SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NOT FEE REQUIRED]
For the transition period form ____________ to ____________
Commission file No. 33-98682
JD AMERICAN WORKWEAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 05-046010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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: $ 482,880
The aggregate market value of the voting and non-voting common equity
of the registrant held by non-affiliates of the registrant at May 19, 1998
was approximately $5,164,767 based upon the closing sale price of $4.50 for
the Registrant's Common Stock, $.002 par value, as reported by the National
Association of Securities Dealers OTC Bulletin Board on May 19, 1998.
As of May 15, 1998 the registrant had 1,984,899 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, 1998
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to Vote of Securities Holders 16
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters 17
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7. Financial Statements 22
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART III
Item 9. Directors, Executive Officers, Promoters, and
Control Persons; Compliance with Section 16(a)
of Exchange Act 23
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain Beneficial Owners and
Management 28
Item 12. Certain Relationships and Related Transactions 31
PART IV
Item 13. Exhibit List and Reports on Form 8-K 33
PART I
ITEM 1. BUSINESS.
Recent Developments
Private Placement of Series A 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 is
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), subject to adjustment. A
significant portion of the proceeds of this offering were 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.
The Series A Preferred Stock entitles the holders thereof 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; however 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 A Preferred Stock. Each holder of
Series A 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 A Preferred Stock are
convertible.
The Company has 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. At the time this registration
statement is declared effective by the SEC, the Series A Preferred Stock
will automatically convert into Common Stock. The Company has agreed to
maintain the effectiveness of this registration statement until March 15,
1999.
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 will
use 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 works "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Current stockholders
and prospective investors are cautioned that any forward-looking statements
are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various
factors. Such factors are described under the headings "Business-Certain
Considerations", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto.
General
The Company is primarily engaged in the business of designing,
manufacturing, marketing and selling commercial and industrial workwear
products. The Company was incorporated in Rhode Island in 1991 under the
name Jaque Dubois, Inc. and was re-incorporated in Delaware in 1994. In
July 1995, the Company's name was changed to JD American Workwear, Inc. The
Company's industrial workwear products consist of a complete line of
commercial and industrial footwear and workwear highlighted by 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. The Company was recently awarded a second patent with
respect to certain unique functional characteristics of its Safety Uniform
Pants. See "BUSINESS - Patents and Proprietary Rights." The Company
markets its products throughout the United States and internationally
principally for industrial and manufacturing applications.
The Industrial and Commercial Uniform Workwear Market
According to Moody's Industry Review (May 1995) the industrial and
commercial uniform work clothing market represents approximately $14.6
billion in annual sales. This market consists of thousands of businesses
with uniformed workers engaged in diverse fields such as agriculture,
chemicals, mining and exploration, manufacturing and fabrication,
transportation and shipping, pest control, utilities, flooring and
carpeting, construction and mechanical trades, and business and repair
services. There are approximately 45 million "blue collar" workers in the
United States in these industries. One common theme among these industries
is that they employ large work forces who spend a portion of their time
bending and kneeling on various surfaces, but do not spend enough time doing
so to make wearing external knee pads practical. In addition to being
impractical, external knee pads are cumbersome, and may cause circulation
problems.
Business Strategy
The Company's objective is to become a leading provider of safety
workwear products. To achieve this objective, the Company is pursuing a
business strategy which includes the following principal elements: (i)
expand product acceptance for its proprietary products - JD Safety Work
Jeans and JD Safety Uniform Pants; (ii) identify and pursue customers with
large manufacturing and construction bases of employees and safety
requirements, and (iii) offer a complete line of industrial workwear to
complement its proprietary core products.
Expand product acceptance for its proprietary products - JD Safety
Work Jeans, and JD Safety Uniform Pants. To create brand awareness and
name recognition and ultimately achieve product acceptance of JD Safety Work
Jeans and JD Safety Uniform Pants, the Company will continue to attend
numerous tradeshows and safety seminars, advertise in targeted trade
journals and the general media, make direct mailings to customer lists and
develop its team of independent distributors and sales agents. The Company
has also commenced an awareness program with safety related agencies and
trade groups such as NIOSH, OSHA and the National Safety Council. The
Company also intends to strengthen its relationships with various labor
unions and contractors associations.
Identify and pursue customers with large manufacturing and
construction bases of employees and safety requirements. The Company's sales
and marketing efforts are focused primarily towards safety directors and
loss control and ergonomics specialists of industrial and commercial
businesses. Management believes that such sales and marketing efforts will
encourage the purchase and use of the Company's products by such businesses.
Offer a complete line of industrial workwear to complement its
proprietary core products. 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 a
complete line of industrial workwear.
Products and Features
The Company offers three types of products: JD Safety Work Jeans, JD
Safety Uniform Pants and Private Label Conventional Workwear. 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%. For the fiscal year ended February
28, 1997, sales of the JD Safety Work Jeans accounted for approximately 62%
of revenues while sales of JD Safety Uniform Pants accounted for
approximately 31%. Sales of private label workwear and footwear represented
approximately 17% of the Company's revenues during the year ended February
28, 1998, and approximately 7% during the fiscal year ended February 28,
1997.
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 $39 price range. The
Company's sales to catalogs and retailers are at a lower price than the
retail price. JD Safety Work Jeans feature a permanent built-in closed
cell polymer padding in the knee area secured in place by a moisture
resistant protective leather sheathing, providing a cushion between the knee
and any work surface. This feature offers protection and comfort when
kneeling or leaning on surfaces that are hard, damp, cold, slippery or
rough. JD Safety Work Jeans also feature high quality leather sheathing
strategically placed on the seat creating a surface which is extremely
durable, pliable and slip resistant. The Company believes that JD Safety
Work Jeans increase job productivity by offering the wearer a high level of
protection with much greater ease of movement than found in conventional
(external) knee pads. Independent lab tests performed at various times from
1993 through the date of this report have demonstrated that JD Safety Work
Jeans are more durable and more protective than most workwear, as measured
against accepted industry standards. Certain functional properties of JD
Safety Work Jeans are protected by a patent issued in 1991. JD Safety 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.
