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 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file No. 33-98682
JD AMERICAN WORKWEAR, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 05-0460102
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46 OLD FLAT RIVER ROAD COVENTRY, RHODE ISLAND 02816
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(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: $ 103,567
The aggregate market value of the voting and non-voting common equity of
the registrant held by non-affiliates of the registrant at June 9, 2000 was
approximately $3,093,945 based upon the closing sale price of $1.1875 for the
Registrant's Common Stock, $.002 par value, as reported by the National
Association of Securities Dealers OTC Bulletin Board on June 9, 2000.
As of June 1, 2000 the registrant had 2,605,427 shares of Common Stock,
$.002 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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JD AMERICAN WORKWEAR, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to Vote of Securities Holders 15
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters 16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Opera 17
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 24
Item 10. Executive Compensation 26
Item 11. Security Ownership of Certain Beneficial Owners and
Management 29
Item 12. Certain Relationships and Related Transactions 32
PART IV
Item 13. Exhibit List and Reports on Form 8-K 34
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PART I
ITEM 1. BUSINESS.
RECENT DEVELOPMENTS
PATINA CORP. ACQUISITION
On June 12, 2000 the Company completed the acquisition of 100% of Patina Corp.,
which includes assets of its subsidiary International Machine and Welding, Inc.
Patina Corp. is a holding corporation that acquires going concerns and/or assets
of various businesses. Patina Corp. was formed in April 1999 for such functions
and immediately undertook to find acquisitions and purchased its first
subsidiaries in August 1999. Patina Corp. immediately began to seek funding
using various assets of its demolition, construction and asbestos abatement
subsidiaries. Funding was not secured for the various contracts and
opportunities that arose between inception and May 31, 2000. On May 31, 2000 all
agreements related to the subsidiaries ceased and the assets were returned to
their respective owners. While Patina Corp. or JD American Workwear, Inc.
through its construction management division anticipates doing business with
these associates the original contract and the assets that were described in the
anticipated transaction announced in August 1999 are no longer under the control
of Patina Corp.
However, the assets acquired on June 1, 2000 in an agreement between
International Commerce and Finance, Inc. and Patina Corp. allows the terms and
conditions of the amended contract with Patina Corp. to close.
These assets include a 28,000 square foot machine shop and 38 acres of
commercially zoned land in Bartow, Florida and all the tools and machinery to
make this facility the largest machine shop South of Jacksonville, Florida. The
operation also includes a heavy equipment and parts sales operation. The
combined entities expect a minimum of $3 million in revenue in its first full
fiscal year. Certain management of the former business located at this site are
employees of the Company and are well known in the area. These management
personnel have been responsible for sales well in excess of the Company
projections, each year, over the last thirty years. It is anticipated that this
subsidiary will provide $500,000 in net operating profits in its first full
fiscal year.
The contract terms require up to $6,500,000 of assets to be included based on
the appraised value of the equipment, machinery, land buildings, receivables and
other assets and $3,000,000 in sales contracts or commitments to be included.
Patina Corp. awaits the signing of a $3,000,000 contract to repair and
rehabilitate a structure for the New York State Department of Transportation.
The award letter has been received and all the requirements have been fulfilled
and have been returned to the agency. It is anticipated that the project will
begin in July 2000. This contract, when signed, will be managed by the JD
American construction management division. Simultaneous with the receipt of the
contract an additional $1 million dollars in heavy equipment will be added to
the asset base.
The acquisition is being funded with 11,300 shares of a newly created 6% Series
C Convertible Preferred Stock with a stated value $1,000 per share and
conversion rights into common stock at $1.00 per share when available. 1,500 of
these shares are issued and outstanding but held in escrow for use in paying the
earn-up provisions expected to be included in the employment agreements of the
management of the subsidiary. Additionally, the Preferred Shares pay a dividend
of 6% per annum payable in cash or in kind semi-annually. These shares have
voting rights equaling 3,562,500 shares.
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INTERNATIONAL COMMERCE AND FINANCE, INC.
On June 1, 2000 the Company signed an option agreement with International
Commerce and Finance, Inc. to have the right of first refusal to acquire any and
all projects that are currently under contract or may be conceived, acquired or
partnered for two years for the sum of 25,000 restricted common shares.
