worldwide
distribution. Geronimo also specializes as a design and manufacturing
consultant to the outerwear trade and is a high volume private label
manufacturer to prominent merchants. Mr. Lisi is a member of the executive
committee of the Leather Apparel Association and is considered by his peers
to be a leading authority in the leather apparel industry. Mr. Lisi and the
Company are parties to a sales representative agreement and a consulting
agreement, and Geronimo and the Company are parties to an overseas agency
agreement. See "CERTAIN TRANSACTIONS."
Gerard S. DiFiore, Esq., Assistant Secretary and Director. Mr.
DiFiore became a Director of the Company in February 1995 and has been
Assistant Secretary of the Company since January 1994. For more than the
past ten years, Mr. DiFiore has practiced law concentrating in the areas of
securities, corporate, banking and business law. Since 1995, Mr. DiFiore
has been a partner with Herten, Burstein, Sheridan, Cevasco, Bottinelli &
Litt. From 1990 to 1994, Mr. DiFiore was associated with Robinson, St. John
& Wayne, a Newark, New Jersey firm. From 1987 to 1990, Mr. DiFiore was
associated with Bachner, Tally, Polevoy & Misher of New York City. From
1984 to 1987, Mr. DiFiore was an attorney in the Division of Corporation
Finance with the U.S. Securities and Exchange Commission, Washington, DC.
Mr. DiFiore is a member of the American Bar Association (Member, Business
Law Section, Committee Member, Federal Regulation of Securities) and the New
Jersey Bar Association (Committee Member, Corporate and Securities Law
Committee). In 1984, Mr. DiFiore received a J.D. cum laude from Suffolk
University Law School, Boston, Massachusetts, and in 1981 received a B.A. in
Economics with honors from the University of Vermont.
Dean M. Denuccio, Director. Mr. Denuccio commenced serving as a
director upon the consummation of the Public Offering. Mr. Denuccio has
since 1994 been the Chief Executive Officer and principal stockholder of
Deanco Enterprises, Inc., a Providence, Rhode Island based home care health
provider which employs up to 200 home health care professionals. From 1988
to 1991, Mr. Denuccio was Chief Executive Officer and principal stockholder
of Personnel Network Services, a privately owned health care staffing
agency. From 1985 to 1988, Mr. Denuccio was a certified public accountant
with Ernest A. Almonte CPAs (1985-1987) and Ernst & Young, CPAs (1987-1988).
In 1986 Mr. Denuccio received a B.S. in Business Administration from Bryant
College, and in 1991 received a JD from University of Tulsa Law School.
Compliance with Section 16(a) of the Securities Exchange of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
Exchange Act") requires officers, directors and persons who own more than
10% of a class of equity securities registered pursuant to Section 12 of the
Exchange Act to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the principal exchange upon which
such securities are traded or quoted. Officers, directors and greater than
10% shareholders are also required by SEC regulation to furnish copies of
any such reports filed pursuant to Section 16(a) with the Company. Since
the Company currently does not have a class of equity securities registered
pursuant to Section 12 of the Exchange Act, there is no obligation upon the
Company's officers, directors and 10% or greater stockholders to file any
such reports pursuant to Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary for the fiscal years ended
February 28, 1997, 1996, and 1995, respectively, of the cash and non-cash
compensation awarded, paid or accrued, by the Company to the President and
CEO and to the Company's second most highly compensated executive officer
who was serving as such at the end of fiscal 1997 (collectively, the "named
executive officers"). The Company at no time during the last three fiscal
years had more than two named executive officers and no officer of the
company earned annual compensation of $100,000 or more.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Name and Fiscal Options by All Other
Principal Position Year Annual Compensation No. of Shares Compensation
Salary Bonus - -
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David N. DeBaene, 1997(1) $85,000 - - -
President and CEO 1996 57,557 0 - -
1995 42,498 650 - -
Anthony P. Santucci, 1997 7,500 - - -
CFO 1996 - - - -
1995 - - - -
<F1> Under his employment agreement, Mr. DeBaene was entitled to be paid at
a rate of $85,000 per annum, however, in order to conserve cash, has
agreed to defer approximately $10,000 of such compensation.