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 has established manufacturing relationships with Fine Vines, Inc.
("Fine Vines") and East Texas Sportswear, Inc ("East Texas Sportswear").
The Company also continues to use Reed to produce certain products.
The Company's manufacturing arrangements with Fine Vines and East
Texas Sportswear 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, Fine Vines
and East Texas Sportwear. 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 and independent sales representatives. 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, 1997, 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. In February, 1997, the
Company's JD Safety Work Jeans were featured in a direct mail marketing
syndication with several major gasoline credit card companies. For the
fiscal years ended February 28, 1998 and 1997, direct marketing sales
accounted for approximately 75% and 20%, 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. 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, Sears Workwear Catalog,
Modern Farm, Wear Guard, The Sportsmans' Guide, Delta Safety Products, Ergo
Shop, and Masterman's. Approximately twenty million copies of the JC Penney
Catalog displaying JD SafetyWork Jeans will be mailed semi-annually
commencing in June 1998. Sales to catalog merchants accounted for
approximately 8% of revenues for the fiscal year ended February 28, 1998 and
approximately 42% for fiscal 1997.
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 17%
of revenues for the fiscal year ended February 28, 1998 versus 38% of total
revenues for the fiscal year ended February 28, 1997.
In April 1995, the Company signed a five year agreement with Shawnmark
Industries, Inc. ("Shawnmark") giving Shawnmark exclusive rights to sell the
Company's JD Safety Uniform Pants to the golf course industry. 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.
Independent Sales Representatives and Sales Arrangements
Since January 1993, the Company has been building a team of
independent sales representatives, regional sales directors, and sales
agents. The Company has established a representative network based
principally upon industry grouping of the account types which the
representative may solicit. While certain agreements also restrict the
territory in which a representative can solicit designated accounts, most
agreements simply limit the type of accounts which may be solicited. Other
accounts cannot be solicited without the prior approval of the Company.
For instance, one sales representative covers building supply distributors,
while another representative covers discount chains and retail clothing
stores. All representatives receive a commission of between 5.75% and 7% of
collected sales. This commission rate is reduced on integrated accounts
(i.e., accounts where the representative makes the introduction but
management assists in closing the sale). Currently, the Company has a total
of five active independent representatives covering a broad spectrum of
industries. In addition, certain of the Company's representatives have been
given exclusivity with respect to particular industries.
Competition
The principal competitive factors in the Company's markets include
innovative product design, product quality, value, product performance,
durability, availability, established customer relationships, name
recognition, distribution and price. The Company competes principally on
the basis of innovative product design, quality, product performance and
value.
The Company competes against a number of companies, many of which have
longer operating histories, established markets and far greater financial,
advertising, research and development, manufacturing, marketing, personnel
and other resources than the Company currently has or may reasonably be
expected to have in the foreseeable future. This competition may have an
adverse effect on the ability of the Company to scale up and expand its
operations or operate profitability. Dominant competitors of conventional
workwear include Carhart Industries, Red Kap Industries a division of VF
Corp., Cintas Corp. and Angelica Corp. The Company believes that its
competitors may be engaged in the development and marketing of products
similar to those being developed and marketed by the Company. Accordingly,
some of these companies may launch products competitive with those currently
offered or under development by the Company. 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) are being gradually discontinued
due to the Company's name change. The Company has applied with the U.S.
Patent and Trademark office to register the name "JD American Workwear" and
certain other proprietary trademarks that are used to identify its
proprietary products. There can be no assurance that third parties will not
assert infringement claims in the future, the defense costs of which could
be extensive.
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.
Customer Dependence
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 1998 net sales, R&S
Marketing accounted for approximately 19% of the Company's net sales, and
Depan accounted for approximately 11% of net sales. For fiscal 1997, the
Company's four largest customers accounted for approximately $300,000, or
60%, of the Company's net sales for the fiscal year, 21% to the largest
customer (Mason Shoe Company), 17% to Shawnmark Industries and 11% each to
JC Penney and American Linen Supply. No other customers accounted for 10% or
more of such sales.
Seasonality
The Company's business has been subject to seasonal trends based upon
climate, because the highly durable denim in JD Safety Work Jeans is heavier
(and consequently warmer) than the materials used in conventional work
jeans. Sales volume for JD Safety Work Jeans has been higher during the
fall and winter seasons and lower during the spring and summer seasons. The
Company believes that sales of JD Safety Uniform Pants and the conventional
workwear now offered by the Company will be less sensitive to the seasonal
trends which affect JD Safety Work Jeans. The Company believes, therefore,
that as its revenue mix changes to include greater uniform sales volume,
overall seasonality will be reduced.
Employees
At May 15, 1998, the Company had eleven employees, eight of which are
full-time. Of the employees, three are performing executive and marketing
functions, two are performing accounting and financial functions, two are
performing production and fulfillment functions, two 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, 1998 of $4,496,566 and incurred a net loss of $1,162,109 for
the fiscal year ended February 28, 1998. At February 28, 1997, the
accumulated deficit was $3,334,457 and the Company's net loss for the fiscal
year then ended was $804,208. 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 28, 1999, and
perhaps thereafter. The Company had significant negative cash flow from
operations during each of fiscal 1996, 1997 and 1998 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, 1998 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. The Company may be required to seek
additional financing if adequate levels of revenue are not realized, if
higher than anticipated costs are incurred in the expansion of the Company's
manufacturing and marketing activities, or if product demand exceeds
expected levels. There can be no assurance that any additional financing
thereby necessitated will be available on acceptable terms to the Company,
if at all.
