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
For the fiscal year ended February 28, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[ ] 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 of (I.R.S. Employer Identification No.)
incorporation 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:
$1,226,143
The aggregate market value of the voting and non-voting common equity
of the registrant held by non-affiliates of the registrant at June 1, 1999
was approximately $4,723,350 based upon the closing sale price of $3.125 for
the Registrant's Common Stock, $.002 par value, as reported by the National
Association of Securities Dealers OTC Bulletin Board on June 1, 1999.
As of June 1, 1999 the registrant had 2,348,645 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, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to Vote of Securities Holders 17
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 20
Item 7. Financial Statements 26
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 26
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of Exchange Act 29
Item 10. Executive Compensation 31
Item 11. Security Ownership of Certain Beneficial Owners and
Management 35
Item 12. Certain Relationships and Related Transactions 38
PART IV
Item 13. Exhibit List and Reports on Form 8-K 41
</TABLE>
PART I
ITEM 1. BUSINESS.
Recent Developments
Private Placement of Series B Preferred Stock. On April 9, 1998, the
Company entered into a Securities Purchase Agreement (the "Purchase
Agreement") with The Union Labor Life Insurance Company, a Maryland
corporation ("ULLICO"), and certain additional agreements related to the
Purchase Agreement. Pursuant to the terms of the Purchase Agreement, the
Company issued to ULLICO 2,500 shares of Series B 12% Cumulative Convertible
Preferred Stock, $.001 par value (the "Series B Preferred Stock"). As a
part of the issuance of the Series B Preferred Stock, the Company also
issued to ULLICO a detached ten-year stock purchase warrant to purchase
799,000 shares of Common Stock at an exercise price of $.01 per share (the
"Investor Warrant"). The aggregate purchase price for the Series B
Preferred Stock and the Investor Warrant was $2,500,000. The Company used
the net proceeds to facilitate and expand a program of union labor
manufacturing of its products, to repay certain notes payable and long-term
debt, and for sales and administrative salaries, product development, sales
and marketing expense, and other general corporate purposes.
The Series B Preferred Stock is convertible, at the option of the
holder, into the number of shares of Common Stock which results from
dividing the Conversion Price into $1,000 for each share of Series B
Preferred Stock being converted. The Conversion Price shall be $5.00,
subject to adjustment.
The Series B Preferred Stock entitles ULLICO to receive, when and as
declared by the Company's Board, cumulative cash dividends in preference to
the payment of dividends on all other shares of capital stock of the
Company. During the two-year period following issuance of the Series B
Preferred Stock (the "PIK Period") the Company has the option of making
payment of the semi-annual dividends on the Series B Preferred Stock either
in cash or by issuing additional shares of Series B Preferred Stock ("PIK
Dividends"). In the event the Company elects to pay dividends in shares of
Series B Preferred Stock, the Company is required to issue additional
detached ten-year dividend warrants (the "Dividend Warrants") to purchase
54,000 shares of Common Stock at an exercise price of $.01 per share for
each semi-annual dividend period that PIK Dividends are paid. During the
PIK Period the Company may not pay or declare cash dividends on any stock
other than the Series B Preferred Stock. Unless full dividends on the
Series B Preferred Stock for all past dividend periods and the then current
period shall have been paid or declared and a sufficient sum for the payment
thereof set aside in trust for the Series B Preferred Stock Holders, no
dividend (other than a dividend payable solely in Common Stock) shall be
paid or declared, and no distribution made, on any other shares of stock.
The Company may, at its own option and at any time after the third
anniversary of the original issuance of the Series B Preferred Stock, redeem
the Series B Preferred Stock, in whole but not in part. In such event, the
Company is obligated to pay holders of the Series B Preferred Stock the
investment value per share, plus a redemption premium equal to a 20%
internal rate of return on the investment value. A mandatory redemption of
1,250 shares of Series B Preferred Stock is required on each of the first
business days of April 2004 and 2005.
Each holder of Series B Preferred Stock is entitled to vote on all
Company matters and is entitled to the number of votes equal to the largest
number of full shares of Common Stock into which such shares of Series B
Preferred Stock are convertible. The Series B Preferred Stock holders shall
be entitled to elect one director out of the seven authorized directors of
the Company's board and one director out of the three directors comprising
the Company's Compensation Committee. If certain events occur or do not
occur, such as the failure to pay either a PIK Dividend or cash dividend to
the Series B Preferred Stock holders, the holders of the Series B Preferred
Stock shall be entitled, immediately upon giving written notice, to elect
the smallest number of directors that will constitute a majority of the
authorized number of directors.
The Company and ULLICO entered into a Registration Rights Agreement
dated April 9, 1998 which requires the Company, upon written request, to
file a registration statement for the public resale of the Common Stock
issued on conversion of the Series B Preferred Stock. The Company is
required to file and cause to become effective a maximum of two registration
statements, excluding registration statements on Form S-3. The Company
shall not be obligated to effect more than one registration and Form S-3
during any six-month period and shall be obligated to file and cause to
become effective no more than six registration statements on Form S-3. No
registration statement is required to be filed unless the proposed public
offering price of the securities under such registration shall be at least
$5 million prior to deducting underwriting discounts and commissions). The
Registration Rights Agreement also provides for incidental registration.
Increase in Authorized Capital. On April 15, 1998, the shareholders of
the Company approved an amendment to the Company's Certificate of
Incorporation that would increase the number of authorized shares of Common
Stock of the Company from 4,500,000 shares to 7,500,000 shares.
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 an extensive line of
commercial and industrial footwear and workwear highlighted by its 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 and was thereafter assigned to the Company in January, 1995.
In June 1997, the Company was 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) an extensive line of commercial and industrial
footwear and 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 a broader mix of customers. The Company's sales
and marketing efforts have traditioally focused towards safety directors and
loss control and ergonomics specialists of industrial and commercial
businesses. Management believes that such sales and marketing efforts
encouraged the purchase and use of the Company's products by such
businesses. In addition, Management intends to focus on expanding sales
directly to the end user, by developing sales and marketing programs for
major retail workwear and hardware re-sellers, workwear and hardware catalog
merchants and trade unions and by expanding awareness of the company's
internet website.
Offer an extensive line of commercial and industrial footwear and
workwear to complement its proprietary core products. In response to
customer demands, the Company has identified an opportunity to fulfill the
greater needs of its customer base with an expanded line of products in
addition to its Safety Uniform Pant and Safety Work Jean. The Company has
demonstrated it can deliver its customers nationally recognized brand
products at a reduced cost and greater personal service with a direct sales
force. Accordingly, the Company has entered into supply arrangements with
several manufacturers to supply an extensive line of commercial and
industrial footwear and workwear.
Products and Features
The Company offers four types of products: JD Safety Work Jeans, JD
Safety Uniform Pants, JD Rugged 5-pocket Jeans and Private Label
Conventional Workwear. For the fiscal year ended February 28, 1999, sales
of the JD Safety Work Jeans accounted for approximately 38% of revenues,
sales of JD Safety Uniform Pants accounted for approximately 18%, and sales
of JD Rugged 5-pocket Jeans accounted for approximately 32%,. For the fiscal
year ended February 28, 1998, sales of the JD Safety Work Jeans accounted
for approximately 55% of revenues while sales of JD Safety Uniform Pants
accounted for approximately 24%. Sales of private label workwear and
footwear represented approximately 12% of the Company's revenues during the
year ended February 28, 1999, and approximately 17% during the fiscal year
ended February 28, 1998.
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 $35 to $45 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. During fiscal 1998 and continuing into fiscal 1999, the
Company developed a tanning process to incorporate blue and other color
leather sheathing into the JD Safety Work Jean in response to customer
requests, without compromising the durability and washability of the
traditional brown leather sheathing products. Certain functional properties
of JD Safety Work Jeans are protected by a patent issued in 1991. JD Safety
Work Jeans are offered in fifty-five sizes.
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 $35 to $39 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 clothes with the protection,
comfort and durability of JD Safety Uniform Pants. JD Safety Uniform Pants
are offered in fifty-five sizes, and in five different colors.
JD Rugged 5-Pocket Jeans. During fiscal 1999, the Company began
marketing and selling JD Rugged 5-Pocket Jeans, a non-proprietary heavy
denim work jean, to complement its line of JD Safety Work Jeans and
JD Safety Uniform Pants. JD Rugged 5-Pocket Jeans are produced from 100%
American made materials manufactured in America to the Company's strict
design specifications and typically retail in the $25 to $29 price range.
JD Rugged 5-Pocket Jeans are offered in fifty-five sizes.
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 and are manufactured to the Company's specifications,
but do not incorporate any of the proprietary features of the JD Safety Work
Jeans or 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 outside contractors. The Company's proprietary products are
manufactured to strict Company specifications. Historically, the Company
had a manufacturing arrangement with Reed Manufacturing Co., Inc. ("Reed")
pursuant to which Reed manufactured both the JD Safety Work Jeans and JD
Safety Uniform Pants to the Company's specifications. In December, 1997, in
contemplation of an equity investment by ULLICO, the Company began producing
JD Safety Work Jeans and JD Safety Work Uniform Pants in contractor
facilities covered by collective bargaining agreements. As a result, the
Company established manufacturing relationships with Fine Vines, Inc. ("Fine
Vines") and East Texas Sportswear, Inc ("East Texas Sportswear"). Fine
Vines has subsequently discontinued operations, and the Company shifted some
manufacturing to Magee Apparel Company. ("Magee"). The Company also
continues to use Reed to produce certain products.
The Company's manufacturing arrangements with East Texas Sportswear
and Magee provide more operational flexibility than that offered by other
manufacturers used by the Company in the past. Although the Company has
incurred additional start up costs and surcharges and slightly higher
initial unit costs in entering into these manufacturing arrangements, these
arrangements will enable the Company to order smaller and more consistent
production runs in a given pant size, which will increase manufacturing
efficiencies and decreasing the Company's unit costs over time.
The Company believes that its supply arrangements with a limited
number of manufacturers provides consistency and quality of its products.
While the Company believes that the interruption of production of these
products, 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 Company intends that all of its products will
be manufactured inside the United States.
Conventional Workwear. The Company has agreements with several
suppliers for its conventional uniform workwear, including Reed, East Texas
Sportwear and Magee. The Company's conventional workwear products are
manufactured to strict Company specifications. Management of the Company
believes that there are adequate alternative sources of these products
should the Company be unable to obtain these products from any one source.
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. 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
Swift Textiles, Columbus, GA (denim), Blackhawk Leather, Milwaukee, WI
(leather); Manufacturer's Rubber and Supply, Merrimac, MA, (foam padding)
and Brookwood Industries, New York, NY (sheathing).
Most of the raw materials and components required by the Company are
supplied by the Company to its manufacturers under a consignment
arrangement. 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.
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 network of
distributors, catalog merchants, retail resellers and the Company's recently
expanded in-house sales force. 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, and (iii) distributor 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 May and October, 1998, the Company's JD Safety Work Jeans and
JD Safety Uniform Pants 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 2 million
mechanics, tradesmen and other blue collar workers. For the fiscal years
ended February 28, 1999 and 1998, direct marketing sales accounted for
approximately 9% and 75%, respectively, of the Company's total revenues.