</TABLE>
The Company does not have any annuity, retirement, pension, deferred
or incentive compensation plan or arrangement under which any executive
officers are entitled to benefits, nor does the Company have any long-term
incentive plan pursuant to which performance units or other forms or
compensation are paid. Executive officers who qualify will be permitted to
participate in the Company's 1995 Stock Option Plan which was adopted in
February 1995. See "Stock Option Plan." Executive officers may participate
in group life, health and hospitalization plans if and when such plans are
available generally to all employees.
Employment Agreements
Effective as of March 1, 1995, the Company entered into an employment
agreement with each of David N. DeBaene and Elizabeth Cotter for their
services as Chairman and President and Executive Vice President,
respectively. The agreement is for a base term of five (5) years, and is
thereafter renewable for additional periods of one (1) year with respect to
Ms. Cotter and three (3) years with respect to Mr. DeBaene, unless the
Company gives notice to the contrary. In accordance with his agreement with
the Company, Mr. DeBaene's first year base salary is $65,000, increasing
annually thereafter in $20,000 increments, and Ms. Cotter's first year
annual base salary is $38,000, increasing annually thereafter in $10,000
increments. In order to conserve resources, Mr. DeBaene has deferred the
implementation of his salary increase. In addition, each executive Mr.
DeBaene is entitled to receive an annual cash bonus based upon a percentage
of the Company's pre-tax income (as defined) for each fiscal year in
accordance with a sliding scale schedule contained in the agreements. No
bonus is payable unless and until the Company earns pre-tax income in excess
of $5 million. The agreement also provides for certain non-competition and
non-disclosure covenants of the executive and for certain Company paid
fringe benefits such as disability insurance and inclusion in pension,
profit sharing, stock option, savings, hospitalization and other benefit
plans at such times as the Company shall adopt them. Mr. DeBaene is not
eligible to receive awards under the Company's 1995 Stock Option Plan since
he is on the Committee administering the Plan.
The agreement of Mr. DeBaene also provide for the payment of certain
additional severance compensation of $250,000 in the event that at any time
during the term thereof (i) the agreement is terminated by the Company
without cause (as defined therein), or (ii) terminated by the employee due
to a change in control (as defined therein). The Company believes that the
change in control provisions in these agreements may tend to discourage
attempts to acquire a controlling interest in the Company and may also tend
to make the removal of management more difficult; however, the Company
believes such provisions provide security and decision-making independence
for its executive officers.
Effective as of June 1, 1996, the Company entered into an Consulting
Agreement with Thomas A. Lisi for his services on a part-time basis as Vice
President/Marketing & Manufacturing. Mr. Lisi is obligated to render
services of not more than eight hours per week at the Company's headquarters
facility and is compensated at a rate of $42.50 per hour, without benefits.
The Consulting Agreement is for an initial trial term of three months
subject to termination by either party upon 30 days prior written notice.
After the expiration of the trial period, the agreement will continue for
successive three month periods, unless terminated by either party.
Director Compensation
The Directors of the Company are elected annually and serve until the
next annual meeting of stockholders and until a successor shall have been
duly elected and qualified. Directors of the Company who are not employees
or consultants do not receive any compensation for their services as members
of the Board of Directors, but are reimbursed for expenses incurred in
connection with their attendance at meetings of the Board of Directors.
Directors may be removed with or without cause by a vote of the majority of
the stockholders then entitled to vote.
Compensation Committee
David N. DeBaene and Gerard S. DiFiore are members of the Compensation
Committee which reviews and makes recommendations with respect to
compensation of officers, employees and consultants, including the granting
of options under the Company's 1995 Stock Option Plan.
Stock Option Plan
The 1995 Stock Option Plan. The Company's 1995 Stock Option Plan (the
"Plan") adopted by the Company's Board of Directors in February 1995 and by
the stockholders in July 1995, provides for the issuance of options
("Options") to employees, officers and, under certain circumstances,
directors of and consultants to the Company ("Eligible Participants").