Manufacturing, Distribution and Scale Up Risks. Although the Company
has established numerous customer relationships as well as relationships
with suppliers and manufacturers to conduct operations at higher unit
volumes, difficulties may be experienced in inventory management, product
distribution and other areas until the Company's operations have been scaled
up for some period of time. Since the Company has recently entered into
manufacturing arrangements with Fine Vines and East Texas Sportswear,
difficulties such as production delays and quality control problems may be
encountered. The Company has switched manufacturers on three occasions,
once because of the Company's capital constraints in meeting minimum
production levels, once because of the manufacturer's quality control
problems and most recently in contemplation of the Company's transaction
with ULLICO. 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. 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 a network of non-exclusive sales
representatives. The Company's future growth and profitability will depend
in part, on the expansion of this representative network and later, if
business conditions dictate, upon the building of an internal sales force,
the hiring of a sufficient number of qualified sales agents and upon their
ability to develop and continue relationships with commercial accounts.
Dependence on Limited Management; Part Time Chief Financial Officer.
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 43% 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
The Company currently leases 12,000 square feet of space of a 19,600
square foot facility in Coventry, Rhode Island pursuant to a lease expiring
August 1999. The monthly lease cost is approximately $2,000. The lease
contains an option, expiring on October 31, 1999, enabling the Company to
purchase the entire facility (including 3.5 acres of surrounding land) for
$150,000, provided the Company gives notice of exercise of the option by
September 30, 1999, and a purchase and sale agreement is executed by the
parties by November 10, 1999. In the event the Company exercises its
purchase option, the surrounding land included in the purchase would enable
the Company to expand the size of this facility. The Company also leases
approximately 6,000 square feet of warehouse space in West Warwick, Rhode
Island at the rate of $650 per month pursuant to a one year lease expiring
October 1998. Management believes that its current facilities will be
satisfactory to meet the Company's needs for the foreseeable future
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.
Bid Prices
----------------
High Low
---- ---
FISCAL 1997
First Quarter (April 12, 1996 through May 30, 1996) $6.750 $5.250
Second Quarter (June 1, 1996 through August 31, 1996) $6.500 $4.000
Third Quarter (September 1, 1996 through November 30, 1996) $6.000 $2.375
Fourth Quarter (December 1, 1996 through February 28, 1997) $5.000 $3.500
FISCAL 1998
First Quarter (March 1, 1997 through May 31, 1997) $5.000 $3.000
Second Quarter (June 1, 1997 through August 31, 1997) $4.500 $3.250
Third Quarter (September 1, 1997 through November 30, 1997) $5.000 $3.500
Fourth Quarter (December 1, 1997 through February 28, 1998) $5.500 $3.750
The closing bid price of the Company's Common Stock as reported by the
OTCBB was $4.00 on May 19, 1998.
(b) Holders. As of May 19, 1998 there were approximately 100 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
In December, 1997, the Company completed a private placement of 313
shares of Series A 10% Manditorily Convertible Preferred Stock ("Series A
Preferred Stock"), generating gross proceeds of $782,500. The offering was
made to a limited number of accredited and/or sophisticated investors in
reliance on an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "1933 Act"), pursuant to Section
4(2) of the 1933 Act and Rule 506 thereunder. The Company paid registered
broker dealers aggregate commissions of $67,000 in connection with the
offering. The Series A Preferred Stock is 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), subject to adjustment.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company has recently emerged from the development stage and
intends to scale up its operations. Since its inception, the Company has
been involved in the design and development of its products, the development
of its relationships with its suppliers and manufacturing contractors and
the marketing of its products through various distribution channels. First
commercial shipments of JD Safety Work Jeans were made in September 1992.
First commercial shipments of an early version of JD Safety Uniform Pants
were made during 1994. In March 1995, relatively small quantities of a
later version of JD Safety Uniform Pants were sold, and this version became
the working prototype for the JD Safety Uniform Pants currently manufactured
by the Company. The Company experienced during fiscal 1998 and 1997, and
may experience during all or a portion of fiscal 1999, 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, Fine Vines Inc. and East Texas Sportswear 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 will provide more
operational flexibility than that offered by prior manufacturers of 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 believes that the decrease in its annual sales are, in
large part, attributable to the amount of financial and other resources
expended in connection with the negotiation of the ULLICO investment and the
implementation of new marketing programs and manufacturing systems. Since
closing the ULLICO transaction, the Company's management has been able to
reapply its full attention to the Company's core business. While no
assurances can be made, the Company believes this return of focus will
enable it to increase revenues by carrying out its various sales programs
without distraction.
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. The Company believes that sales of JD Safety Uniform Pants and the
conventional workwear now offered by the Company will be less sensitive to
the seasonal trends which affect JD Safety Work Jeans. The Company
believes, therefore, that as its revenue mix changes to include greater
uniform sales volume, overall seasonality will be reduced.
For the reasons stated above, the Company believes that its results of
operations for the year ended February 28, 1998 are not necessarily
indicative of the Company's future results of operations. Following the
Company's initial public offering, the Company significantly increased its
expenditures for inventory, salaries, advertising and marketing expenditures
and other costs to increase its level of production.
Fiscal Year 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 1996. This increased loss is mainly
attributable to higher marketing, employment and consulting expenses.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net sales increased $414,298 or 418.8% in fiscal 1997 as compared to
fiscal 1996. This increase was directly attributable to increases in unit
sales volume.
Gross profit increased $166,472 or 547.4% in fiscal 1997 as compared
to fiscal 1996. Gross profit as a percentage of sales increased to 38% in
fiscal 1997 as compared to 31% in fiscal 1996. The increase in gross profit
percentage is primarily due to a shift in marketing and sales to more
profitable direct sales and catalog merchant sales programs.