International Commerce and Finance, Inc. currently has the management contract
and an option to purchase a going concern with a one stop solution to the
banking industries needs and desire to integrate their branch banking system
with personal computer networks relieving themselves of expensive hardware,
programming and a technical staff to run the infrastructure. The solutions
company has been successful in maintaining an average of $5,000,000 in sales for
the last several years. The solutions company anticipates growth from newly
signed contracts to produce up to an additional $3,000,000 in revenue this
fiscal year with profit margins of 10% or greater. Additional contracts are in
the final negotiation stage.
RHODE ISLAND TRUCK AND EQUIPMENT CORP.
The Company completed the acquisition of Rhode Island Truck and Equipment, Corp.
on June 10, 2000. The Stock Purchase Agreement requires JD American Workwear,
Inc. to pay one share of restricted common stock for each dollar of appraised
value of the assets.
Rhode Island Truck and Equipment, Corp. provides sales of commercial trucks and
construction related equipment and tools. Additionally they provide hauling,
paving and commercial and demolition recycling. With an additional bonding line
substantial growth for its operations are expected. Total annual revenues are
expected to be $1,000,000 from the construction services sector and $200,000 in
construction equipment. Net pre tax profit is expected to be in the 10% to 20%
range.
Founded in 1995 the operations reached sales of in excess of $500,000 with
limited or no funding with profits of between 5% and 25% through their operating
history.
PRIVATE PLACEMENT OF SERIES B PREFERRED STOCK. On April 9, 1998, the Company
entered into a Securities Purchase Agreement (the "Purchase Agreement") with The
Union Labor Life Insurance Company, a Maryland corporation ("ULLICO"), and
certain additional agreements related to the Purchase Agreement. Pursuant to the
terms of the Purchase Agreement, the Company issued to ULLICO 2,500 shares of
Series B 12% Cumulative Convertible Preferred Stock, $.001 par value (the
"Series B Preferred Stock"). As a part of the issuance of the Series B Preferred
Stock, the Company also issued to ULLICO a detached ten-year stock purchase
warrant to purchase 799,000 shares of Common Stock at an exercise price of $.01
per share (the "Investor Warrant"). The aggregate purchase price for the Series
B Preferred Stock and the Investor Warrant was $2,500,000. The Company used the
net proceeds to facilitate and expand a program of union labor manufacturing of
its products, to repay certain notes payable and long-term debt, and for sales
and administrative salaries, product development, sales and marketing expense,
and other general corporate purposes.
The Series B Preferred Stock is convertible, at the option of the holder, into
the number of shares of Common Stock, which results from dividing the Conversion
Price into $1,000 for each share of Series B Preferred Stock being converted.
The Conversion Price shall be $5.00, subject to adjustment.
The Series B Preferred Stock entitles ULLICO to receive, when and as declared by
the Company's Board, cumulative cash dividends in preference to the payment of
dividends on all other shares of capital stock of the Company. During the
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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
affect more than one registration and Form S-3 during any six-month period and
shall be obligated to file and cause to become effective no more than six
registration statements on Form S-3. No registration statement is required to be
filed unless the proposed public offering price of the securities under such
registration shall be at least $5 million prior to deducting underwriting
discounts and commissions). The Registration Rights Agreement also provides for
incidental registration.
INCREASE IN AUTHORIZED CAPITAL. On April 15, 1998, the shareholders of the
Company approved an amendment to the Company's Certificate of Incorporation that
would increase the number of authorized shares of Common Stock of the Company
from 4,500,000 shares to 7,500,000 shares.
FORWARD LOOKING STATEMENTS
When used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are intended
to identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
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regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, operating results and financial
position. Current stockholders and prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are described under the headings "Business-Certain
Considerations", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto.
GENERAL
The Company is primarily engaged in the business of designing, manufacturing,
marketing and selling commercial and industrial workwear products. The Company
was incorporated in Rhode Island in 1991 under the name Jaque Dubois, Inc. and
was re-incorporated in Delaware in 1994. In July 1995, the Company's name was
changed to JD American Workwear, Inc. The Company's industrial workwear products
consist of an extensive line of commercial and industrial footwear and workwear
highlighted by its two key proprietary safety products, denim safety work jeans
("JD Safety Work Jeans(TM)") and cotton/poly blend uniform style Safety Work
Pants ("JD Safety Uniform Pants(TM)"). The Company's initial product, JD Safety
Work Jeans, was designed and patented by David N. DeBaene, the Company's founder
and President and was thereafter assigned to the Company in January, 1995. In
June 1997, the Company was awarded a second patent with respect to certain
unique functional characteristics of its Safety Uniform Pants. In February 2000
the Company received notice from its' President advising of the allowance of a
Patent, for inclusion in our product line on a Safety Work Pant that includes a
built in back brace. The pants cannot be worn without the detachable back brace,
which acts as the waist band, belt and back support. This feature allows the
user a strap free environment and increases work place safety by reducing the
potential, for getting "hung' by the straps of conventional back support
systems. 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, (iii) develop a direct consumer
market via the Internet for all product lines, (iv) an extensive line of
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commercial and industrial footwear and workwear to complement its proprietary
core products, and (v) licensing of the proprietary patents for manufacture and
direct distribution removing the handling and warehousing cost from the company,
reserve the ability for the company to purchase, at a substantial discount from
the manufacturer thereby reducing the need to carry raw material inventory.