Options granted under the plan may be either "incentive stock options"
("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or "nonqualified stock options" ("NQSOs"). The Plan
does not provide for the issuance of stock appreciation rights but does
permit the granting of restricted stock and deferred stock awards. A total
of 250,000 shares of Common Stock is currently reserved for issuance under
the Plan. The Plan is administered by David N. DeBaene and Gerald S.
DiFiore, who constitute the Compensation Committee of the Board of Directors
("Committee"). The Committee has sole discretion and authority, consistent
with the provisions of the Plan, to select the Eligible Participants to whom
Options will be granted under the Plan, the number of shares which will be
covered by each Option and the form and terms of the agreement to be used.
All employees and officers of the Company (except for members of the
Committee) are eligible to participate in the Plan. Directors are eligible
to participate only if they have been declared to be "eligible directors" by
resolution of the Board of Directors. Members of the Committee are not
Eligible Participants. At February 28, 1997, approximately 9 persons were
eligible to receive ISOs under the Plan.
Options. The Committee is empowered to determine the exercise price
of Options granted under the Plan, but the exercise price of ISOs must be
equal to or greater than the fair market value of a share of Common Stock on
the date the Option is granted (110% with respect to optionees who own at
least 10% of the outstanding Common Stock). The exercise price of NQSOs
granted under the Plan must not be less than 85% of the fair market value of
the Common Stock on the date the Option is granted. The Committee has the
authority to determine the time or times at which Options granted under the
Plan become exercisable, but the Options expire no later than ten years from
the date of grant (five years with respect to Optionees who own at least 10%
of the outstanding Common Stock of the Company). The Options are
nontransferable, other than by will and the laws of descent, and generally
may be exercised only by an employee while employed by the Company or within
90 days after termination of employment (one year from termination resulting
from death or disability).
During fiscal 1996, one Option was granted under the Plan to Mr.
Zambelli, the Company's Chief Financial Officer. The Option was an ISO to
purchase 12,500 shares at an exercise price of $2.00 per share. There were
no other grants of Options under the Plan during fiscal 1997, although
after the close of the fiscal year, NQSOs to purchase 200,000 shares were
granted to a financial consultant.
As of the date of this report, there are outstanding ISOs to purchase
12,500 shares issued to Mr. Zambelli, and NQSOs to purchase 12,500 shares
issued to Mr. Lisi, having a weighted average an exercise price of $1.50 per
share and NQSOs to purchase 200,000 shares having excercise prices of $2.50
and $3.25 per share. In connection with the Public Offering, the Company
agreed to restrict the amount of Options available for grant under the Plan
to 15% of the number of shares of Common Stock outstanding.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(individual grants)
The following table sets forth information with respect to individual
grants of stock options to the named executive officers during fiscal 1997.
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options/SARs Exercise or
Underlying Options/ Granted to Employees Base Price Expiration
Name of Officer SARS Granted in Fiscal Year ($/Sh.) Date
----------------------------------------------------------------------------------------------------
<S> <C> <C>
David N. DeBaene - - - -
Anthony Santucci - - - -
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercises of Options during fiscal 1997
and the number and value of unexercised Options held as of the end of fiscal
1997.
<TABLE>
<CAPTION>
Value of Unexercised
No. of Unexercised In-the-Money Options
No. of Shares Options at Fiscal Year-End at Fiscal Year-End (2)
Acquired on Value ------------------------------ ------------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David N. DeBaene - - - - $ - $ -
Anthony Santucci - - - - - -
<F1> Value realized is calculated to equal the market price of the Common
Stock at exercise less the exercise price.
<F2> Represents the difference between $6.00 the market price of the Common
Stock on February 28, 1997 (fiscal year end) and the exercise price of
the option, multiplied by the number of options for each respective
person named.
</TABLE>
Option Repricing
Not applicable.