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. In addition, as a result of
its relationship with ULLICO, the Company has targeted union members in the
building trades, distributing brochures and product samples in union halls
and on larger union job sites. 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 Catalog, JC Penney Workwear Catalog, Modern Farm, The Sportsmans'
Guide, Delta Safety Products, Ergo Shop, and Masterman's. Approximately
twenty million copies of the JC Penney Catalog displaying JD SafetyWork
Jeans were mailed in each of June 1998, November 1998 and June 1999. Sales
to catalog merchants accounted for approximately 28% of revenues for the
fiscal year ended February 28, 1999 and approximately 8% for fiscal 1998.
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 approximately 34%
of revenues for the fiscal year ended February 28, 1999 versus 17% of total
revenues for the fiscal year ended February 28, 1998.
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.
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.
Uniform Rental Service Customers. The Company's JD Safety Uniform
Pants are sold to several leading uniform rental companies throughout the
United States and Canada. During fiscal 1999 the Company began working
with Unifirst Corporation to develop a joint marketing program for JD Safety
Uniform Pants utilizing Unifirst's hundred's of sales representatives and
thousands of uniform route drivers. Sales to uniform rental service customers
accounted for approximately 13.3% of revenues for the fiscal year ended
February 28, 1999 and approximately 11% for fiscal 1998.
Retail Customers. As a result of the Company's focus in developing
brand awareness for the JD Safety Work Jeans and JD Safety Uniform Pants,
the Company has been able to attract several independent and national
retailers. Because the Company's products typically are worn by tradesmen
and laborers, the Company believes that its products are better displayed
in stores selling hardware, building materials and farm goods as opposed
to traditional clothing retailers. The Company has recently begun selling
JD Safety Work Jeans to Payless/Cashways for display in approximately 75
of its more than 200 stores throughout the midwest. Sales to retailers
accounted for approximately 16.8% of revenues for the fiscal year ended
February 28, 1999. There were no significant sales in this category
during the fiscal year ended February 28, 1998.
Sales Representatives and Sales Arrangements
Historically, the Company used a team of independent sales
representatives, regional sales directors, and sales agents to generate
sales. The Company established a representative network based principally
upon industry grouping of the account types which the representative may
solicit. During the fiscal year ended February 1999, the Company shifted
focus and added three full-time, in-house salaried executives to its sales
force. These sales executives have brought a variety of sales and marketing
experience to the Company, and have enabled the Company to target
traditional and new markets for the Company's products.
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., 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. No assurances can be given that the Company will
be able to compete successfully.
Patents and Proprietary Rights
Certain functional features of the JD Safety Work Jeans are covered by
a U.S. Patent No. 5,038,408 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 U.S. Patent No. 5,634,215
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
Dubois (the original name of the Company) have been discontinued due to the
Company's name change to JD American Workwear, Inc. 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.
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.
Research and Development
The Company continues to develop new proprietary and non-proprietary
products to add to its product line. During fiscal 1998 and continuing into
fiscal 1999, the Company developed a tanning process to incorporate blue and
other color leather sheathing into the JD Safety Work Jean in response to
customer requests, without compromising the durability and washability of
the traditional brown leather sheathing products. The Company has also
developed and is beginning to market a line of gardening pants for the
professional and recreational landscaper, a 100% cotton fire retardant pant
used by utility workers as well as a line of children's wear, each
incorporating the Company's proprietary safety features. During fiscal 1999
and 1998, the Company expended approximately $53,000 and $4,000 on research
and development activities.
Customer Dependence
For fiscal 1999, the Company's four largest customers accounted for
approximately $713,600, or 58%, of the Company's net sales. JC Penney
accounted for approximately 23% of the Company's 1999 net sales, UniFirst
Corp. accounted for approximately 13% of the Company's net sales, and R.I.
Truck and Equipment Co. and New England Seed Co. each accounted for
approximately 11% of net sales. For fiscal 1998, the Company's three
largest customers accounted for approximately $237,000, or 49%, of the
Company's net sales. Mason Shoe Company accounted for approximately 19% of
the Company's 1999 net sales, R&S Marketing accounted for approximately 19%
of the Company's net sales, and Depan accounted for approximately 11% of net
sales. No other customers accounted for 10% or more of such sales during
fiscal 1999 and 1998.
Seasonality
The Company's business traditionally 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. Sales of JD Safety Uniform Pants and the conventional
workwear now offered by the Company are less sensitive to the seasonal
trends which affect JD Safety Work Jeans. As the Company's revenue mix has
shifted to include a greater volume of uniform parts and other products,
overall seasonality has been reduced.
Employees
At May 15, 1999, the Company had 16 employees, 14 of which are full-
time. Of the employees, two are performing executive and marketing
functions, two are performing accounting and financial functions, seven are
performing production and fulfillment functions, three are performing sales
functions and two are performing general office administration functions.
The Company expects to and is in the process of hiring 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, 1999 of $6,189,331 and incurred a net loss of $1,692,765 for
the fiscal year ended February 28, 1999. At February 28, 1998, the Company
had an accumulated deficit of $4,496,566 and incurred a net loss of
$1,162,109 for the fiscal year ended February 28, 1998. Because the
Company 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 ended February 29, 2000, and perhaps thereafter. The Company had
significant negative cash flow from operations during each of fiscal 1997,
1998 and 1999 and the Company continues to experience negative cash flow as
it builds inventory to be in a position 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 reports of the Company's auditors
concerning the Company's financial statements for each of the two years
ended February 28, 1999 include 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.
Need for Additional Financing. Cash flow from operations and the
investment by ULLICO provided for working capital needs and principal
payments on long-term debt through fiscal 1999. However, the Company will
be required to seek additional financing to provide for working capital
needs and principal payments on long-term debt during fiscal 2000 and to
meet its business strategy of achieving significant market penetration of
its JD workwear products. 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. As a
result of the expansion of inventory in contemplation of sales to union
workers as well as the increase in receivables generated through increased
sales, the Company has and continues to experience cash flow shortages.
The Company's inability to timely pay vendors and service providers as a
result of a cash flow shortage will adversely affect the Company's
operations. There can be no assurance that financing will be available to
the Company on acceptable terms, 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 entered into manufacturing
arrangements with Fine Vines and East Texas Sportswear and then shifted
production from Fine Vines to Magee Apparal, difficulties such as production
delays and quality control problems have been encountered. The Company has
switched manufacturers on four occasions, once because of the Company's
capital constraints in meeting minimum production levels, once because of
the manufacturer's quality control problems, once more recently in
contemplation of the Company's transaction with ULLICO, and most recently
because the manufacturer discontinued operations. Two of these past
incidents caused an inventory shortage which adversely affected the
Company's operations. 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. Moreover, due the limited and sporadic nature of the Company's
production runs, it is not feasible for the Company to expect vendors to
react quickly, efficiently and on a cost-effective basis to the Company's
production demands. 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.
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 a
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.
Sales and Marketing. The Company has shifted from a network of non-
exclusive sales representatives to a team of in-house sales executives. The
Company's future growth and profitability will depend in part, on the
success of this internal sales force and their ability to develop and
continue relationships with traditional and new accounts.
Dependence on Limited Management; Part Time Chief Financial Officer
and Executive Vice President. The success of the Company is substantially
dependent on the efforts and abilities of its founder and President, David
N. DeBaene, Thomas A. Lisi, its Executive Vice President of Sales and
Marketing, and Anthony 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. Neither Mr. Lisi nor Mr. Santucci are required to devote full-
time to the Company. Mr. Santucci's oral 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, or senior sales
executive in the event that Mr.Lisi is not in a position to render such
services to the Company.
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 36% 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.
Possible Change in Control. Pursuant to its agreements with ULLICO,
the Series B Preferred Stock holders shall be entitled to elect one director
out of the seven authorized directors of the Company's board and one
director out of the three directors comprising the Company's Compensation
Committee. If certain events occur or do not occur, such as the failure to
pay either a PIK Dividend or cash dividend to the Series B Preferred Stock
holders, the holders of the Series B Preferred Stock shall be entitled,
immediately upon giving written notice, to elect the smallest number of
directors that will constitute a majority of the authorized number of
directors. Moreover, ULLICO holds Series B Preferred Stock which is
currently convertible into 500,000 shares of Common Stock, and holds
warrants to purchase 799,000 shares of Common Stock. Pursuant to its
agreements with ULLICO, in the event the Company does not reach certain
performance milestones, the Series B Preferred Stock held by ULLICO may be
converted into a greater number of shares of the Company's Common Stock than
provided for upon conversion if the performance targets are met. As a
result, ULLICO could potentially obtain a substantial controlling interest
in the Company. There can be no assurance that the Company will be able to
meet the performance targets set forth in the applicable agreements and,
therefore, avoid a possible change in control of the Company's capital
stock. Such a change in control may result in fundamental changes to the
management of the Company and the character of its business.
ITEM 2. PROPERTIES
In December 1998, the Company purchased the 19,600 square foot
building in Coventry, Rhode Island formerly leased by the Company. The
purchase price of the property was $145,000, of which $125,000 was paid in
the form of a promissory note to the seller bearing interest at 10 1/2
percent, secured by a mortgage on the property. The promissory note
requires monthly payments of $2,686.74, and is payable in full in January
2002.
As a result of the purchase, the Company will be able to terminate its
lease with respect to approximately 6,000 square feet of warehouse space in
West Warwick, Rhode Island and to consolidate its executive offices,
manufacturing facilities and warehouse space into one building. Management
believes that its current facility will be satisfactory to meet the
Company's needs for the foreseeable future; however, the surrounding land
included in the purchase would enable the Company to expand the size of this
facility, if necessary
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 COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
1. (a) Market Information. Since the April 1996 closing of the
Company's initial 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 for the past two fiscal years. 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 1998
First Quarter (March 1, 1997 through May 31, 1997) $5.00 $3.00
Second Quarter (June 1, 1997 through August 31, 1997) $4.50 $3.25
Third Quarter (September 1, 1997 through November 30, 1997) $5.00 $3.50
Fourth Quarter (December 1, 1997 through February 28, 1998) $5.50 $3.75
FISCAL 1999
First Quarter (March 1, 1998 through May 31, 1998) $4.75 $3.375
Second Quarter (June 1, 1998 through August 31, 1998) $4.9375 $2.8125
Third Quarter (September 1, 1998 through November 30, 1998) $4.375 $3.00
Fourth Quarter (December 1, 1998 through February 28, 1999) $4.25 $2.75
</TABLE>
The closing bid price of the Company's Common Stock as reported by the
OTCBB was $2.625 on June 1, 1999.
(b) Holders. As of June 1, 1999 there were approximately 110
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. See
"Item 1 -- Business - Recent Developments -- Private Placement of Series B
Preferred Stock". 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.