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 ADD A FOCUS TOWARD PATENT LICENSING. We intend to seek
manufacturers, distributors, uniform rental and industrial garment launderers to
purchase licensing rights for our patented products. The intention is to sell
certain rights and to collect future royalties from these agreements while
purchasing products from those licensees for direct shipment to our other
customers obtained through our marketing efforts.
OFFER AN EXTENSIVE LINE OF COMMERCIAL AND INDUSTRIAL FOOTWEAR AND WORKWEAR TO
COMPLEMENT ITS PROPRIETARY CORE PRODUCTS. In response to customer demands, the
Company has identified an opportunity to fulfill the greater needs of its
customer base with an expanded line of products in addition to its Safety
Uniform Pant and Safety Work Jean. The Company has demonstrated it can deliver
its customers nationally recognized brand products at a reduced cost and greater
personal service with a direct sales force. Accordingly, the Company has entered
into supply arrangements with several manufacturers to supply an extensive line
of commercial and industrial footwear and workwear.
PRODUCTS AND FEATURES
The Company offers four types of products: JD Safety Work Jeans, JD Safety
Uniform Pants, JD Rugged 5-pocket Jeans and Private Label Conventional Workwear.
For the fiscal year ended February 29, 2000, sales of the JD Safety Work Jeans
accounted for approximately 31% of revenues, sales of JD Safety Uniform Pants
accounted for approximately 54%, and sales of JD Rugged 5-pocket Jeans accounted
for approximately XX%. For the fiscal year ended February 28, 1999, sales of the
JD Safety Work Jeans accounted for approximately 38% of revenues while sales of
JD Safety Uniform Pants accounted for approximately 18%, and sales of JD Rugged
5-pocket Jeans accounted for approximately 32%.
JD SAFETY WORK JEANS. JD Safety Work Jeans are constructed of heavy denim and
leather, are designed for worker protection, durability and comfort and are
machine washable. They are produced from 100% American made materials
manufactured in America to the Company's strict design specifications and
typically retail in the $35 to $45 price range. The Company's sales to catalogs
and retailers are at a lower price than the retail price. JD Safety Work Jeans
feature a permanent built-in closed cell polymer padding in the knee area
secured in place by a moisture resistant protective leather sheathing, providing
a cushion between the knee and any work surface. This feature offers protection
and comfort when kneeling or leaning on surfaces that are hard, damp, cold,
slippery or rough. JD Safety Work Jeans also feature high quality leather
sheathing strategically placed on the seat creating a surface, which is
extremely durable, pliable and slip resistant. The Company believes that JD
Safety Work Jeans increase job productivity by offering the wearer a high level
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of protection with much greater ease of movement than found in conventional
(external) kneepads. 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. A patent issued in 1991 protects certain functional
properties of the JD Safety Work Jeans. JD Safety Work Jeans are offered in
fifty-five sizes.
JD SAFETY UNIFORM PANTS. JD Safety Uniform Pants are cotton/poly blend uniform
style work pants, which incorporate many of the unique features and concepts of
JD Safety Work Jeans. JD Safety Uniform Pants were developed following
substantial materials research and testing and are durable enough to withstand
repeated high temperature industrial laundering. Like JD Safety Work Jeans, they
are designed for worker protection, durability and comfort, are produced from
100% American made materials and are manufactured in America to the Company's
exact design specifications and typically retail in the $35 to $39 price range.
The Company's sales to catalogs and retailers are at a lower price than the
retail price. JD Safety Uniform Pants also feature a permanent built-in closed
cell polymer padding in the knee area covered by a unique proprietary protective
sheathing material developed by the Company. This material will not absorb most
liquids commonly encountered by industrial workers, such as water, pesticides,
petroleum fuels, and many chemicals. In addition, this sheathing material is
extremely durable, highly resistant to abrasion, punctures and tears. The
Company developed this product to meet what it believes is a large and unmet
need for work clothes with the protection, comfort and durability of JD Safety
Uniform Pants. JD Safety Uniform Pants are offered in fifty-five sizes, and in
five different colors.