Compensation Committee Interlock and Insider Participation
No directors other than those identified above as members of the
Compensation Committee served on that Committee during the last completed
fiscal year. None of the executive officers of the Company has served on
the board of directors or on the compensation committee of any other entity,
any of whose officers served either on the Board of Directors or on the
Compensation Committee of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 1, 1997 certain information
regarding the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each of the Company's directors, and (iii) all of the Company's executive
officers and directors as a group. Beneficial ownership has been determined
in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. Under this Rule, certain shares may be deemed to be beneficially
owned by more than one person (such as where persons share voting power or
investment power). In addition, shares are deemed to be beneficially owned
by a person if the person has the right to acquire the shares (for example,
upon exercise of an option) within 60 days of the date as of which the
information is provided; in computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding shares
of any person as shown in the following table does not necessarily reflect
the person's actual ownership or voting power at any particular date.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
or Number in Group Beneficial Ownership(1) Percentage of Class
------------------------------------------------------------------------------
<S> <C> <C>
David N. DeBaene 613,300(2) 34.40%
Annette DeBaene 51,000(3) 2.90%
Norman DeBaene 48,000(3) 2.70%
Elizabeth Cotter 12,500(4) *
Thomas A. Lisi 62,500(5) 3.50%
Gerard S. DiFiore 50,000(6) 2.70%
Joseph Lussier 136,200(7) 7.10%
William Durkin 152,200(7) 7.90%
Dean M. Denuccio - -
All Officers and Directors
as a group (6 persons) 738,300(5)(6) 40.00%
<F*> less than 1%.
<F1> Except as otherwise indicated, each named holder has, to the Company's
knowledge, sole voting and investment power with respect to the shares
indicated.
<F2> Includes 25,800 shares owned of record by David N. DeBaene's sister.
<F3> Annette and Norman DeBaene are the parents of David N. DeBaene.
<F4> Ms. Cotter is the spouse of David N. DeBaene.
<F5> Includes shares issuable upon exercise of 12,500 non-qualified stock
options.
<F6> Includes shares issuable upon exercise of 50,000 common stock purchase
warrants.
<F7> Includes shares issuable upon exercise of 136,200 common stock purchase
warrants.
</TABLE>
Escrow of Shares
In accordance with the requirements of certain state securities
administrators, certain of the Company's principal stockholders have agreed
to place into escrow an aggregate of 700,000 shares (the "Escrow Shares") of
the 875,000 shares of Common Stock held by them. Under the escrow
agreement, the Escrow Shares will be ratably released to the holders in 25%
increments on the sixth, seventh, eighth and ninth anniversaries,
respectively, of the date of this Prospectus. If the Company meets or
exceeds certain net earnings or stock price targets, the release of the
Escrow Shares will be accelerated. Additionally, in accordance with the
requirements of another state securities administrator, the holdings of all
officers, directors and post-offering five percent (5%) stockholders are
subject to certain lock-up restrictions until January 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with Thomas A. Lisi and Geronimo Leathers, Inc.
Mr. Lisi and the Company are parties to a sales representative
agreement (the "Representative Agreement") effective March 1, 1993
appointing Mr. Lisi as special accounts director on a nationwide basis for
the following types of accounts: (i) U.S. aircraft companies and defense
industry contractors; (ii) domestic multi-level marketing organizations and
premium gift and catalog services and (iii) domestic specialty leather
stores. Under this agreement, Mr. Lisi is entitled to commissions of 7% of
the wholesale price of all units sold to accounts which were solicited and
closed solely by his efforts, and 3.5% for sales to accounts closed with the
assistance of other Company personnel. In addition, until February 1995,
the Company was a party to an agreement with Geronimo Leathers, Inc.
("Geronimo"), a privately held Massachusetts corporation in which Mr. Lisi
is a principal stockholder, pursuant to which the Company retained Geronimo
as the Company's foreign manufacturing agent (the "Foreign Manufacturing
Agreement"). Pursuant to the Foreign Manufacturing Agreement, Geronimo
arranged to have samples of the Company's products produced abroad and
obtained terms upon which some of the Company's products could be
manufactured offshore. In accordance with the Foreign Manufacturing
Agreement, Geronimo earned aggregate fees of approximately $18,000 for the
three year period ended February 28, 1995.