Selling, general and administrative ("SG&A") increased $29,319 or 3.6%
in fiscal 1997 as compared to fiscal 1996. The Company incurred increases
in payroll, research and development and consulting expenses which were
partially offset by decreases in amortization of debt discount, amortization
of loan fees and advertising expenses.
Net interest expense was $156,601 in fiscal 1997 compared to net
interest expense of $387,227 in fiscal 1996. The decrease in interest
expense was primarily due to the reduction of outstanding debt resulting
from the conversion of several classes of notes.
The Company's net loss for fiscal 1997 was $804,208, compared to a net
loss of $1,171,988 in fiscal 1996. This decreased loss is directly
attributable to the increase in sales and gross profit from operations as
well as the decrease in interest costs.
Liquidity and Capital Resources
During fiscal 1998, net cash used by operations was $953,967 as
compared to net cash used by operations of $1,383,676 in fiscal 1997.
Accounts receivable decreased by $18,298 reflecting an increase in
collection efforts. 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.
During fiscal 1998 and 1997, the Company incurred capital expenditures
of $13,284 and $28,773, respectively. The Company plans capital spending of
approximately $50,000 on machinery, equipment and computer systems during
fiscal 1999.
In December, 1997, the Company completed a private placement of
$782,500 of Series A 10% Manditorily Convertible Preferred Stock. A
significant portion of the proceeds of this offering were 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 1 - Business - Recent Developments - Private Placement
of Series A Preferred Stock."
As previously announced, on April 9, 1998, the Company entered into a
Securities Purchase Agreement (the "Purchase Agreement") with a private
investor. 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 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 will use 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."
The Company is currently negotiating with debt holders to convert its
outstanding convertible debt into Common Stock of the Company.
Management believes cash flow from operations and from
invested funds will provide for working capital needs and
principal payments on long-term debt through fiscal 1998.
Inflation is not expected to have a major impact on the Company's
operations.
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 as Exhibit 16.1.
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 39 Chairman of the Board, President and
Chief Executive Officer
Thomas A. Lisi 53 Vice President, Marketing and
Director
Anthony P. Santucci 35 Treasurer, Chief Financial Officer,
Secretary and Director
Elizabeth Cotter 36 Director
Dean M. Denuccio 32 Director
Steev Panneton 39 Vice President, Manufacturing
and Operations and Director
Herb Canapary 65 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 the founder and a former
a member of the executive committee of the Leather Apparel Association and
is considered by his peers to be a leading authority in the leather
apparel industry. Mr. Lisi and the Company are parties to a sales
representative agreement and a consulting agreement, and Geronimo and
the Company are parties to an overseas agency agreement. See "CERTAIN
TRANSACTIONS."
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, 1998, 1997, and 1996, 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 during fiscal 1997
(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
Compensation
Name and Fiscal Options by All Other
Principal Position Year Annual Compensation No. of Shares Compensation
- ------------------ ------ ------------------- ------------- ------------
Salary Bonus
------ -----
<S> <C> <C> <C> <C> <C>
David N. DeBaene, 1998(1) $105,000 -- -- --
President and CEO 1997(2) 85,000 -- -- --
1996 57,557 -- -- --
<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>
</TABLE>
The Company does not have any annuity, retirement, pension, deferred
or incentive compensation plan or arrangement under which any executive
officers are entitled to benefits, nor does the Company have any long-term
incentive plan pursuant to which performance units or other forms or
compensation are paid. Executive officers who qualify will be permitted to
participate in the Company's 1995 Stock Option Plan which was adopted in
February 1995. See "Stock Option Plan." Executive officers may participate
in group life, health and hospitalization plans if and when such plans are
available generally to all employees.
Employment Agreements
Effective as of March 1, 1995, the Company entered into an employment
agreement with 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 is $65,000, increasing annually thereafter
in $20,000 increments. In order to conserve resources, Mr. DeBaene has
deferred the implementation of his salary increase. 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 an Consulting
Agreement with Thomas A. Lisi for his services on a part-time basis as Vice
President/Marketing & Manufacturing. Mr. Lisi is obligated to render
services of not more than eight hours per week at the Company's headquarters
facility and is compensated at a rate of $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, 1998,
approximately 10 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.
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. In connection
with the Public Offering, the Company agreed to restrict the amount of
Options available for grant under the Plan to 15% of the number of shares of
Common Stock outstanding.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(individual grants)
There were no individual grants of stock options or stock appreciation
rights to any of the named executive officers during fiscal 1998.
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 1998, and none of the named executive
officers held any stock options or stock appreciation rights as of the end
of fiscal 1998.
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 April 30, 1998 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>
<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) 36.00%
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) 2.50%
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Steev Panneton Common Stock 60,023 3.02%
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) 42.54%
As a Group (7 persons) Series A Preferred **
Series B Preferred **
Other 5% Stockholders
Joseph Lussier Common Stock 136,200 (6) 6.42%
640 Hospital Trust Bldg
Providence, RI
William Durkin Common Stock 172,200 (6)(7) 8.59%
640 Hospital Trust Bldg Series A Preferred 20 6.39%
Providence, RI
Merit Capital Assoc, Inc. Series A Preferred 20 6.39%
1221 Post Road
Westport, CT
Gerald Hoak Series A Preferred 40 12.78%
640 Hospital Trust Bldg
Providence, RI
ULLICO Common Stock 1,299,000 (8) 39.56%
111 Massachusetts Ave Series B Preferred 2,500 100.00%
Washington, DC
<FN>
<F*> Assumes 1,984,899 shares of Common Stock, 313 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 136,200 common stock
purchase warrants (the "time warrants") but does not include shares
issuable upon exercise of 96,624 common stock purchase warrants, which
are exercisable only upon certain vesting conditions (the "performance
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 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>
</TABLE>
Escrow of Shares. In accordance with the requirements of certain
state securities administrators, certain of the Company's principal
stockholders have agreed to place into escrow an aggregate of 700,000 shares
(the "Escrow Shares") of the 875,000 shares of Common Stock held by them.