JD RUGGED 5-POCKET JEANS. During fiscal 1999, the Company began marketing and
selling, JD Rugged 5-Pocket Jeans, a non-proprietary heavy denim work jean, to
complement it's line of JD Safety Work Jeans and JD Safety Uniform Pants. JD
Rugged 5-Pocket Jeans are produced from 100% American made materials
manufactured in America to the Company's strict design specifications and
typically retail in the $25 to $29 price range. JD Rugged 5-Pocket Jeans are
offered in fifty-five sizes.
MANUFACTURING AND SOURCES OF SUPPLY
PROPRIETARY PRODUCTS. The Company's JD Safety Work Jeans and JD Safety Uniform
Pants are manufactured in the United States exclusively from raw materials
produced in the United States. Some of the component parts and subassemblies are
manufactured by the Company, however, final assembly is performed by outside
contractors. The Company's proprietary products are manufactured to strict
Company specifications. Historically, the Company had a manufacturing
arrangement with Reed Manufacturing Co., Inc. ("Reed") pursuant to which Reed
manufactured both the JD Safety Work Jeans and JD Safety Uniform Pants to the
Company's specifications. In December, 1997, in contemplation of an equity
investment by ULLICO, the Company began producing JD Safety Work Jeans and JD
Safety Work Uniform Pants in contractor facilities covered by collective
bargaining agreements. As a result, the Company established manufacturing
relationships with Fine Vines, Inc. ("Fine Vines") and East Texas Sportswear,
Inc ("East Texas Sportswear"). Fine Vines has subsequently discontinued
operations. On November 2, 1998 it was determined that the Company would no
longer produce garments at the union facility East Texas Sportswear. The Company
determined that the failure of union locals, the Union of Needle Trades,
Industrial and Textile Employees, commonly known as Unite and ULLICO to support
the sales efforts and provide required services, marketing assistance and
information agreed to as inducement to complete the ULLICO funding made
continued purchasing of higher price union made products unfeasible. The Company
shifted some manufacturing to Magee Apparel Company. ("Magee") and continues to
use Reed to produce certain products.
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We believe that our supply arrangement with a limited number of manufacturers
provides consistency and quality of our 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 or in Mexico under the terms the North American Free
Trade Agreement, specifically using section 807. In October 1999 meetings were
held with the Bancomext Trade Commission of Mexico to explore the feasibility of
this program.
RAW MATERIALS. Raw materials used in the manufacture of JD Safety Work Jeans
consist of denim fabric, leather sheathing and closed cell polymer foam padding,
each of which is supplied by several established sources. The raw materials used
in the manufacture of JD Safety Uniform Pants consists of twill fabrics
(cotton/polyester blends), closed cell polymer foam padding, and a proprietary
mill fabric sheathing composed of products which are commonly available. None of
the principal raw materials used by the Company in the manufacture of its
products are limited by critical supply or single origins. The Company's
principal suppliers are Swift Textiles, Columbus, GA (denim), Blackhawk Leather,
Milwaukee, WI (leather); Manufacturer's Rubber and Supply, Merrimac, MA, (foam
padding) and Brookwood Industries, New York, NY (sheathing).
Most of the raw materials and components required by the Company are supplied by
the Company to its manufacturers under a consignment arrangement. The lead-time
between ordering and receipt of raw materials varies with the materials
involved, but generally ranges from three weeks to six weeks. Generally, the
Company must make advance purchases of most component raw materials for the JD
Safety Work Jeans and JD Safety Uniform Pants. These raw materials include
padding for the knees, sheathing for the knees and buttocks as well as the twill
fabric for the Safety Uniform Pants. The Company has not experienced any
difficulties in obtaining raw materials on commercially reasonable terms,
however, the disruption of its supply of these materials would have a material
adverse effect on the Company's operations.
QUALITY CONTROL. Management believes that maintaining high quality manufacturing
standards is important to its competitive position and also believes that the
Company has developed a reputation for high quality products. The Company
maintains quality control systems and procedures which it reviews with its
manufacturing personnel and which it modifies as appropriate. The Company's
quality control systems and procedures include inspection of each fully
assembled pant to verify performance and safety features.