In February 1995, the Representative Agreement between the Company and
Mr. Lisi was amended to remove a royalty provision contained therein, and in
consideration for the modification of the Representative Agreement, the
Company issued to Mr. Lisi 25,000 shares of Common Stock and a non-qualified
stock option under the Company's 1995 Stock Option Plan to purchase 12,500
shares of Common Stock. In connection with the amendment of the
Representative Agreement, the Company and Mr. Lisi entered into a three year
consulting agreement (the "Consulting Agreement") pursuant to which Mr. Lisi
is required to devote not less than ten (10) hours per month to the Company
and provide services with respect to product research and development,
marketing and similar matters. Pursuant to the Consulting Agreement, during
fiscal 1997, is entitled to Mr. Lisi recieved consulting fees of $10,000 per
annum, payable monthly, plus accountable expenses.
Also in February 1995, the Foreign Manufacturing Agreement between the
Company and Geronimo was terminated and, in substitution therefor, the
Company and Geronimo entered into a three year overseas agency agreement
(the "Overseas Agency Agreement"). This agreement gives Geronimo the right
to bid on substantially all future overseas production of the Company's
products. Unlike the Foreign Manufacturing Agreement, the Overseas Agency
Agreement does not require any minimum retention payments by the Company if
it does not pursue foreign manufacture of its products.
See "EXECUTIVE COMPENSATION - Employment Agreements" for the
description of an employment agreement consulting arrangement between the
Company and Mr. Lisi.
In 1993, another principal stockholder of Geronimo (not Mr. Lisi)
purchased 12,500 shares of Common Stock from the Company for $25,000.
The Company believes that the terms of these transactions were no less
favorable to the Company than would have been obtained from transactions
with non affiliated parties negotiated on an arms length basis.
All future material affiliated transactions and loans will be made or
entered into on terms that are no less favorable to the Company than those
that can be obtained from unaffiliated third parties; and all future
material affiliated transactions and loans, and any forgiveness of loans,
will be approved by a majority of the independent outside members of the
Company's board of directors who do not have an interest in the
transactions.
Consulting Agreements
Warrants to Messrs. Durkin and Lussier. In connection with their
agreement to provide financial consulting services to the Company for a
three (3) year period commencing August 1996, the Company issued on August
6, 1996 to each of Messrs. Joseph Lussier and William Durkin, warrants to
purchase 232,824 shares of Common Stock expiring August 7, 2003, or a total
of 465,648 shares. The warrants are divided into two (2) classes, time
warrants which contain vesting provisions based solely on the expiration of
time, and performance warrants, containing vesting provisions based upon the
price of the Company's Common Stock during various periods. Messrs. Durkin
and Lussier received 136,200 time warrants and 96,624 performance warrants
each. As of the date of this report, none of the performance warrants have
vested, but a portion of such warrants may potentially vest, depending on
satisfaction of the vesting conditions contained therein. At the date
hereof, an aggregate of 217,920 (or 108,960 per holder) of the time warrants
have vested and are exercisable. The exercise price of all of the warrants
is $4.00 per share, subject to adjustment under certain circumstances.
Messrs. Lussier and Durkin are affiliated with Merit Capital Associates,
Inc., the underwriter of the Company's Public Offering. In connection with
the issuance of the warrants, the Company recorded an expense in its
financial statements in accordance with FASB No. 123 in the amount of
$60,000 for the fiscal year ended February 28, 1997.
Mission Bay Consultants, Inc. On April 2, 1997, the Company entered
into a one (1) year Consulting Agreement with Mission Bay Consulting, Inc.,
a financial public relations firm ("Mission Bay"), for certain financial
consulting services. In connection with this Consulting Agreement the
Company issued to Mission Bay an option under the Company's 1995 Stock
Option Plan to purchase an aggregate of 200,000 shares of common stock, and
also issued 28,000 shares of common stock under the 1995 Stock Option Plan.