Recent Sales of Unregistered Securities
On April 9, 1998, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with The Union Labor Life Insurance
Company, a Maryland corporation ("ULLICO"), and certain additional
agreements related to the Purchase Agreement. Pursuant to the terms of the
Purchase Agreement, the Company issued to ULLICO 2,500 shares of Series B
12% Cumulative Convertible Preferred Stock, $.001 par value (the "Series B
Preferred Stock"), in reliance on an exemption from the registration
requirements of the 1933 Act, pursuant to Section 4(2) of the 1933 Act and
Rule 506 thereunder. As a part of the issuance of the Series B Preferred
Stock, the Company also issued to ULLICO a detached ten-year stock purchase
warrant to purchase 799,000 shares of Common Stock at an exercise price of
$.01 per share (the "Investor Warrant"). The Series B Preferred Stock is
convertible, at the option of the holder, into the number of shares of
Common Stock which results from dividing the Conversion Price into $1,000
for each share of Series B Preferred Stock being converted. The Conversion
Price shall be $5.00, subject to adjustment. The aggregate purchase price
for the Series B Preferred Stock and the Investor Warrant was $2,500,000.
See "Item 1 -- Business - Recent Developments - Private Placement of Series
B Preferred Stock.
In December, 1997, the Company completed a private placement of 313
shares of Series A 10% Manditorily Convertible Preferred Stock. (the "Series
A Preferred Stock"), in reliance on an exemption from the registration
requirements of the 1933 Act, pursuant to Section 4(2) of the 1933 Act and
Rule 506 thereunder. The Series A Preferred Stock was convertible, at the
option of the holder, into shares of the Company's Common Stock at an
initial conversion rate equal to 1,000 shares of Common Stock for each share
of Series A Preferred Stock (representing a conversion price of $2.50 per
share of Common Stock); however, as a result of the subsequent issuance of
Series B Preferred Stock, the Series A Preferred Stock is convertible at the
rate of 1,289 shares of Common Stock for each share of Series A Preferred
Stock (representing a conversion price of $1.94 per share of Common Stock).
The Company agreed to file a registration statement, no later than July 15,
1998, to register the public resale of the Common Stock issued on conversion
of the Series A Preferred Stock, and to maintain the effectiveness of this
registration statement until March 15, 1999. At the time the registration
statement was to be declared effective by the SEC, the Series A Preferred
Stock would automatically convert into Common Stock. The Registration
Statement has not yet been filed. As of April 30, 1999, the Company, at the
request of the holders of 78 shares of Series A Preferred Stock, converted
said shares of Series A Preferred Stock into shares of Common Stock in
reliance of the exemption from the registration requirements of the 1933 Act
pursuant to Section 3(a)(9) of said Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of 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.
Following the Company's initial public offering in January 1995, the Company
significantly increased its expenditures for inventory, salaries,
advertising and marketing expenditures and other costs to increase its level
of production. 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 1999 and 1998, and
expects that it will continue to experience during all or a portion of
fiscal 2000, 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 October 1997, the Company entered into negotiations with ULLICO to
make an equity investment in the Company. The parties initially
contemplated that such an investment could be consummated in January 1998
but the process was not completed until April 1998. A significant amount of
the Company's financial and management resources, which the Company believes
would have otherwise been utilized in running the day-to-day operations of
the Company, were allocated to the protracted negotiations and the
resolution of other issues relating to the investment. Such resources were
also expended in facilitating the shift to unionized manufacturing and
building a marketing effort to sell Company products to union members. As a
result of the agreement to engage union sewing shops to manufacture Company
products new vendors required training in the patented technological
processes of manufacturing these products including, but not limited to, the
procurement and financing of raw materials. Management of the Company was
required to provide steady supervision over all manufacturing processes to
reduce errors in training and application of production techniques and to
ensure that turnaround times would be met. However, management believes
that these arrangements have provided and will continue to provide more
operational flexibility than that offered by prior manufacturers for the
Company, by permitting the Company to better balance its inventory and
produce numerous sizes in a weekly batch run, rather than just one size.
The Company's business has been subject to seasonal trends based upon
climate, because 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. Sales of JD Safety Uniform Pants and the conventional workwear now
offered by the Company are less sensitive to the seasonal trends which
affect JD Safety Work Jeans. As the Company's revenue mix has shifted to
include greater uniform sales volume, overall seasonality has reduced.
Historically, the Company used a team of independent sales
representatives, regional sales directors, and sales agents to generate
sales. The Company established a representative network based principally
upon industry grouping of the account types which the representative may
solicit. During the fiscal year ended February 1999, the Company shifted
focus and added three full-time, in-house salaried executives to its sales
force. These sales executives have brought a variety of sales and marketing
experience to the Company, and have enabled the Company to target
traditional and new markets for the Company's products.
For the reasons stated above, the Company believes that its results of
operations for the years ended February 28, 1999 and 1998 are not
necessarily indicative of the Company's future results of operations.
Fiscal Year 1999 Compared to Fiscal Year 1998
---------------------------------------------
Net sales increased $743,263 or 154.0% to $1,226,143 in fiscal 1999 as
compared to fiscal 1998. This increase was attributable to higher unit sales
volume generated by the Company's expanded in-house sales and marketing team
as well as increased focus on retail and brand name awareness of JD
products.
Gross profit increased $60,331 or 25% in fiscal 1999 as compared to
fiscal 1998. Gross profit as a percentage of sales decreased to
approximately 24% in fiscal 1999 as compared to 49% in fiscal 1998. The
decrease in gross profit percentage is primarily due to a shift from direct
marketing and sales to higher volume retailers, catalog merchants and rental
customers, all of whom are resellers rather than consumers of these
products.
Selling, general and administrative ("SG&A") increased $694,958 or 57%
in fiscal 1999 as compared to fiscal 1998. The Company incurred
significantly higher marketing and promotional expenses due to increased
trade show and travel activity. Employee compensation costs were also
higher as a result of the addition of a team of sales and marketing
personnel and support staff. Consulting expenses and professional fees also
increased significantly in fiscal 1999 as management sought additional
outside assistance in developing and implementing management, sales and
marketing, public relations and brand name awareness programs.
Interest expense was $88,911 in fiscal 1999 compared to interest
expense of $170,313 in fiscal 1998. The decrease in interest expense is
primarily due to the reduction of long-term debt through conversions into
common stock. During the twelve months ended February 28, 1999, the Company
converted approximately $480,000 plus accrued interest of long term debt
into common stock.
The Company's net loss was $1,692,765 for fiscal 1999, compared to a
net loss of $1,162,109 for fiscal 1998. This increased loss is mainly
attributable to higher marketing, employment and consulting expenses.
Fiscal Year 1998 Compared to Fiscal Year 1997
---------------------------------------------
Net sales decreased $30,353 or 5.9% in fiscal 1998 as compared to
fiscal 1997. This decrease was attributable to lower unit sales volume.
Gross profit increased $40,103 or 20.4% in fiscal 1998 as compared to
fiscal 1997. Gross profit as a percentage of sales increased to 49.1% in
fiscal 1998 as compared to 38.4% in fiscal 1997. The increase in gross
profit percentage is primarily due to a continuing effort to shift marketing
and sales to more profitable direct sales and catalog merchant sales
programs.
Selling, general and administrative ("SG&A") increased $384,724 or
45.6% in fiscal 1998 as compared to fiscal 1997. The Company incurred
higher marketing and promotional expenses due to increased trade show and
travel activity. Employee compensation costs were also higher as a result
of marketing efforts. In addition, consulting expenses increased
significantly in fiscal 1998.
Net interest expense was $169,881 in fiscal 1998 compared to net
interest expense of $156,601 in fiscal 1997. The increase in interest
expense is primarily due to the interest expense incurred on the short-term
loans used for operating purposes throughout the year.
The Company's net loss was $1,162,109 for fiscal 1998, compared to a
net loss of $804,208 for fiscal 1997. This increased loss is mainly
attributable to higher marketing, employment and consulting expenses.
The Company believes that the decrease in annual sales during fiscal
1998 were in large part attributable to the amount of financial and other
resources expended on the ULLICO transaction in connection with the
negotiation of the ULLICO investment and the implementation of new marketing
programs and manufacturing systems. Since closing the ULLICO transaction in
April of 1998, management has been able to reapply its full attention to the
Company's core business.
Liquidity and Capital Resources
During fiscal 1999, net cash used by operations was $2,067,479 as
compared to net cash used by operations of $953,967 in fiscal 1998.
Accounts receivable increased by $547,712 following strong fourth quarter
sales. The rise in inventories is partly the result of the production of
"union-made" inventory following the launch of the Company's "Union-Made"
marketing campaign as well as the addition of two significant products to
our expanding prodict line - JD Safety Work Jeans with blue leather and our
Rugged 5-pocket work jean.
During fiscal 1999 and 1998, the Company used funds for capital
expenditures of $109,334 and $13,284, respectively. During the fiscal year
ended February 28, 1999 the Company updated its computer network, added
additional sewing capacity in its Coventry location and added three new
vehicles. In December 1998, the Company purchased the 19,600 square foot
building in Coventry, Rhode Island formerly leased by the Company. The
purchase price of the property was $145,000 of which $125,000 was financed
by a mortgage payable to the seller requiring monthly payments of $2,687
through December 2001 and a final payment of $50,934 due in January 2002.
The Company plans capital spending of approximately $50,000 on machinery,
equipment and computer systems during fiscal 2000.
On April 9, 1998, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with ULLICO. Pursuant to the terms of
the Purchase Agreement, the Company issued 2,500 shares of Series B 12%
Cumulative Convertible Preferred Stock, $.001 par value (the "Series B
Preferred Stock") as well as a detachable ten-year stock purchase warrant to
purchase 799,000 shares of Common Stock at an exercise price of $.01 per
share (the "Investor Warrant"). The aggregate purchase price for the Series
B Preferred Stock and the Investor Warrant was $2,500,000.
The Company used the net proceeds to facilitate and expand a program
of union labor manufacturing of its products, to repay certain notes payable
and long-term debt, and for sales and administrative salaries, product
development, sales and marketing expense, and other general corporate
purposes. See "Item 1 - Business - Recent Developments - Private Placement
of Series B Preferred Stock."
In December, 1997, the Company completed a private placement of
$782,500 of Series A 10% Manditorily Convertible Preferred Stock. The
Series A Preferred Stock was convertible, at the option of the holder, into
shares of the Company's Common Stock at an initial conversion rate equal to
1,000 shares of Common Stock for each share of Series A Preferred Stock
(representing a conversion price of $2.50 per share of Common Stock);
however, as a result of the subsequent issuance of Series B Preferred Stock,
the Series A Preferred Stock is convertible at the rate of 1,289 shares of
Common Stock for each share of Series A Preferred Stock (representing a
conversion price of $1.94 per share of Common Stock), subject to adjustment.
A significant portion of the proceeds of this offering was used to increase
production of finished goods inventory, repay principal and accrued interest
on outstanding short term borrowings, fund marketing and sales programs,
settle overdue accounts payable and accrued liabilities, and for working
capital. See "Item 5 -- Market For Common Equity and Related Stockholder
Matters -- Recent Sales of Unregistered Securities."