MARKETING AND SALES
The Company's JD Safety Work Jeans and JD Safety Uniform Pants and its private
label conventional workwear are marketed and sold through network of
distributors, catalog merchants, retail resellers and the Company's recently
expanded in-house sales force. In addition, the Company's senior management
devotes a substantial amount of time to the overall coordination of the
Company's sales to distributors, as well as to the Company's direct sales.
Currently, the Company's marketing and sales efforts are segmented into the
following general categories (i) direct marketing sales, (ii) catalog sales, and
(iii) distributor sales, each of which is described below.
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DIRECT MARKETING SALES. The Company advertises and markets its products through
direct mailings, participation and exhibition of products at industrial trade
shows, personal solicitations at businesses, which have been identified as
likely purchasers of the Company's products and industry referrals. In May and
October, 1998, and October 1999 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.
The Company maintains a proprietary mailing list derived from various sources
consisting of both established customers and persons responding to
advertisements in trade magazines and similar publications. The Company makes
several mailings to this list annually. In addition, as a result of its
relationship with ULLICO, the Company has targeted union members in the building
trades, distributing brochures and product samples in union halls and on larger
union job sites. The project with ULLICO has been unsuccessful due in large part
to undelivered mailing lists, undelivered advertising sources to union members
and the general failure of ULOLICO to provide the assistance that was the
inducement used by ULLICO to have the Company accept its investment and
manufacture products at union sites that increased the manufacturing costs of
certain JD products significantly. 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 issues of the JC PENNEY CATALOG, JC
PENNEY WORKWEAR CATALOG, MODERN FARM, THE SPORTSMANS' GUIDE, DELTA SAFETY
PRODUCTS, ERGO SHOP, AND MASTERMAN'S. Approximately twenty million copies of the
JC PENNEY CATALOG displaying JD SafetyWork Jeans were mailed in each of June
1998, November 1998, June 1999, and November 1999. Sales to catalog merchants
accounted for approximately 17% of revenues for the fiscal year ended February
29, 2000 and approximately 28% for fiscal 1999.
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 30% of revenues for
the fiscal year ended February 29, 2000 versus 34% of total revenues for the
fiscal year ended February 28, 1999.
In April 1995, the Company signed a five year agreement with Shawnmark
Industries, Inc. ("Shawnmark") giving Shawnmark exclusive rights to sell the
Company's JD Safety Uniform Pants to the golf course industry. Based upon the
favorable response received by Shawnmark in connection with its initial sales
and promotional activities the Company agreed in July 1995 to expand the
coverage of the exclusivity with Shawnmark to companies in the following
industries throughout the United States: (1) country clubs, including pro shops;
(2) landscaping/nursery business; (3) federal, state and municipal parks and
recreation departments; (4) seed, sod and turf producers and installers; and (5)
irrigation and sprinkler systems.
UNIFORM RENTAL SERVICE CUSTOMERS. The Company's JD Safety Uniform Pants are sold
to several leading uniform rental companies throughout the United States and
Canada. During fiscal 1999, the Company began working with Unifirst Corporation
to develop a joint marketing program for JD Safety Uniform Pants utilizing
Unifirst's hundred's of sales representatives and thousands of uniform route
drivers. Sales to uniform rental service customers accounted for approximately
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17% of revenues for the fiscal year ended February 29, 2000 and approximately
13.3% for fiscal 1999. Initial negotiations have begun with these customers to
license the patents owned by the Company for manufacturing at these customers
facilities. These programs would substantially reduce the cost to these
customers, even with the royalty to be provided to the Company, and would also
allow for the expansion of their markets because of the reduction in price then
available to their rental customers. JD American Workwear, Inc. would be able to
purchase garments to meet other sales demand and would also allow these
manufacturing facilities to direct ship the product to the end user.
RETAIL CUSTOMERS. As a result of the Company's focus in developing brand
awareness for the JD Safety Work Jeans and JD Safety Uniform Pants, the Company
has been able to attract several independent and national retailers. Because the
Company's products typically are worn by tradesmen and laborers, the Company
believes that it's products are better displayed in stores selling hardware,
building materials and farm supplies as opposed to traditional clothing
retailers. The Company sells JD Safety Work Jeans to Payless/Cashways for
display in approximately 75 of its more than 200 stores throughout the Midwest.
Sales to retailers accounted for approximately 8% for the fiscal year ended
February 29, 2000, and approximately 16.8% of revenues for the fiscal year ended
February 28, 1999.
COMPETITION
The principal competitive factors in the Company's markets include innovative
product design, product quality, value, product performance, durability,
availability, established customer relationships, name recognition, distribution
and price. The Company competes principally on the basis of innovative product
design, quality, product performance and value.