The Company has also agreed to reimburse Mission Bay for its accountable
expenses incurred in connection with the Agreement.
Related Party Loans
As disclosed in Note E to the financial statements, the Company has
borrowed money from time to time from related parties. At February 28,
1997, the Company owed approximately $43,000 to Annette and Norman DeBaene,
principal stockholders; $10,000 to a corporation controlled by Annette and
Norman DeBaene, and approximately $15,000 to David N. DeBaene. These loans
are not interest bearing and will be repaid out of operating cashflow.
Legal Services
A director of the Company, Gerard S. DiFiore, who is also a warrant
holder, is a partner of the law firm that acts as general counsel to the
Company. This firm represented the Company in numerous matters including
all general corporate and real estate matters, several private placements,
several litigation matters and the Public Offering, including blue sky
matters relating thereto. The legal fees paid by the Company in connection
with all the foregoing matters were approximately $39,000 and $220,000 for
the years ended February 28, 1997 and 1996, respectively.
Conversion Agreements
As of July 1, 1995, the Company entered into conversion agreements
with certain holders of its various classes of outstanding indebtedness,
including (i) its 10% Secured Convertible Notes due December 1, 1995 (the
"Secured Notes"); (ii) its 12% Subordinated Notes due July 31, 1995 (the
"Subordinated Notes"); and (iii) its 20% Demand Notes (the "Demand Notes").
Pursuant to these conversion agreements, holders of an aggregate of $943,575
principal amount of indebtedness agreed to convert their indebtedness, plus
accrued interest through the date of conversion into shares of Common Stock.
The conversion was effective February 28, 1996, the date of the first
closing of the Public Offering, and an aggregate of 349,225 shares of Common
Stock were issued.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) List of Exhibits
The exhibits that are filed with this report or that are incorporated herein
by reference are set forth in the Exhibit Index appearing on page E-I
hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
JD AMERICAN WORKWEAR, INC.
Date:June 13, 1997 By: /s/ David N. DeBaene
David N. DeBaene, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report is signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ----------------------------------------------------------------------------
<S> <C> <C>
/s/ David N. DeBaene Chairman of the Board, President June 13, 1997
David N. DeBaene and Chief Executive Officer
(Principal Executive Officer)
/s/ Elizabeth Cotter Executive Vice President and June 13, 1997
Elizabeth Cotter Director
/s/ Anthony P. Santucci Vice President and Chief June 13, 1997
Anthony P. Santucci Financial Officer
(Principal Financial Officer)
/s/ Gerard S. DiFiore Assistant Secretary and Director June 13, 1997
Gerard S. DiFiore
/s/ Thomas A. Lisi Director June 13, 1997
Thomas A. Lisi
/s/ Dean M. Denuccio Director June 13, 1997
Dean M. Denuccio
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Incorporated Documents SEC Exhibit Reference Numbered
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
2.1 Form of Conversion Agreement As filed with the Registrants's N/A
between the Registrant and Form SB-2 on October 27, 1995,
certain holders of the Secured File No. 33-98486
Company's 10% Notes, 12%
Subordinated Notes and 20%
Demand Notes
3.1 Certificate of Incorporation As filed with the Registrant's N/A
of the Registrant, as amended Form SB-2, on October 27, 1995,
File No. 33-98486
3.2 By-Laws of the Registrant, As filed with the Registrant's N/A
as amended Form SB-2 on File No. 33-98486
October 27, 1995,
4.1 Form of Warrant Agreement As filed with the Registrant's N/A