Under the escrow agreement, the Escrow Shares will be ratably released to
the holders in 25% increments on the sixth, seventh, eighth and ninth
anniversaries, respectively, of the 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 are divided into two (2) classes, time
warrants which contain vesting provisions based solely on the expiration of
time, and performance warrants, containing vesting provisions based upon the
price of the Company's Common Stock during various periods. Messrs. Durkin
and Lussier received 136,200 time warrants and 96,624 performance warrants
each. As of the date of this report, none of the performance warrants have
vested, half of said performance warrants have expired, and the balance of
the performance warrants may potentially vest, depending on satisfaction of
the vesting conditions contained therein. At the date hereof, all of the
time warrants have vested and are exercisable. The exercise price of all of
the warrants is $4.00 per share, subject to adjustment under certain
circumstances. Messrs. Lussier and Durkin are affiliated with Merit Capital
Associates, Inc., the underwriter of the Company's Public Offering.
Mission Bay Consultants, Inc. On April 2, 1997, the Company entered
into a one (1) year Consulting Agreement with Mission Bay Consulting, Inc.,
a financial public relations firm ("Mission Bay"), for certain financial
consulting services. In connection with this Consulting Agreement the
Company issued to Mission Bay an option under the Company's 1995 Stock
Option Plan to purchase an aggregate of 200,000 shares of common stock, and
also issued 28,000 shares of common stock under the 1995 Stock Option Plan.
The Company has also agreed to reimburse Mission Bay for its accountable
expenses incurred in connection with the Agreement. 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.
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, 1998, the Company owed approximately $25,000 in the
aggregate to the parents of David N. DeBaene and a corporation which they
control. These loans are not interest bearing and will be repaid out of
operating cashflow. In addition, at February 28, 1998, David N. DeBaene
owed approximately $10,000 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
1998.
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>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ David N. DeBaene Chairman of the Board, President June 11, 1998
David N. DeBaene and Chief Executive Officer
(Principal Executive Officer)
/s/ Anthony P. Santucci Treasurer, Chief Financial Officer, June 11, 1998
Anthony P. Santucci Secretary and Director (Principal
Financial Officer)
/s/ Thomas A. Lisi Director June 11, 1998
Thomas A. Lisi
/s/ Elizabeth Cotter Director June 11, 1998
Elizabeth Cotter
/s/ Dean M. Denuccio Director June 11, 1998
Dean M. Denuccio
/s/ Steev Panneton Director June 11, 1998
Steev Panneton
/s/ Herbert Canapary Director June 11, 1998
Herbert Canapary
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Incorporated Documents SEC Exhibit Reference Numbered
---------------------- --------------------- ------------
<C> <S> <C> <C>
2.1 Form of Conversion Agreement As filed with the Registrant's N/A
between the Registrant and certain Form 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 filed with the Registrant's N/A
as 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 N/A
issued in the Registrant's January Form SB-2 1995 Private Placement
on October 27, 1995, File No.
33-98486
4.3 Form of Unit Purchase Option issued As filed with the Registrant's N/A
to Merit Capital Associates, Inc. Form SB-2 on October 27, 1995,
File No. 33-98486
4.4 Form of 11% Convertible Subordinated As filed with the Registrant's N/A
Note of the Registrant issued in the Form SB-2 on October 27, 1995,
Registrant's August, 1995 Private File No. 33-98486
Placement
4.5 Form of Warrant of the Registrant As filed with the Registrant's N/A
issued in the Registrant's August, Form SB-2 on October 27, 1995,
1995 Private Placement File No. 33-98486
4.6 Securities Purchase Agreement As filed with the Registrant's N/A
dated April 9, 1998 Form 8-K on April 15, 1998
4.7 Certificate of Designation of As filed with the Registrant's N/A
Series B Preferred Stock. Form 8-K on April 15, 1998
4.8 Stockholders' Agreement dated As filed with the Registrant's N/A
April 9, 1998. Form 8-K on April 15, 1998
4.9 Registration Rights Agreement dated As filed with the Registrant's N/A
April 9, 1998 Form 8-K on April 15, 1998
4.10 Warrant Certificate issued to ULLICO As filed with the Registrant's N/A
Form 8-K on April 15, 1998
4.11 Escrow Agreement As filed with the Registrant's N/A
Form 8-K on April 15, 1998
10.1 Lease Agreement for the Registrant's As filed with the Registrant's N/A
Coventry, RI facility Form SB-2 on October 27, 1995,
File No. 33-98486
10.2 Loan Agreement with Home Loan As filed with the Registrant's N/A
and Investment Bank Form SB-2 on October 27, 1995,
File No. 33-98486
10.3 Employment Agreement with As filed with the Registrant's N/A
David N. DeBaene Form SB-2 on October 27, 1995,
File No. 33-98486
10.4 Employment Agreement with As filed with the Registrant's N/A
Elizabeth Cotter Form SB-2 on October 27, 1995,
File No. 33-98486
10.5 Consulting Agreement with As filed with the Registrant's N/A
Thomas A. Lisi Form SB-2 on October 27, 1995,
File No. 33-98486
10.6 Overseas Agency Agreement with As filed with the Registrant's N/A
Geronimo Leathers Form SB-2 on October 27, 1995,
File No. 33-98486
10.7 Registrant's 1995 Stock Option Plan As filed with the Registrant's N/A
Form SB-2 on October 27, 1995,
File No. 33-98486
10.8 Form of Option Agreement under the As filed with the Registrant's N/A
Registrant's 1995 Stock Option Plan Form SB-2 on October 27, 1995,
File No. 33-98486
10.9 Form of Sales Representative As filed with the Registrant's N/A
Agreement Form SB-2 on October 27, 1995,
File No. 33-98486
10.10 Special Accounts Director Agreement As filed with the Registrant's N/A
with Shawnmark Industries dated Form SB-2 on October 27, 1995,
July 25, 1995 File No. 33-98486
16.1 Letter of Richard A. Eisner, LLP As filed with the Registrant's N/A
dated May 6, 1998 Form 8-K on May 13, 1998
99.1 United States Patent #5,038,408 As filed with the Registrant's N/A
Form SB-2 on October 27, 1995,
File No. 33-98486
99.2 United States Patent #5,634,215 As filed with the Registrant's N/A
Form SE on June 11, 1998
Filed Herewith
4.12 Certificate of Designations of
Series A Preferred Stock
23.1 Consent of BDO Seidman, LLP
27 Financial Data Schedule
</TABLE>
JD AMERICAN WORKWEAR, INC
_______________________
FINANCIAL STATEMENTS
For the years ended February 28, 1998 and 1997
BDO BDO Seidman, LLP 40 Broad Street, Suite 500
Accountants and Consultants Boston, Massachusetts 02109-4307
Telephone:(617) 422-0700
Fax: (617) 422-0909
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, 1998, 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 general 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 1998 financial statements referred to above present