During the year ended February 28, 1999, notes totaling $480,000, plus
accrued interest, were converted into an aggregate 153,221 shares of common
stock.. The Company is currently negotiating with debt holders to convert
the balance of its outstanding convertible debt into Common Stock of the
Company.
Cash flow from operations and the investment by ULLICO provided for
working capital needs and principal payments on long-term debt through
fiscal 1999. However, the Company will be required to seek additional
financing to provide for working capital needs and principal payments on
long-term debt during fiscal 2000 and to meet its business strategy of
achieving significant market penetration of its JD workwear products.
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. As a result of the expansion of inventory
in contemplation of sales to union workers as well as the increase in
receivables generated through increased sales, the Company has and continues
to experience cash flow shortages. The Company's inability to timely pay
vendors and service providers as a result of a cash flow shortage will
adversely affect the Company's operations. There can be no assurance that
financing will be available to the Company on acceptable terms, if at all.
Inflation is not expected to have a major impact on the Company's
operations.
Year 2000 Issue
General. The Year 2000 issue arises because many computer programs use
two digits rather than four to define the applicable year. Using two digits
could result in system failure or miscalculations that cause disruptions of
operations. In addition to computer systems, any equipment with embedded
technology that involves date sensitive functions is at risk if two digits
have been used rather than four. The Board of Directors has instructed the
Company's Chief Financial Officer to oversee the Company's Year 2000
readiness project. The project is composed of the following stages: 1)
assessment of the problem, 2) developing a plan of action, 3) remediation
activities and 4) compliance testing.
State of Readiness. The Company is in the process of inventorying and
making an assessment of its information and non-information technology
systems (such as telephone and alarm systems), and expects to complete such
assessment by the end of June 1999. A plan of corrective action using both
internal and external resources to enhance or replace the systems for Year
2000 compliance will be implemented during the Summer 1999. Internal
resources consist of permanent employees of the Company, where as external
resources will be composed of contract programming personnel that are
directed by the Company's management. The Company is in the process of
contacting the appropriate customers, vendors, banks and service providers
to determine their Year 2000 compliance. Remediation for critical systems
is expected by the end of Summer 1999. The testing stage for critical
systems within the entire Company is planned for early Fall 1999.
Costs. The Company has incurred approximately $12,000 in expenses in
updating its management information system to alleviate potential Year 2000
problems, and expects to incur an additional $25,000 prior to the end of
fiscal year 2000. These expenditures represent personnel costs related to
software remediation of major impact systems. The Company had previously
initiated a hardware upgrade plan for desktop computers that was independent
of the Year 2000 issue, and, therefore, most hardware upgrades were
completed under this plan.
Risks. The Company does not anticipate that the costs of its Year
2000 issues or the risks to the Company which might arise from the Year 2000
problem are likely to be material. If the Company's desktop software
applications are not compliant, employees will not be able to use such
applications. If the Company's customers are not Year 2000 compliant, the
Company risks not being paid on time, and if its suppliers, vendors, banks,
service providers and internal voice and data systems are not compliant, the
Company risks not being able to timely service its customers. However, the
Company does not have control over third parties, and as a result, cannot
currently estimate to what extent future operating results may be adversely
affected by the failure of third parties to successfully address their Year
2000 issues. If the Company's plans to address the Year 2000 issue are not
successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could
have a material adverse effect on the Company's financial condition,
liquidity and results of operations. There can be no assurance that the
Company's assessment of the impact of Year 2000 is complete and that further
analysis and study, as well as the testing and implementation of planned
solutions, will not reveal the need for additional remedial work. The
Company is potentially vulnerable to mistakes made by key suppliers of
products and services in their advice to the Company with respect to their
Year 2000 readiness. The Company is also potentially vulnerable to
operational difficulties in the Company's corporate offices, including the
risk of power outages, banking delays and the potential failure of credit
card and check authorization systems. The financial magnitude of these
risks cannot currently be estimated.
Worst Case Scenario. The Y2K problem may result in the Company's own
or other third-party computers shutting down or performing incorrect
computations. If uncorrected, the Year 2000 problem could adversely impact:
(a) the reliability of the company's internal information management
systems, such as accounting systems, e-mail and desktop computers, (b) the
physical operation of systems used by the Company which have embedded
technology, such as telephone systems, utility services, security systems
and other physical office infrastructure, (c) the Company's ability to
interface with third parties, such as delivering products to or receiving
payments from customers or obtaining products from vendors on a timely
basis. It is not presently possible to describe a reasonably likely "worst
case Year 2000 scenario" without making numerous assumptions. The Company
presently believes that a most likely worst case scenario would make it
necessary for the Company to replace some suppliers or contractors,
rearrange some work plans, and delay routinely performed management,
administrative, operational and financial activities. Assuming this worst
case scenario is correct, the Company believes that such circumstances could
have a materially adverse effect on its financial condition or results of
operations.
Contingency Plans. The Company currently does not have contingency
plans in place in the event that it does not complete all of its Year 2000
remediation, some of its systems are not Year 2000 compliant or some of its
major customers, vendors, banks or service providers are not Year 2000
compliant. However, it expects to have completed sufficient compliance
work by the end of the Summer 1999 and to have sufficient time to identify
those areas for which contingency plans will be necessary, and it will
create those contingency plans as necessary at that time. Contingency plans
may include backup manual bookkeeping and accounting procedures, shifting
production to Y2K compliant vendors and inventory buildup by the Company
prior to December 31, 1999. Any additional inventory buildup by the Company
could generate unfavorable cash flows and inventory valuation exposures of
uncertain amount and duration. Any future contingency plan will be based
on its best estimates of numerous factors, which, in turn, will be derived
by relying on numerous assumptions about future events. However, there can
be no assurance that these assumptions or estimates will have been correctly
made, that the Company will have anticipated all relevant factors or that
there will not be increased costs associated with the Company's Year 2000
problems. Additionally, there can be no assurance that any contingency
plans implemented by the Company would be adequate to meet the Company's
needs without materially impacting its operations, that any such plan would
be successful or that the Company's results of operations would not be
materially and adversely affected by the delays and inefficiencies inherent
in conducting operations in an alternative manner.
The foregoing statements as to the Company's Year 2000 efforts are
forward looking and, along with all other forward-looking statements herein,
are made in reliance on the safe harbor provisions discussed under the
caption "Forward Looking Statements" in Item 1, above.
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
Effective April 1, 1998, the Boston office of Richard A. Eisner &
Company, LLP ("RAE") was merged into the Boston office of BDO Seidman, LLP
("BDO"). As this merger resulted in RAE no longer having an office in the
Providence-Boston area, the Company concluded that it would be appropriate
to select a new accounting firm. By unanimous consent, the Board of
Directors of the Company voted on May 5, 1998, to retain BDO to serve as the
Company's independent auditors. RAE's report on the Company's financial
statements for the year ended February 28, 1997 contains a statement
expressing substantial doubt about the Company's ability to continue as a
going concern. However, during the Company's two most recent fiscal years
or any subsequent interim period, there were no disagreements between the
Company and RAE on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of RAE, would have caused it to make reference
to the subject matter of the disagreement in connection with its report on
the audited financial statements.
Prior to the engagement of BDO there were no discussions between the
Company and BDO regarding (i) the application of any accounting principle to
a specific or completed transaction (ii) the type of audit opinion that
might be rendered on the Company's financial statements, or (iii) any matter
that was the subject of disagreement with the Company's former auditor on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
The Company requested that RAE furnish it with a letter addressed to
the Securities and Exchange Commission indicating whether RAE agrees with
the statements made by the Company in response to this Item 4, or, if not,
stating the basis upon which RAE disagrees. A copy of said letter has been
filed with the Commission.
On April 5, 1999, JD American Workwear, Inc. (the "Registrant")
dismissed BDO Seidman, LLP as the principal independent accountants for the
Registrant.
The report on the Registrant's financial statements prepared by BDO
Seidman, LLP for fiscal year ended February 28, 1998 contain no adverse
opinion or disclaimer of opinion and are not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the two most recent fiscal years and the subsequent interim
period, there were no disagreements with BDO Seidman, LLP or Richard A.
Eisner & Company, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if
not resolved to the satisfaction of them, would have caused them to make
reference to the subject matter of the disagreement in connection with its
report on the audited financial statements.
The decision to change accountants was recommended and approved by the
Board of Directors of the Registrant.
On April 5, 1999, the Registrant engaged the auditing firm of Bederson
& Company, LLP to audit the Registrant's financial statements for the fiscal
year ended February 28, 1999.
Prior to the engagement of Bederson & Company, LLP, there were no
discussions with representatives of said firm regarding either the
application of any accounting principle to a specific or completed
transaction, or the type of audit opinion that might be rendered on the
Registrant's financial statements, or any matter that was the subject of
disagreement with the Company's former auditor on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure.
The Registrant has requested that BDO Seidman, LLP furnish it with a
letter addressed to the Securities and Exchange Commission indicating
whether they agree with the statements made by the Registrant in response to
this Item 4, and, if not, stating the respect in which they does not agree.
A copy of said letter was filed with the Commission.
PART II
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 40 Chairman of the Board, President and Chief
Executive Officer
Thomas A. Lisi 54 Vice President, Marketing and
Director
Anthony P. Santucci 36 Treasurer, Chief Financial Officer, Secretary
and Director
Elizabeth Cotter 37 Director
Dean M. Denuccio 33 Director
Steev Panneton 40 Vice President, Manufacturing
and Operations and Director
Herb Canapary 66 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.
Thomas A. Lisi, Vice President, Marketing and Director. 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 founder and former
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."
Anthony P. Santucci, Treasurer, Chief Financial Officer and Secretary.
Mr. Santucci became the Company's Chief Financial Officer in September 1996
and became a Director in April 1998. Mr. Santucci is also President of
Bevco Plastics Company 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 responsibilities included all accounting,
financial reporting, financial planning, risk management, tax functions, and
managing a staff of 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.
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.
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.
Steev Panneton, Vice President, Manufacturing and Operations and
Director. Mr. Panneton has been an employee of the Company since its
inception in 1992, and has overseen and\or participated in all phases of the
Company's manufacturing operations. Mr. Panneton was elected to the Board
of Directors by the Board of Directors in January 1998 to fill the vacancy
created by the resignation of a former director.
Herbert Canapary, Director. Pursuant to the Securities Purchase
Agreement (the "Purchase Agreement") dated April 9, 1998, with The Union
Labor Life Insurance Company, a Maryland corporation ("ULLICO"), and certain
additional agreements related to the Purchase Agreement, Mr. Canapary was
elected to the Board of Directors by the Board of Directors to fill the
vacancy in the Board resulting from the increase in the number of members of
the Board from 5 to 7. Mr. Canapary has been employed by ULLICO, the union
labor life insurance company, for 17 years, and presently serves as ULLICO's
Vice-President - Investments .