Form SB-2, on October 27, 1995,
File No. 33-98486
4.2 Form of warrant of the As filed with the Registrants's N/A
Registrant issued in the Form SB-2 on October 27, 1995,
Registrant's January 1995 File No. 33-98486
Private Placement
4.3 Form of Unit Purchase Option As filed with the Registrant's N/A
issued to Merit Capital Form SB-2 on October 27, 1995,
Associates, Inc. File No. 33-98486
4.4 Form of 11% Convertible As filed with the Registrant's N/A
Subordinated Note of the Form SB-2 on October 27, 1995,
Registrant issued in the File No. 33-98486
Registrant's August, 1995
Private Placement
4.5 Form of warrant of the Form SB-2 on October 27, 1995, N/A
Registrant As filed with the File No. 33-98486
Registrant's issued in the
Registrant's August, 1995
Private Placement
10.1 Lease Agreement for the As filed with the Registrant's N/A
Registrant's Coventry, RI Form SB-2 on October 27, 1995,
facility File No. 33-98486
10.2 Loan Agreement with Home Loan As filed with the Registrant's N/A
and Investment Bank Form SB-2 on October 27, 1995,
File No. 33-98486
10.3 Employment Agreement with As filed with the Registrant's N/A
David N. De Baene Form SB-2 on October 27, 1995,
File No. 33-98486
10.4 Employment Agreement with As filed with the Registrant's N/A
Elizabeth Cotter Form SB-2 on October 27, 1995,
File No. 33-98486
10.5 Employment Agreement with As filed with the Registrants's N/A
Thomas L. Zambelli Form SB-2 on October 27, 1995,
File No. 33-98486
10.6 Consulting Agreement with As filed with the Registrant's N/A
Thomas A. Lisi Form SB-2 on October 27, 1995,
File No. 33-98486
10.7 Overseas Agency Agreement with As filed with the Registrants's N/A
Geronimo Leathers Form SB-2 on October 27, 1995,
File No. 33-98486
10.8 Registrant's 1995 Stock Option As filed with the Registrant's N/A
Plan Form SB-2 on October 27, 1995,
File No. 33-98486
10.9 Form of Option Agreement under As filed with the Registrants's N/A
the Registrant's 1995 Stock Form SB-2 on October 27, 1995,
Option Plan File No. 33-98486
10.10 Form of Sales Representative As filed with the Registrants's N/A
Agreement Form SB-2 on October 27, 1995,
File No. 33-98486
10.11 Special Accounts Director As filed with the Registrants's N/A
Agreement with Shawnmark Form SB-2 on October 27, 1995,
Industries dated July 25, 1995 File No. 33-98486
10.12 Agreement between the Registrant As filed with the Registrants's N/A
and Geocel Corporation Form SB-2 on October 27, 1995,
dated May 9, 1995 File No. 33-98486
10.13 Supply Agreement with Reed As filed with the Registrants's N/A
Manufacturing Company, Inc. Form SB-2 on October 27, 1995,
dated October 3, 1995 File No. 33-98486
10.14 Supply Agreement with Mason As filed with the Registrants's N/A
Shoe dated October 26, 1995 Form SB-2 on October 27, 1995,
File No. 33-98486
23.1 Consent of Richard A. Eisner As filed with the Registrants's N/A
& Company, LLP Form SB-2 on October 27, 1995,
File No. 33-98486
99.1 United States Patent #5,038,408 As filed with the Registrants's N/A
Form SB-2 on October 27, 1995,
File No. 33-98486
Filed Herewith
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 7,634
<SECURITIES> 0
<RECEIVABLES> 225,153
<ALLOWANCES> 0
<INVENTORY> 828,891
<CURRENT-ASSETS> 1,067,602
<PP&E> 207,535
<DEPRECIATION> 106,976
<TOTAL-ASSETS> 1,269,572
<CURRENT-LIABILITIES> 569,184
<BONDS> 0
0
0
<COMMON> 3,417
<OTHER-SE> 3,191,229
<TOTAL-LIABILITY-AND-EQUITY> 1,269,572
<SALES> 513,233
<TOTAL-REVENUES> 513,233
<CGS> 316,350
<TOTAL-COSTS> 316,350
<OTHER-EXPENSES> 844,490
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,601
<INCOME-PRETAX> (804,208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (804,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (804,208)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