fairly, in all material respects, the financial position of JD American
Workwear, Inc. at February 28, 1998, 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 1998 have been prepared assuming
the Company will continue as a going concern. However, through February 28,
1998, the Company has experienced substantial losses and at February 28, 1998
had an accumulated deficit of approximately $4,500,000, has not paid all
obligations as they became 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.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Boston, Massachusetts
May 20, 1998
June 12, 1998 as to Notes 1 and 10
Richard A. Eisner & Company, LLP
Accountants & Consultants
RAE
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
JD American Workwear, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of JD American Workwear, Inc. for the
year ended February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with general 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 1997 financial statements enumerated above present
fairly, in all material respects, the results of operations of JD American
Workwear, Inc. and its cash flows for the year ended February 28, 1997, in
conformity with generally accepted accounting principals.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, at February 28, 1997,
the Company had a working capital deficiency and a capital deficiency which
raised substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are discussed in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Richard A. Eisner & Company
Cambridge, Massachusetts
May 30, 1997
JD AMERICAN WORKWEAR, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
February 28,
1998
------------
<S> <C>
ASSETS (Note 4)
Current Assets:
Cash and cash equivalents $ 16,932
Accounts receivable, net of allowance for doubtful
accounts of $16,900 203,685
Inventories (Note 2) 1,057,784
Prepaid expenses, current portion 229,859
Loans receivable, employees 17,419
----------
Total current assets 1,525,679
Property and equipment, net (Note 3) 75,369
Intangible assets, net (Note 3) 57,547
Prepaid expenses, long-term 182,713
Other assets 15,032
----------
$1,856,340
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4) $ 868,325
Accounts payable and accrued expenses 234,412
Accrued interest on notes payable 85,958
Short-term loans 11,774
----------
Total current liabilities 1,200,469
----------
Long-term debt, net of current portion (Note 4) 101,830
Commitments and contingencies (Notes 5 and 6)
Stockholders' equity (Notes 6, 7 and 10):
Preferred stock, Series A, $.001 par value;
authorized 1,000,000 shares; issued and outstanding,
313 shares (liquidating preference $782,500)
Common stock, $.002 par value; authorized
4,500,000 shares; issued and outstanding,
1,984,899 shares 3,970
Additional paid-in-capital 5,046,637
Accumulated deficit (4,496,566)
----------
Total stockholders' equity 554,041
----------
$1,856,340
==========
</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,
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 482,880 $ 513,233
Cost of goods sold 245,894 316,350
----------- -----------
Gross profit 236,986 196,883
Selling, general and administrative
expenses (Notes 5 and 6) 1,229,214 844,490
----------- -----------
Loss from operations (992,228) (647,607)
Interest expense, net (169,881) (156,601)
----------- -----------
Net loss $(1,162,109) $ (804,208)
=========== ===========
Basic and diluted net loss per common share $ (0.63) $( 0.48)
=========== ===========
Weighted average shares outstanding 1,855,859 1,676,305
=========== ===========
The accompanying notes are an integral part of the financial statements.
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CASH FLOWS
</TABLE>
<TABLE>
<CAPTION>
Years Ended
-----------------------------
February 28, February 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,162,109) $ (804,208)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 69,810 47,959
Securities issued for services 314,242 0
Changes in operating assets and liabilities:
Accounts receivable 18,298 (213,552)
Inventories (228,893) (201,411)
Prepaid expenses and other assets (38,994) (8,773)
Accounts payable and accrued expenses 73,679 (203,691)
----------- -----------
Net cash used by operating activities (953,967) (1,383,676)
----------- -----------
Cash flows from investing activities:
Capital expenditures (13,284) (28,773)
Net cash used by investing activities (13,284) (28,773)
Cash flows from financing activities:
Exercise of stock options 412,500 0
Proceeds from notes and long-term debt 233,000 15,024
Proceeds from sales of common and
preferred stock 782,500 544,888
Issuance costs for common and preferred
stock (122,575) (14,985)
Principal payments on notes and
long-term debt (328,876) (345,602)
----------- -----------
Net cash provided by financing activities 976,549 199,325
----------- -----------
Increase (decrease) in cash and cash
equivalents 9,298 (1,213,124)
Cash and cash equivalents, beginning of year 7,634 1,220,758
----------- -----------
Cash and cash equivalents, end of year $ 16,932 $ 7,634
=========== ===========
Supplemental cash flow disclosures:
Interest paid $ 62,793 $ 58,300
=========== ===========
</TABLE>
See Notes 6 and 7 for information relating to certain 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, 1998 and 1997
(Notes 6, 7 and 10)
<TABLE>
<CAPTION>
Common stock Preferred stock Additional
$.002 Par Value $.001 Par Value Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 29, 1996 1,564,225 $3,128 $2,450,700 ($2,530,249) $ (76,421)
Initial public offering of
stock, net 77,768 156 422,401 422,557
Shares issued to retire debt 63,440 127 253,634 253,761
Shares issued for services 3,000 6 4,494 4,500
Warrants issued for services 60,000 60,000
Net loss (804,208) (804,208)
-----------------------------------------------------------------------------------------
Balance, February 28, 1997 1,708,433 $3,417 0 $0 $3,191,229 ($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 0 0 179,000 179,000
Exercise of stock options 150,000 300 412,200 412,500
Warrants issued for services 0 0 92,000 92,000
Shares issued to retire debt 9,554 19 51,573 51,592
Exercise of warrants 2,437 6 (6) 0
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 ($4,496,566) $ 554,041
=========================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
February 28, 1998 and 1997
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. During the fiscal year ended February 28,
1998, the Company completed a private offering of series "A" preferred
stock. Further, subsequent to the fiscal year end, in April, 1998, the
Company issued shares of series "B" preferred stock. (See Note 10.) The
Company received proceeds of $2,500,000 upon the closing of the agreement of
which $1,500,000 was deposited in escrow and was released to the Company
on June 12, 1998 upon the Company meeting certain conditions.