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, 1999, 1998, and 1997, respectively, of the cash and non-cash
compensation awarded, paid or accrued, by the Company to all individuals
serving as the Company's chief executive officer (collectively, the "named
executive officers"). The Company at no time during the last three fiscal
years had any executive officers whose total annual compensation, exceeded
$100,000, except as set forth below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Name and Fiscal Compensation Options by All Other
Principal Position Year Salary Bonus No. of Shares Compensation
- ------------------ ------ ------ ----- ------------- ------------
<S> <C> <C> <C> <C> <C>
David N. DeBaene, 1999 $125,000 - - -
President and CEO 1998(1) $105,000
1997(2) $ 85,000 - - -
<FN>
<F1> Under his employment agreement, Mr. DeBaene was entitled to be paid at
a rate of $105,000 per annum, plus $10,000 which was deferred from
fiscal 1997. However, in order to conserve cash, Mr. DeBaene has
agreed to defer approximately $15,000 of such compensation to fiscal
1999.
<F2> 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, Mr.
DeBaene agreed to defer approximately $10,000 of such compensation to
fiscal 1998.
</FN>
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 David N. DeBaene as Chairman and President. The agreement is
for a base term of five (5) years, and is thereafter renewable for
additional periods of three (3) years, unless the Company gives notice to
the contrary. In accordance with his agreement with the Company, Mr.
DeBaene's first year base salary was $65,000, increasing annually thereafter
in $20,000 increments. In addition, 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.
The agreement of Mr. DeBaene also provides 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 this agreement 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 a 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 $33.00 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, Anthony P. Santucci and Herbert Canapary 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 and non-restricted stock and deferred
stock awards. A total of 250,000 shares of Common Stock were originally
reserved for issuance under the Plan; however, in January 1998, the Board of
Directors voted to amend the Plan and reserve for issuance under the Plan an
additional 500,000 shares, which amendment was ratified by the stockholders
of the Company at the Annual Meeting of Stockholders held April 15, 1998.
The Plan is administered by the Compensation Committee of the Board of
Directors (the "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, 1999,
approximately 20 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 1998, NQSOs to purchase 200,000 shares were granted to a
consultant at exercise prices ranging from $2.50 to $3.25 per share.
Subsequent thereto, in connection with the extension of the consulting
agreement with said consultant, options to purchase 50,000 of said shares
were surrendered, and the consultant was issued 50,000 shares. In January
1998, the Company issued 9,500 shares to an employee of said consultant in
consideration of services rendered outside of the scope of the consulting
agreement. In June 1998, in connection with an additional extension of the
term of the consulting agreement with said consultant and an expansion in
scope of the services to be rendered by said consultant, the Company issued
options to purchase an additional 300,000 shares of Common Stock at exercise
prices ranging from $3.25 to $5.75 per share. Of these options, 60,000
shares have been exercised, and options to purchase 240,000 shares remain
outstanding.
As of the date of this report, there are outstanding NQSOs to purchase
12,500 shares having an exercise price of $1.50 per share as well as options
to purchase 240,000 shares having exercise prices ranging from $3.75 to
$5.75 per share.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(individual grants)
There were no individual grants of stock options or stock appreciation
rights to any of the named executive officers during fiscal 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
None of the named executive officers exercised stock options or stock
appreciation rights during fiscal 1999, and none of the named executive
officers held any stock options or stock appreciation rights as of the end
of fiscal 1999.
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, 1999 certain information
regarding the ownership of the Company's securities by (i) each person known
by the Company to be the beneficial owner of more than 5% of any class of
the Company's voting securities, (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 vote.
</TABLE>
<TABLE>
<CAPTION>
Name and Address or Amount and Nature of Percentage
Number in Group Beneficial Ownership(1) of Class*
------------------- ----------------------- ----------
<S> <C> <C> <C>
David N. DeBaene Common Stock 714,650(2) 30.43%
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Elizabeth Cotter Common Stock 12,500(3) **
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Thomas A. Lisi Common Stock 62,500(4) 2.65%
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Steev Panneton Common Stock 60,023 2.56%
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Dean M. Denuccio Common Stock 0 **
15 Alpine Estates Drive Series A Preferred 0 **
Cranston, RI Series B Preferred 0 **
Hebert Canapary Common Stock 0(5) **
111 Massachusetts Ave. Series A Preferred 0(5) **
Washington, DC Series B Preferred 0 **
Anthony P. Santucci Common Stock 0 **
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
All Officers and Director Common Stock 849,673(2)(4)(5) 35.99%
As a Group (7 persons) Series A Preferred 0 **
Series B Preferred 0 **
Other 5% Stockholders
Joseph Lussier Common Stock 191,158(6) 7.52%
1645 Warwick Avenue
Warwick, RI 02886
William N.Durkin Common Stock 233,058(6)(7) 9.08%
69 East Shore Drive Series A Preferred 20 8.51%
Coventry, RI 02816
Merit Capital Assoc, Inc. Series A Preferred 20 8.51%
1221 Post Road
Westport, CT
Gerald Hoak Series A Preferred 40 17.02%
1221 Post Road
Westport, CT
Mission Bay Consultants Common Stock 286,650(8) 11.03%
20946 Avenal Run
Boca Raton, FL 33428
ULLICO Common Stock 1,299,000(9) 35.61%
111 Massachusetts Ave. Series B Preferred 2,500 100.00%
Washington, DC
<FN>
<F*> Assumes 2,348,645 shares of Common Stock, 235 shares of Series A
Preferred Stock and 2,500 shares of Series B Preferred Stock issued
and outstanding.
<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 48,000 shares owned of record by Mr. DeBaene's father, 51,000
shares owned of record by Mr. DeBaene's mother, and 28,150 shares
owned of record by Mr. DeBaene's sister. Does not include shares
owned of record by Elizabeth Cotter, Mr. DeBaene's wife.
<F3> Ms. Cotter is the spouse of David N. DeBaene.
<F4> Includes shares issuable upon exercise of 12,500 non-qualified stock
options.
<F5> Does not include Series B Preferred Stock, shares of Common Stock
issuable upon conversion of Series B Preferred Stock or shares of
Common Stock issuable upon exercise of outstanding warrants owned of
record by ULLICO, of which Mr. Canapary serves as Vice President -
Investments.
<F6> Includes shares issuable upon exercise of 191,158 common stock
purchase warrants (the "time warrants") See "Certain Relationships and
Related Transactions."
<F7> Includes 20,000 shares of Common Stock issuable upon conversion of
Series A Preferred Stock.
<F8> Includes 250,000 shares of Common Stock issuable upon exercise of
outstanding stock options.
<F9> Includes 500,000 shares of Common Stock issuable upon conversion of
Series B Preferred Stock as well as 799,000 shares issuable upon
exercise of outstanding warrants. See "Item 1 Business -- Recent
Developments -- Private Placement of Series B Preferred Stock."
</FN>
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 as of the date of
the Company's initial public offering. 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
initial public offering. 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.
Possible Change In Control. Pursuant to its agreements with ULLICO,
the Series B Preferred Stock holders shall be entitled to elect one director
out of the seven authorized directors of the Company's board and one
director out of the three directors comprising the Company's Compensation
Committee. If certain events occur or do not occur, such as the failure to
pay either a PIK Dividend or cash dividend to the Series B Preferred Stock
holders, the holders of the Series B Preferred Stock shall be entitled,
immediately upon giving written notice, to elect the smallest number of
directors that will constitute a majority of the authorized number of
directors. Moreover, ULLICO holds Series B Preferred Stock which is
currently convertible into 500,000 shares of Common Stock, and holds
warrants to purchase 799,000 shares of Common Stock. Pursuant to its
agreements with ULLICO, in the event the Company does not reach certain
performance milestones, the Series B Preferred Stock held by ULLICO may be
converted into a greater number of shares of the Company's Common Stock than
provided for upon conversion if the performance targets are met. As a
result, ULLICO could potentially obtain a substantial controlling interest
in the Company. There can be no assurance that the Company will be able to
meet the performance targets set forth in the applicable agreements and,
therefore, avoid a possible change in control of the Company's capital
stock. Such a change in control may result in fundamental changes to the
management of the Company and the character of its business.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 were divided into two (2) classes, time
warrants which contain vesting provisions based solely on the expiration of
time, and performance warrants, which contained 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 vested and all have expired. At the date hereof, all
of the time warrants have vested and are exercisable. The exercise price of
all of the warrants was originally $4.00 per share, subject to adjustment
under certain circumstances; however as a result of the subsequent issuance
of the Series A Preferred and the Series B Preferred Stock the exercise
price was adjusted to $2.85 per share and the number of time warrants
increased to 191,158 shares each. Mr. Lussier is and Mr. Durkin was
formerly affiliated with Merit Capital Associates, Inc., the underwriter of
the Company's Public Offering.
Mission Bay Consultants, Inc. On April 2, 1997, the Company entered
into a one (1) year Consulting Agreement with Mission Bay Consulting, Inc.,
a management consulting and public relations firm ("Mission Bay"), for
certain 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. In September 1997, in
consideration of the extension of the Consulting Agreement, 50,000 of said
options were surrendered, and the Company issued 50,000 shares of Common
Stock to Mission Bay Consulting under the 1995 Stock Option Plan. In
January 1998, the Company issued 9,500 shares to an employee of Mission Bay
Consulting, in consideration of services rendered outside of the scope of
the Consulting Agreement. In June 1998, in connection with an additional
extension of the term of the consulting agreement with Mission Bay and an
expansion in scope of the services to be rendered by said Mission Bay, the
Company issued options to purchase an additional 300,000 shares of Common
Stock at exercise prices ranging from $3.25 to $5.75 per share. Of these,
options to purchase 60,000 shares have been exercised and options to
purchase 240,000 shares remain outstanding.
Related Party Loans
As disclosed in the Notes to the financial statements, the Company has
from time to time borrowed money from or loaned money to related parties.
At February 28, 1999, the Company owed approximately $155,000 in the
aggregate to the parents of David N. DeBaene. Approximately $145,000 of
these loans bear interest at the rate of 10% and will be repaid out of
operating cash flow at the rate of $5,500 per month until September 1,
2001. In addition, at February 28, 1999, David N. DeBaene owed
approximately $16,600 to the Company. This loan is not interest bearing.
Stockholders Agreement
A Stockholders Agreement dated April 9, 1998 (the "Stockholders
Agreement") was entered into among ULLICO, the Company, David N. DeBaene,
Annette DeBaene, Norman DeBaene, Thomas Lisi, and Steev Panneton (each, a
"Holder"). The Stockholders Agreement provides that the Company shall have
a right of first refusal before any shares of Common Stock may be
transferred by any Holder. ULLICO has a right of second refusal and co-sale
rights, if the Company does not elect to buy all of the securities it is
offered. If ULLICO enters into an agreement to transfer, sell or otherwise
dispose of all of its Preferred Stock, Warrants and any Common Stock issued
upon conversion or exercise of the former ("Purchased Shares") (such
agreement referred to as a "Tag-Along Sale"), each Holder has the right to
participate in the Tag-Along Sale. If ULLICO, alone or with another person,
accepts an offer from any party who is unaffiliated with it to purchase any
Purchased Shares which results in such party having the ability to elect a
majority of the Company's Board of Directors, then, at the request of
ULLICO, each Holder shall sell all shares of Common Stock held by such
Holder (referred to as a "Drag-Along Sale").
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.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
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 1999.
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 11, 1999 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>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ David N. DeBaene Chairman of the Board, President and June 11, 1999
- ------------------------- Chief Executive Officer (Principal
David N. DeBaene Executive Officer)
/s/ Anthony P. Santucci Treasurer, Chief Financial Officer, June 11, 1999
- ------------------------- Secretary and Director (Principal
Anthony P. Santucci Financial Officer)
/s/ Thomas A. Lisi Director June 11, 1999
- -------------------------
Thomas A. Lisi
/s/ Elizabeth Cotter Director June 11, 1999
- -------------------------
Elizabeth Cotter
/s/ Dean M. Denuccio Director June 11, 1999
- -------------------------
Dean M. Denuccio
/s/ Steev Panneton Director June 11, 1999
- -------------------------
Steev Panneton
/s/ Herbert Canapary Director June 11, 1999
- -------------------------
Herbert Canapary
</TABLE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Sequentially
Incorporated Documents SEC Exhibit Reference Numbered
- ---------------------- --------------------- ------------
<S> <C> <C>
2.1 Form of Conversion Agreement As filed with the Registrant's Form N/A
between the Registrant and certain SB-2 on October 27, 1995,
holders of the Registrant's 10% File No. 33-98486
Secured Notes, 12% Subordinated
Notes and 20% Demand Notes
3.1 Certificate of Incorporation of the As filed with the Registrant's N/A
Registrant, as amended Form SB-2, on October 27, 1995, File
No. 33-98486
3.2 By-Laws of the Registrant, as As filed with the Registrant's N/A
amended Form SB-2 on October 27, 1995, File
No. 33-98486
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 Registrant As filed with the Registrant's Form N/A
issued in the Registrant's January SB-2 on October 27, 1995, File
1995 Private Placement No. 33-98486
4.3 Form of Unit Purchase Option As filed with the Registrant's Form N/A
issued to Merit Capital Associates, SB-2 on October 27, 1995, File
Inc. No. 33-98486
4.4 Form of 11% Convertible As filed with the Registrant's Form N/A
Subordinated Note of the Registrant SB-2 on October 27, 1995, File
issued in the Registrant's August, No. 33-98486
1995 Private Placement
4.5 Form of Warrant of the Registrant As filed with the Registrant's Form N/A
issued in the Registrant's August, SB-2 on October 27, 1995, File
1995 Private Placement No. 33-98486
4.6 Securities Purchase Agreement As filed with the Registrant's Form N/A
dated April 9, 1998 8-K on April 15, 1998
4.7 Certificate of Designation of As filed with the Registrant's Form N/A
Series B Preferred Stock. 8-K on April 15, 1998
4.8 Stockholders' Agreement dated As filed with the Registrant's Form N/A
April 9, 1998. 8-K on April 15, 1998
4.9 Registration Rights Agreement As filed with the Registrant's Form N/A
dated April 9, 1998 8-K on April 15, 1998
4.10 Warrant Certificate issued to As filed with the Registrant's Form N/A
ULLICO 8-K on April 15, 1998
4.11 Escrow Agreement As filed with the Registrant's Form N/A
8-K on April 15, 1998
4.12 Certificate of Designations of As filed with the Registrant's Form N/A
Series A Preferred Stock 10-KSB on June 11, 1998
10.1 Lease Agreement for the As filed with the Registrant's Form N/A
Registrant's Coventry, RI facility SB-2 on October 27, 1995,
File No. 33-98486
10.2 Loan Agreement with Home Loan As filed with the Registrant's Form N/A
and Investment Bank SB-2 on October 27, 1995,
File No. 33-98486
10.3 Employment Agreement with As filed with the Registrant's Form N/A
David N. DeBaene SB-2 on October 27, 1995,
File No. 33-98486
10.4 Employment Agreement with As filed with the Registrant's Form N/A
Elizabeth Cotter SB-2 on October 27, 1995,
File No. 33-98486
10.5 Consulting Agreement with As filed with the Registrant's Form N/A
Thomas A. Lisi SB-2 on October 27, 1995,
File No. 33-98486
10.6 Overseas Agency Agreement with As filed with the Registrant's Form N/A
Geronimo Leathers SB-2 on October 27, 1995,
File No. 33-98486
10.7 Registrant's 1995 Stock Option As filed with the Registrant's Form N/A
Plan SB-2 on October 27, 1995,
File No. 33-98486
10.8 Form of Option Agreement under As filed with the Registrant's Form N/A
the Registrant's 1995 Stock Option SB-2 on October 27, 1995,
Plan File No. 33-98486
10.9 Form of Sales Representative As filed with the Registrant's Form N/A
Agreement SB-2 on October 27, 1995, File
No. 33-98486
10.10 Special Accounts Director As filed with the Registrant's Form N/A
Agreement with Shawnmark SB-2 on October 27, 1995, File
Industries dated July 25, 1995 No. 33-98486
16.1 Letter of Richard A. Eisner, LLP As filed with the Registrant's Form N/A
dated May 6, 1998 8-K on May 13, 1998
16.2 Letter of BDO Seidman LLP As filed with the Registrant's Form N/A
8-K/A on April 1, 1999
99.1 United States Patent #5,038,408 As filed with the Registrant's Form N/A
SB-2 on October 27, 1995, File
No. 33-98486
99.2 United States Patent #5,634,215 As filed with the Registrant's Form N/A
SE on June 11, 1998
Filed Herewith
- --------------
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Bederson & Company LLP
27 Financial Data Schedule
</TABLE>
JD AMERICAN WORKWEAR, INC
------------------------------
FINANCIAL STATEMENTS
For the years ended February 28, 1999 and 1998
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of JD American Workwear, Inc.
We have audited the accompanying balance sheet of JD American Workwear, Inc.
as of February 28, 1999, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principals used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the financial position of JD American
Workwear, Inc. at February 28, 1999, and the results of its operations and
its cash flows for the year then ended, in conformity with generally
accepted accounting principals.
The accompanying financial statements for 1999 have been prepared assuming
the Company will continue as a going concern. However, through February 28,
1999, the Company has experienced substantial losses and at February 28,
1999 had an accumulated deficit of approximately $6,200,000, has not paid
all obligations as they become due and expects to incur additional losses
before it achieves profitable operations, which raises substantial doubt
about the Company's ability to continue as a going concern. Management's
plans in regards to this matter is discussed in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
BEDERSON & COMPANY LLP
West Orange, New Jersey
June 7, 1999
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of JD American Workwear, Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of JD American Workwear, Inc. for the year ended
February 28, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present
fairly, in all material respects, the results of the operations of JD
American Workwear, Inc. and its cash flows for the year ended February 28,
1998, in conformity with generally accepted accounting principles.
The accompanying financial statements for 1998 have been prepared assuming
the Company will continue as a going concern. However, through February
28, 1998, the Company had experienced substantial losses and at February
28, 1998, had an accumulated deficit of approximately $4,500,000, had not
paid all obligations as they became due and expected to incur additional
future losses, which raised substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to this
matter is discussed in Note 1. The financial statements for 1998 do not
include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Boston, Massachusetts
May 20, 1998
JD AMERICAN WORKWEAR, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
February 28,
1999
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 174,472
Accounts receivable, net of allowances of $52,200 751,397
Inventories (Note 2) 1,267,628
Prepaid expenses, current portion 181,149
Loans receivable, employees 20,193
-----------
Total current assets 2,394,839
Property, plant and equipment, net (Note 3) 269,323
Intangible assets, net (Note 3) 61,341
Prepaid expenses, long-term 154,540
Other assets 4,998
-----------
$ 2,885,041
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4) $ 306,674
Accounts payable and accrued expenses 284,900
Accrued interest on notes payable 30,366
-----------
Total current liabilities 621,940
-----------
Long-term debt, net of current portion (Note 4) 205,756
-----------
Commitments and contingencies (Note 6)
Stockholders' equity (Notes 7 and 10):
Preferred stock; authorized 1,000,000 shares;
Series A, $.001 par value, 299 shares issued and outstanding
(liquidating preference $747,500) -
Series B, $.001 par value, 2,500 shares issued and outstanding
(liquidating preference $2,500,000) 3
Common stock, $.002 par value; authorized 7,500,000 shares; issued
and outstanding, 2,248,241 shares 4,496
Additional paid-in-capital 5,046,177
Detachable warrant 3,196,000
Accumulated deficit (6,189,331)
-----------
Total stockholders' equity 2,057,345
-----------
$ 2,885,041
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
-----------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 1,226,143 $ 482,880
Cost of goods sold 928,826 245,894
----------------------------
Gross profit 297,317 236,986
Selling, general and administrative expenses 1,924,172 1,229,214
----------------------------
Loss from operations (1,626,855) (992,228)
Interest income 23,001 432
Interest (expense) (88,911) (170,313)
----------------------------
Net loss $(1,692,765) $(1,162,109)
============================
Basic and diluted net loss per common share $ (0.82) $ (0.63)
============================
Weighted average common shares outstanding 2,069,152 1,855,859
============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
-----------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,692,765) $(1,162,109)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 54,542 69,810
Securities issued for services 194,500 314,242
Changes in operating assets and liabilities:
Accounts receivable (547,712) 18,298
Inventories (209,844) (228,893)
Prepaid expenses and other assets 84,143 (38,994)
Accounts payable and accrued expenses 49,657 73,679
----------------------------
Net cash used by operating activities (2,067,479) (953,967)
----------------------------
Cash flows from investing activities:
Capital expenditures (109,334) (13,284)
----------------------------
Net cash used by investing activities (109,334) (13,284)
----------------------------
Cash flows from financing activities:
Exercise of stock options 133,250 412,500
Proceeds from notes and long-term debt 106,530 233,000
Proceeds from sales of preferred stock and detachable warrant 2,500,000 782,500
Issuance costs for preferred stock (166,442) (122,575)
Principal payments on notes, long-term debt and short-term
loans (238,985) (328,876)
----------------------------
Net cash provided by financing activities 2,334,353 976,549
----------------------------
Increase (decrease) in cash and cash equivalents 157,540 9,298
Cash and cash equivalents, beginning of year 16,932 7,634
----------------------------
Cash and cash equivalents, end of year $ 174,472 $ 16,932
============================
Supplemental cash flow disclosures:
Interest paid $ 71,787 $ 62,793
============================
</TABLE>
Non-cash investing and financing activities:
During the fiscal year ended February 28, 1999:
(1) Land and building of $125,000 was financed by a mortgage note payable
provided by the seller.
(2) Equity securities totalling $534,761 were issued in satisfaction of
notes payable and accrued interest.
See Notes 6 and 7 for information relating to certain fiscal 1998 non-cash
transactions
The accompanying notes are an integral part of the financial statements.