Management believes that the proceeds of these offerings will enable the
Company to meet its cash requirements through February 28, 1999. 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>
Furniture and fixtures 5 - 7 years
Machinery and equipment 5 - 7 years
Office equipment 5 - 7 years
Trucks and autos 5 years
</TABLE>
Leasehold improvements are stated at cost and are amortized on a straight-line
basis over the shorter of the term of the lease or the estimated useful life of
the asset.
Intangible assets
Organization costs are stated at cost and are being amortized over 60 months.
Loan origination fees and debt offering costs 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.
Stock-based compensation
The Company accounts for its employee stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted
the disclosure only alternative of SFAS No. 123 which requires disclosure of
the pro-forma effects on loss and loss per share as well as certain other
information.
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.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, Earnings per share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive affects of options, warrants and convertible
securities. Dilutive earnings per share is very similar to the previously
reported fully diluted earnings per share.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28, 1998
-----------------
<S> <C>
Raw materials $ 81,637
Work-in-process 51,376
Finished goods 924,771
----------
$1,057,784
==========
</TABLE>
3. Property, Equipment and Intangible Assets
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
February 28, 1998
-----------------
<S> <C>
Furniture and fixtures $ 25,182
Leasehold improvements 74,077
Machinery and equipment 74,923
Office equipment 17,091
Trucks and autos 19,946
--------
211,219
Less accumulated depreciation 135,850
--------
$ 75,369
========
</TABLE>
Intangible assets, at cost, consists of the following:
<TABLE>
<CAPTION>
February 28, 1998
-----------------
<S> <C>
Patents $ 52,070
Debt offering costs 189,563
Loan financing fees 39,075
Organization costs 10,500
---------
291,208
Less accumulated amortization 233,661
---------
$ 57,547
=========
</TABLE>
4. Notes Payable and Long-Term Debt
Details of the Company's notes payable and long-term debt as of February 28,
1998 are as follows:
<TABLE>
<S> <C>
Note Payable to a bank at the prime rate plus 2 3/4%.
Payable in monthly installments of approximately $6,000
principal plus interest through August 2000, The note
is collateralized by all Company assets and real estate
owned by certain stockholders. The note is guaranteed in
part by the U.S. Small Business Administration. In
addition, the note is personally guaranteed by certain
stockholders of the Company. The interest rate at
February 28, 1998 is 11.25%. $187,830
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%. Unamortized debt discount at
February 28, 1998 amounted to approximately $17,000.
These notes, including accrued interest are convertible
at the option of the holder, into common stock at $5.40
per share, subject to adjustment as defined in the agreement. 457,045
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
12% 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. 60,000
10% notes due to investors on April 30, 1998. The
notes are subordinated in right of payment to all
indebtedness of the Company outstanding as of
February 1997 or to be incurred in the future.
The notes are collateralized by a first priority
security interest in all inventory of the Company
and are convertible into common stock at a rate of
$4.00 per share, subject to adjustment as defined
in the agreements. 200,000
Non-interest bearing demand note due to a company owned
by the parents of the President of the Company. 4,000
Non-interest bearing demand note due to the parents
of the President of the Company. 11,280
Non-interest bearing note due to a nursing home
owned by the parents of the President of the Company
due October 1, 2000. The Company is to pay the lender
1% of annual net profits commencing October 1, 1993
until the note is paid in full. 10,000
--------
Total 970,155
Less current portion 868,325
--------
NET LONG-TERM DEBT $101,830
========
</TABLE>
Interest expense charged to operations related to these notes for the
years ended February 28, 1998 and February 28, 1997 was $160,500 and
$167,263, respectively.
See Note 7 with respect to the conversion of debt.
The scheduled repayment of debt at February 28, 1998 is as follows:
<TABLE>
<CAPTION>
Year ending February 28, Amount
------------------------ ------
<S> <C>
1999 $868,325
2000 91,830
2001 10,000
--------
$970,155
========
</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 per management and the related parties, are non-
interest bearing. Accordingly, for the years ended February 28, 1998 and
February 28, 1997 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 $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 provides various legal services to the Company. During fiscal
1998 and 1997, fees of approximately $28,000 and $39,000 were incurred,
respectively.
6. Commitments and Contingency:
Employment agreements
The Company has an employment agreement with one key employee providing for
compensation of $105,000 for the fiscal year ended February 28, 1998, with
annual increases of $20,000 through February 2000. The agreement also contains
a bonus stipulation 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 agreement. No bonus is earned unless and until the Company
earns pre-tax income in excess of $5 million.
Lease Obligations
During 1996 the Company leased facilities in West Warwick and Coventry, Rhode
Island which leases expire through April 30, 1999. The Company may continue to
occupy the facilities under a tenant at will agreement upon the expiration of
the lease, until 30 days notice from either party, at a rate of approximately
$2,685 per month. The Coventry lease agreement contains an option which expires
on October 30, 1999 whereby the Company may purchase the Coventry facility for
$150,000.
Future annual rent under this lease is as follows:
<TABLE>
<CAPTION>
Year ending February 28, Amount
------------------------ ------
<S> <C>
1999 $28,795
2000 4,000
-------
$32,795
=======
</TABLE>
Rent expense charged to operations for each of the years ended February 28,
1998 and February 28, 1997, was approximately $32,000.
Consulting agreements
The Company has entered into a consulting agreement with one of its directors,
whereby, the Company paid the director a minimum of $10,000 annually through
February 28, 1998. The agreement renews automatically for periods of one year
until terminated by either party.
In connection with their agreement to provide financial consulting services to
the Company for a three 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, none of the performance warrants have vested,
but a portion of such warrants may potentially vest, depending on satisfaction
of the vesting conditions contained therein. At the date hereof, an aggregate
of 217,920 (or 108,960 per holder) of the time warrants have vested and are
exercisable. The exercise price of all of the warrants is $4.00 per share,
subject to adjustment under certain circumstances. Messrs. Lussier and Durkin
are affiliated with Merit Capital Associates, Inc., the underwriter of the
Company's Public Offering. As permitted by generally accepted accounting
principles, the warrants were valued at the estimated value of the services to
be performed. The Company does not expect that the performance warrants will
vest. The value assigned to the warrants is being amortized over the term of
the consulting agreements, resulting in amortization expense of $92,000 and
$60,000 in the fiscal years ended February 28, 1998 and 1997, respectively.
In fiscal 1998, the Company entered into a consulting agreement which has
since been terminated. Pursuant to this agreement, 20,000 shares of
restricted common stock was issued as compensation for services.
Also in fiscal 1998, 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.
7. Capitalization
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 February and April 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 became 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.
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. Each Preferred Share is convertible at the option of the holder
into Common Stock at a conversion price of $2.50 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 250,000 shares of common stock. Option
activity for the years ended February 28, 1998 and February 28, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-average
Number exercise price
of Shares per share
--------- ----------------
<S> <C> <C>
Options outstanding, February 29, 1996 25,000 $1.75
Canceled (12,500) 2.00
--------
Options outstanding, February 28, 1997 12,500 1.50
Granted 287,500 2.78
Exercised (237,500) 2.84
Canceled (50,000) 3.25
--------
Options outstanding, February 28, 1998 12,500 $1.50
========
</TABLE>
Options for 12,500 shares are exercisable at February 28, 1998 at an
exercise price and a weighted average exercise price of $1.50 per share, with
a weighted average remaining contractual life of 7 years. At February 28,
1998, no shares were available for grant under the plan. See Note 7 with
respect to an option to purchase units granted to the underwriter of the public
offering.
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. The consulting
agreement expires in March 2000. Consulting expense related to the issuances
of stock and stock options under the agreements of $190,200 was recorded for
the fiscal year ended February 28, 1998.
The Company adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" but applies Accounting Principles Board Opinion
No. 25, and related interpretations in accounting for its plans. There was no
compensation expense recognized in 1998 or 1997. SFAS No. 123 requires pro
forma disclosures of the compensation cost of certain awards under stock option
plans. There were no awards during the years ended February 28, 1998 and 1997
requiring performa disclosures.
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, 1998 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 465,648 $4.00 August 7, 2003
</TABLE>
Additionally, the Company has reserved 327,768 shares of common stock for
exercise of the Class B warrants.
Conversion of 15% P.O. Financing Note
In July 1996, holders of the Company's 15% Purchase Order Financing Note
agreed to convert the principal of $195,571 and all accrued interest thereon
of $58,250 into Common Stock at a conversion price of $4.00 per share,
amounting to an aggregate of 63,440 shares of Common Stock
8. Income Taxes
At February 28, 1998, the Company had no current or deferred tax liability.
At February 28, 1998, the Company had net operating loss carryforwards for
federal income tax purposes amounting to approximately $3,900,000 that expire
through 2014 and had deferred tax assets due to the net operating loss
carryovers and temporary differences amounting to approximately $1,500,000, all
of which have been fully reserved since the likelihood of the realization of
the benefits cannot be established.
The Internal Revenue Code contains provisions which may limit the net operating
loss carryover available for use in any given year if significant changes in
ownership interest of the Company occur.
9. Major Customers
For fiscal 1998, the Company's three largest customers accounted for
approximately $237,000, or 49%, of the Company's net sales. Approximately 19%
to Mason Shoe Company, approximately 11% to Depan, and approximately 19% to R
&S Marketing. For fiscal 1997, the Company's four largest customers accounted
for approximately $300,000 or 60% of the Company's net sales for the fiscal
year, 21% to the largest customer (Mason Shoe Company), 17% to Shawnmark
Industries and 11% each to JC Penney and American Linen Supply. No other
customers accounted for 10% or more of such sales.
10. Subsequent Events
On April 9, 1998, the Company authorized the issuance and sale of 3,950 shares
of Series B 12% Cumulative Redeemable 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. If certain events occur or do not occur, such as the
failure to pay a Dividend to the Series B Preferred Stockholders, 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 received
proceeds of $2,500,000 upon the closing of the agreement of which $1,500,000
was deposited in escrow and was released to the Company on June 12, 1998
upon the Company meeting certain conditions.
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. In addition, the shareholders of the Company approved an
amendment to the 1995 Stock Option Plan and reserved an additional 500,000
shares of common stock for issuance under the plan.