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended February 28, 1999 and 1998
<TABLE>
<CAPTION>
Common stock Preferred stock
$ .002 Par Value $ .001 Par Value Additional
------------------ ---------------- Paid-in Detachable Accumulated
Shares Amount Shares Amount Capital Warrant Deficit Total
------ ------ ------ ------ ---------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1997 1,708,433 $3,417 0 $0 $3,191,229 $ 0 ($3,334,457) ($ 139,811)
Common shares issued for payment
of interest 6,975 13 - - 30,681 - - 30,694
Common shares issued for services 107,500 215 - - 430,035 - - 430,250
Options issued for services - - - - 179,000 - - 179,000
Exercise of stock options 150,000 300 - - 412,200 - - 412,500
Warrants issued for services - - - - 92,000 - - 92,000
Shares issued to retire debt 9,554 19 - - 51,573 - - 51,592
Exercise of warrants 2,437 6 - - (6) - - -
Issuance of preferred stock - - 313 - 782,500 - - 782,500
Issuance costs of preferred stock - - - - (122,575) - - (122,575)
Net loss - - - - - - (1,162,109) (1,162,109)
---------------------------------------------------------------------------------------------
Balance, February 28, 1998 1,984,899 3,970 313 0 5,046,637 0 (4,496,566) 554,041
---------------------------------------------------------------------------------------------
Issuance of preferred stock and
detachable warrant - - 2,500 3 (696,003) 3,196,000 - 2,500,000
Issuance costs of preferred stock - - - - (166,442) - - (166,442)
Shares issued to retire 11% notes 97,909 196 - - 376,744 - - 376,940
Preferred stock conversion 19,121 38 (14) - (38) - - -
Shares issued to retire 10% notes 55,312 110 - - 157,711 - - 157,821
Common shares issued for services 50,000 100 - - 162,400 - - 162,500
Options issued for services - - - - 32,000 - - 32,000
Exercise of stock options 41,000 82 - - 133,168 - - 133,250
Net loss - - - - - - (1,692,765) (1,692,765)
---------------------------------------------------------------------------------------------
Balance, February 28, 1999 2,248,241 $4,496 2,799 $3 $5,046,177 $3,196,000 ($6,189,331) $2,057,345
=============================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. The Company and Summary of Significant Accounting Policies:
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. 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. The Company will
seek additional financing when, and if, required although there can be no
assurance that such financing will be available or on terms acceptable to
the Company.
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.
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.
Inventory
Inventories are valued at the lower of cost or market using the first-in,
first-out method.
Depreciation and Amortization
Property and equipment are stated at cost. The Company computes
depreciation and amortization expense on a straight-line basis over the
following estimated useful lives of the assets:
<TABLE>
<CAPTION>
Asset Classification Estimated Useful Lives
- -------------------- ----------------------
<S> <C>
Building 39 years
Furniture and fixtures 5 - 7 years
Machinery and equipment 5 - 7 years
Office equipment 5 - 7 years
Trucks and autos 5 years
</TABLE>
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.
Revenue recognition
The Company recognizes revenues upon shipment of product. Returns and
allowances are recorded on a customer-by-customer basis.
Other Manufacturing Expenses
As a result of the agreement to engage union sewing shops to manufacture
the Company's products, during the fourth quarter of fiscal 1998, the
Company entered into new manufacturing arrangements with two union sewing
contractors. During fiscal 1999, one of these contractors closed its
sewing facility which resulted in a further shift of production to a third
sewing plant. These changes in manufacturing contractors required training
in the patented technological process of manufacturing these products. In
addition management of the Company was required supervise all aspects of
the manufacturing process during these transitions in order to insure
quality and yields. During fiscal 1999 the Company incurred approximately
$75,000 in non-recurring costs in conjunction with these production
changes; such costs are included in selling, general and administrative
expenses.
Advertising costs
Advertising costs are expensed as incurred and totaled $172,761 and $92,003
during the years ended February 28, 1999 and 1998, respectively.
Stock-based compensation
The Company has adopted Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), which establishes a
fair-value-based method of accounting for stock-based compensation plans.
Basic and diluted loss per share
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock for each fiscal year. Common stock
equivalents are not considered in loss years because they are anti-
dilutive.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28, 1999
-----------------
<S> <C>
Raw materials $ 165,749
Work-in-process 21,496
Finished goods 1,080,383
----------
$1,267,628
==========
</TABLE>
3. Property, Equipment and Intangible Assets
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
February 28, 1999
-----------------
<S> <C>
Land and building $225,957
Furniture and fixtures 25,182
Machinery and equipment 86,799
Office equipment 23,996
Trucks and autos 64,720
--------
426,654
Less accumulated depreciation 157,331
--------
$269,323
========
</TABLE>
Depreciation expense for the years ended February 28, 1999 and 1998 was
$21,481 and $28,875, respectively.
Intangible assets, at cost, consists of the following:
<TABLE>
<CAPTION>
February 28, 1999
-----------------
<S> <C>
Patents $ 70,970
Offering costs 189,563
Loan financing fees 39,075
Organization costs 10,500
--------
310,108
Less accumulated amortization 248,767
--------
$ 61,341
========
</TABLE>
Amortization expense for the year's ended February 28, 1999 and 1998 was
$15,106 and $40,935, respectively.
4. Notes Payable and Long-Term Debt
<TABLE>
<S> <C>
The Company's notes payable and long-term debt as of February 28, 1999
consists of the following:
10.5% mortgage note payable, secured by land and building, due in monthly
installments of $2,687 through December, 2001 with a final payment of
$57,934 due in January, 2002. $123,407
10% note payable to the parents of the President of the Company, payable in
monthly installments of $5,494. Final payment due September, 2001. 144,993
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 amortization of the
discount is approximately 17%. These notes, including accrued interest are
convertible at the option of the holder, into common stock at $3.85 per
share, subject to adjustment as defined in the agreement. During the year
ended February 28, 1999, notes totaling $350,000, plus accrued interest,
were converted into common stock; notes of $37,500 were repaid 87,500
10% note due to an investor. The note was due on December 31, 1997. The
note is collateralized by a mortgage on real estate owned by the parents
of the President of the Company. 40,000
Non-interest bearing demand loans payable to certain stockholders of the
Company. 97,000
Non-interest bearing note due to 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
Other 9,530
--------
Total 512,430
Less current portion 306,674
--------
NET LONG-TERM DEBT $205,756
========
</TABLE>
See Note 7 with respect to the conversion of debt.
The scheduled repayment of debt at February 28, 1999 is as follows:
<TABLE>
<CAPTION>
Year ending February 28, Amount
------------------------ ------
<S> <C>
2000 $306,674
2001 82,881
2002 117,673
2003 2,264
2004 2,938
--------
$512,430
========
</TABLE>
5. Related Party Transactions:
As stated in Note 4, the Company has had certain borrowing transactions with
related parties. Certain of these related party obligations are not
formalized by any written agreements and are non-interest bearing.
Accordingly, for the years ended February 28, 1999 and February 28, 1998
there has been no interest expense charged to operations related to these
obligations.
One of the Company's stockholders, who is also a director of the Company,
and a principal stockholder in a corporation that has provided consulting
services to the Company, entered into an agreement whereby the corporation
has the right to bid on future overseas production of the Company. This
agreement does not contain any minimum payments. Under another consulting
arrangement with the Director, he received approximately $12,500 during
1999 and $28,300 during 1998 in consulting fees for marketing assistance
provided to the Company. See Note 6 with regards to a consulting agreement
between the Company and the aforementioned Director of the Company.
A former director of the Company, who is also a warrant holder, is a partner
of a law firm that provided various legal services to the Company. During
fiscal 1999 and 1998, fees of approximately $0 and $28,000 were incurred,
respectively.
6. Commitments and Contingencies:
Employment agreement
The Company has an employment agreement with one key employee providing for
compensation of $145,000 for the fiscal year ending February 29, 2000. The
agreement also contains a bonus stipulation based upon a percentage of the
Company's pre-tax income (as defined) in accordance with a sliding scale
schedule contained in the agreement. No bonus is earned unless and until
the Company earns pre-tax income in excess of $5 million.
Lease Obligations
The Company leases facilities in West Warwick, Rhode Island under a month to
month operating lease at a rental of approximately $685 per month.
The Company acquired its facility in Coventry, Rhode Island during December,
1998. The Company previously leased this facility.
Rent expense charged to operations for the years ended February 28, 1999 and
February 28, 1998, was approximately $29,000 and $32,000, respectively.
Consulting agreements
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 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, all of the
performance warrants have expired. 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 the warrants is $2.85 per share,
subject to adjustment under certain circumstances. Mr. Lussier is
affiliated with Merit Capital Associates, Inc., the underwriter of the
Company's Public Offering. As permitted by generally accepted accounting
principles, the warrants were valued at the estimated value of the services
to be performed. The value assigned to the warrants was amortized over the
term of the consulting agreements, resulting in amortization expense of $0
and $92,000 for the fiscal years ended February 28, 1999 and 1998,
respectively.
In 1997, the Company entered into a consulting agreement which expires
in August, 1999. The agreement provides for commissions to be paid at a
rate of 10% (ten percent) of paid invoices; in cash or in common stock, not
to exceed 300,000 shares, at the option of the consultant. Commission
expense relating to this Consulting Agreement totaled less than $1,000
in each of the years ended February 28, 1999 and 1998.
Cash in Bank
The Company maintains bank accounts which at times contain balances which
exceed the amounts insured by the FDIC.
7. Capitalization
Authorized number of shares of Common Stock
On April 15, 1998, the shareholders of the Company approved an amendment to
the Company's Certificate of Incorporation that increased the number of
authorized shares of Common Stock of the Company from 4,500,000 shares to
7,500,000 shares.
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 $7.00, 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 $8.00, subject to adjustment. The Class B
warrants also expire in January 2001.
In April 1996, the Company had 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 1996, the underwriter of the public offering, pursuant to the
underwriting agreement, received options to purchase 32,768 units at a price
of $8.4375 per unit. The options become exercisable in January 1998 and
expire 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.
Series A 10% Mandatorily Convertible Preferred Stock
The Company sold 313 shares of Series A 10% Mandatorily Convertible
Preferred Stock through a Private Placement dated August 26, 1997, at a
price of $2,500 per Preferred Share. Dividends, when and if declared, are
payable at a rate of 10% annually, payable in kind at the option of the
Company. The Series A Preferred Stock was convertible, at the option of the
holder, into shares of the Company's Common Stock at an initial conversion
rate equal to 1,000 shares of Common Stock for each share of Series A
Preferred Stock (representing a conversion price of $2.50 per share of
Common Stock); however, as a result of the subsequent issuance of Series B
Preferred Stock, the Series A Preferred Stock is convertible at the rate of
1,289 shares of Common Stock for each share of Series A Preferred Stock
(representing a conversion price of $1.94 per share of Common Stock),
subject to adjustment. The shares convert automatically upon the
registration of the underlying common stock issuable upon the conversion.
Holders of Series A Preferred Stock vote on an as converted basis with the
common stockholders.
Common stock options
The Company's 1995 Stock Option Plan provides for the granting of stock and
options to purchase stock up to 750,000 shares of common stock. Option
activity for the years ended February 28, 1999 and February 28, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-average
Number of exercise price
Shares per share
--------- ----------------
<S> <C> <C>
Options outstanding, February 28, 1997 12,500 $1.50
Granted 200,000 2.78
Exercised (150,000) 2.84
Canceled (50,000) 3.25
--------
Options outstanding, February 28, 1998 12,500 1.50
Granted 300,000 4.50
Exercised (41,000) 3.25
Canceled (0)
--------
Options outstanding, February 28, 1999 271,500 $4.55
========
</TABLE>
Options for 12,500 shares are exercisable at February 28, 1999 at an
exercise price and a weighted average exercise price of $1.50 per share,
with a weighted average remaining contractual life of 6 years. At February
28, 1999, there were 150,000 shares available for grant under the plan.
In April 1997, the Company entered into a consulting agreement and a
nonqualified stock option agreement with a consulting firm. In accordance
with the consulting agreement, 78,000 shares of common stock were issued as
compensation as well as options to purchase an additional 200,000 shares
which were granted at exercise prices of $2.50 per share with respect to
100,000 options and $3.25 per share with respect to 100,000 options.
Subsequently, options to purchase 50,000 shares at $3.25 were canceled. In
June 1998, in connection with an additional extension of the term of the
consulting agreement with said consultant and an expansion in scope of the
services to be rendered by said consultant, the Company issued options to
purchase an additional 300,000 shares of Common Stock at exercise prices
ranging from $3.25 to $5.75 per share. Of these options, 41,000 shares
have been exercised, and options to purchase 259,000 shares remain
outstanding. The consulting agreement has been extended to and expires in
March, 2001. Consulting expense related to the issuances of stock and stock
options under the agreements totaled $171,182 and $190,200 for the fiscal
years ended February 28, 1999 and 1998, respectively.
Warrants
The Company has issued warrants to purchase common stock in connection with
the issuance of notes payable, the sale of units (Note 7), and as
compensation for professional service providers. Warrants outstanding at
February 28, 1999 are as follows:
<TABLE>
<CAPTION>
Number Exercise Price
Warrants to Purchase of Shares Per Security Expiration Date
- -------------------- --------- -------------- ---------------
<S> <C> <C> <C>
Common stock and
Class B warrant 327,768 $7.00 January 3, 2001
Common stock 112,500 $2.00 September 30, 2000
Common stock 50,000 $1.50 December 31, 2000
Common stock 68,550 $2.00 July 31, 2000
Common stock 382,318 $2.85 August 7, 2003
</TABLE>
Additionally, the Company has reserved 327,768 shares of common stock for
exercise of the Class B warrants.
Series B 12% Cumulative Convertible Preferred Stock
On April 9, 1998, the Company authorized the issuance and sale of 3,950
shares of Series B 12% Cumulative Convertible Preferred Stock and sold 2,500
of these shares to an investor. In addition, the Company issued a detached
ten-year stock purchase warrant to purchase 799,000 shares of the Company's
common stock at an exercise price of $0.01 per share to the investor for an
aggregate purchase price of $2,500,000. Dividends may be paid through the
issuance of additional shares of Series B preferred stock and warrants to
purchase common stock. A Stockholders Agreement dated April 9, 1998 (the
"Stockholders Agreement") was entered into among the acquirer of the Series
B Preferred Stock (the "Acquirer"), and all officers of the Company and
certain other affiliates ("the Holders") whereby, the Company shall have a
right of first refusal before any shares of Common Stock may be transferred
by any Holder. The Acquirer has a right of second refusal and co-sale
rights, if the Company does not elect to buy all of the securities it is
offered. If the Acquirer enters into an agreement to transfer, sell or
otherwise dispose of all of its Preferred Stock, Warrants and any Common
Stock issued upon conversion or exercise of the former ("Purchased Shares")
(such agreement referred to as a "Tag-Along Sale"), each Holder has the
right to participate in the Tag-Along Sale. If the Acquirer, alone or with
another person, accepts an offer from any party who is unaffiliated with it
to purchase any Purchased Shares which results in such party having the
ability to elect a majority of the Company's Board of Directors, then, at
the request of the Acquirer, each Holder shall sell all shares of Common
Stock held by such Holder (referred to as a "Drag-Along Sale").
The Series B Preferred Stock is convertible, at the option of the Acquirer,
into the number of shares of Common Stock which results from dividing the
Conversion Price into $1,000 for each share of Series B Preferred Stock
being converted. The Conversion Price shall be $5.00, subject to
adjustment.
The Series B Preferred Stock entitles the Acquirer to receive, when and as
declared by the Company's Board, cumulative cash dividends in preference to
the payment of dividends on all other shares of capital stock of the
Company. During the two-year period following issuance of the Series B
Preferred Stock (the "PIK Period") the Company has the option of making
payment of the semi-annual dividends on the Series B Preferred Stock either
in cash or by issuing additional shares of Series B Preferred Stock ("PIK
Dividends"). In the event the Company elects to pay dividends in shares of
Series B Preferred Stock, the Company is required to issue additional
detached ten-year dividend warrants (the "Dividend Warrants") to purchase
54,000 shares of Common Stock at an exercise price of $.01 per share for
each semi-annual dividend period that PIK Dividends are paid. During the
PIK Period the Company may not pay or declare cash dividends on any stock
other than the Series B Preferred Stock. Unless full dividends on the
Series B Preferred Stock for all past dividend periods and the then current
period shall have been paid or declared and a sufficient sum for the payment
thereof set aside in trust for the Series B Preferred Stock Holders, no
dividend (other than a dividend payable solely in Common Stock) shall be
paid or declared, and no distribution made, on any other shares of stock.
The Company may, at its own option and at any time after the third
anniversary of the original issuance of the Series B Preferred Stock, redeem
the Series B Preferred Stock, in whole but not in part. In such event, the
Company is obligated to pay holders of the Series B Preferred Stock the
investment value per share, plus a redemption premium equal to a 20%
internal rate of return on the investment value. A mandatory redemption of
1,250 shares of Series B Preferred Stock is required on each of the first
business days of April 2004 and 2005.
Each holder of Series B Preferred Stock is entitled to vote on all Company
matters and is entitled to the number of votes equal to the largest number
of full shares of Common Stock into which such shares of Series B Preferred
Stock are convertible. The Series B Preferred Stock holders shall be
entitled to elect one director out of the seven authorized directors of the
Company's board and one director out of the three directors comprising the
Company's Compensation Committee. If certain events occur or do not occur,
such as the failure to pay either a PIK Dividend or cash dividend to the
Series B Preferred Stock holders, the holders of the Series B Preferred
Stock shall be entitled, immediately upon giving written notice, to elect
the smallest number of directors that will constitute a majority of the
authorized number of directors.
The Company and the Acquirer entered into a Registration Rights Agreement
dated April 9, 1998 which requires the Company, upon written request, to
file a registration statement for the public resale of the Common Stock
issued on conversion of the Series B Preferred Stock. The Company is
required to file and cause to become effective a maximum of two registration
statements, excluding registration statements on Form S-3. The Company
shall not be obligated to effect more than one registration and Form S-3
during any six-month period and shall be obligated to file and cause to
become effective no more than six registration statements on Form S-3. No
registration statement is required to be filed unless the proposed public
offering price of the securities under such registration shall be at least
$5 million prior to deducting underwriting discounts and commissions). The
Registration Rights Agreement also provides for incidental registration.
The proceeds from the sale of 2,500 shares of preferred stock and the
detachable warrants were allocated to additional paid in capital and the
detachable warrant based on their respective fair market values as of the
date of sale and the dividend imputed.
8. Income Taxes
At February 28, 1999, the Company had no current or deferred tax liability.
At February 28, 1999, the Company had net operating loss carryforwards for
federal income tax purposes amounting to approximately $5,500,000 that
expire through 2015. The Company had deferred tax assets due to the net
operating loss carryovers and temporary differences amounting to
approximately $2,200,000 (February 28, 1999) and $1,500,000 (February 28,
1998), 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 carry over available for use in any given year if significant
changes in ownership interest of the Company occur.
9. Major Customers and Major Suppliers
For fiscal 1999, the Company's four largest customers accounted for
approximately $714,000, or 58%, of the Company's net sales. For fiscal 1998,
the Company's three largest customers accounted for approximately $237,000
or 49% of the Company's net sales. No other customer accounted for 10% or
more of net sales during either year.
For fiscal 1999, the Company's four largest suppliers accounted for
approximately or 88%, of the Company's net purchases. For fiscal 1998, the
Company's three largest suppliers accounted for approximately 67% of the
Company's net purchases. No other vendor accounted for 10% or more of net
sales during either year.
10. Subsequent Events
During the period from March 1, 1999 through June 1, 1999, 64 shares of the
Company's Series A 10% Mandatorily Convertible Preferred Stock, along with
accrued dividends, were converted into a total of 87,616 shares of Common
stock.
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTS
JD American Workwear, Inc.
Coventry, Rhode Island
We hereby consent to the incorporation by reference in the Form S-8 of JD
American Workwear, Inc. ( the "Company") of our report dated May 20, 1998
(June 12, 1998 as to Notes 1 and 10), relating to our audit of the 1998
financial statements of the Company appearing in the Company's Annual
Report on Form 10-KSB as of and for the year ended February 28, 1999.
BDO Seidman, LLP
Boston, Massachusetts
June 11, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTS
JD American Workwear, Inc.
Coventry, Rhode Island
We hereby consent to the incorporation by reference in the Form S-8 of JD
American Workwear, Inc. ( the "Company") of our report dated June 7, 1999,
relating to our audit of the 1998 financial statements of the Company
appearing in the Company's Annual Report on Form 10-KSB as of and for the
year ended February 28, 1999.
Bederson & Company LLP
West Orange, New Jersey
June 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> FEB-28-1999
<CASH> 174,472
<SECURITIES> 0
<RECEIVABLES> 803,597
<ALLOWANCES> 52,200
<INVENTORY> 1,267,628
<CURRENT-ASSETS> 2,394,839
<PP&E> 426,654
<DEPRECIATION> 157,331
<TOTAL-ASSETS> 2,885,041
<CURRENT-LIABILITIES> 621,940
<BONDS> 0
0
3
<COMMON> 4,496
<OTHER-SE> 2,052,846
<TOTAL-LIABILITY-AND-EQUITY> 2,885,041
<SALES> 1,226,143
<TOTAL-REVENUES> 1,226,143
<CGS> 928,826
<TOTAL-COSTS> 928,826
<OTHER-EXPENSES> 1,924,172
<LOSS-PROVISION> (1,626,855)
<INTEREST-EXPENSE> 88,911
<INCOME-PRETAX> (1,692,765)
<INCOME-TAX> (1,692,765)
<INCOME-CONTINUING> (1,692,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,692,765)
<EPS-BASIC> (.82)
<EPS-DILUTED> (.82)
</TABLE>