The Company competes against a number of companies, many of which have longer
operating histories, established markets and far greater financial, advertising,
research and development, manufacturing, marketing, personnel and other
resources than the Company currently has or may reasonably be expected to have
in the foreseeable future. This competition may have an adverse effect on the
ability of the Company to scale up and expand its operations or operate
profitability. Dominant competitors of conventional workwear include Carhart
Industries, Red Kap Industries a division of VF Corp., and Angelica Corp. The
Company believes that its competitors may be engaged in the development and
marketing of products similar to those being developed and marketed by the
Company. Accordingly, some of these companies may launch products competitive
with those currently offered or under development by the Company. No assurances
can be given that the Company will be able to compete successfully.
PATENTS AND PROPRIETARY RIGHTS
Certain functional features of the JD Safety Work Jeans are covered by a U.S.
Patent No. 5,038,408 issued in 1991 (the "Jean Patent"). While the Jean Patent
offers a certain degree of protection, there can be no assurance that it will
provide the Company with any meaningful competitive advantages. The Jean Patent
was issued to David N. DeBaene and was thereupon assigned to the Company in
January 1995. In connection with the assignment the Company agreed to pay Mr.
DeBaene $50,000 for the Jean Patent. The Jean Patent expires in the year 2008,
seventeen years from the date of issuance.
In June 1997, the Company was granted U.S. Patent No. 5,634,215 covering certain
functional features of its JD Safety Uniform Pants. While the Uniform Patent
offers a certain degree of protection, there can be no assurance that it will
provide the Company with any meaningful competitive advantages. The Uniform
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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.
In February 2000, the Company was notified of the acceptance of claims covering
certain functional features to be incorporated in a new product, the JD Safety
Back Brace Pant. The functional features are the function and use of the design
in the back brace, its detachable feature, and coupling mechanism for the brace
to the pant.
The Company has used several identifying trademarks in connection with the sale
of its products. The registered trademarks using the mark JAQUE DUBOIS (the
original name of the Company) have been discontinued due to the Company's name
change to JD American Workwear, Inc. The Company has applied with the U.S.
Patent and Trademark office to register the name "JD American Workwear" and
certain other proprietary trademarks that are used to identify its proprietary
products. There can be no assurance that third parties will not assert
infringement claims in the future, the defense costs of which could be
extensive.
The Company regards the non-patented and the non-copyrighted technology and
know-how related to its products as proprietary trade secrets and attempts to
protect them with confidentiality agreements and confidentiality provisions in
its employee handbook and in its various agreements. Confidentiality agreements,
however, may be difficult to enforce, and, despite the precautions the Company
has taken, it may be possible for third parties to copy aspects of the Company's
products or, without authorization, to obtain and use information which the
Company regards as proprietary.
RESEARCH AND DEVELOPMENT
The Company continues to develop new proprietary and non-proprietary products to
add to its product line. During fiscal 1998 and continuing into fiscal 1999, the
Company developed a tanning process to incorporate blue and other color leather
sheathing into the JD Safety Work Jean in response to customer requests, without
compromising the durability and washability of the traditional brown leather
sheathing products. The Company has also developed and is beginning to market a
line of gardening pants, for the professional and recreational landscaper, and a
line of children's wear, each incorporating the Company's proprietary safety
features. During fiscal 1999 the Company expended approximately $53,000 on
research and development activities.
CUSTOMER DEPENDENCE
For fiscal 2000, the Company's largest customers each representing more than 5%
of shipments accounted for approximately $128,163, or 56.5%, of the Company's
fiscal 2000 shipments. These customers, their respective purchases and the % of
the Company shipments include Cintas $15,046 6.6%, JC Penney $38,172 16.8%,
Mason Shoe Company $14,693 6.5%, Safety Shoe Distributors $11,065 5%, and
Unifirst Corporation $49,187 21.7%. For fiscal 1999, the Company's customers who
exceeded 5% of sales were JC Penney 23%, UniFirst 13%, RI Truck and Equipment
Co. 11% and New England Seed Co. 11%.
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SEASONALITY
The Company's business traditionally has been subject to seasonal trends based
upon climate, because the highly durable denim in JD Safety Work Jeans is
heavier (and consequently warmer) than the materials used in conventional work
jeans. Sales volume for JD Safety Work Jeans has been higher during the fall and
winter seasons and lower during the spring and summer seasons. Sales of JD
Safety Uniform Pants and the conventional workwear now offered by the Company
are less sensitive to the seasonal trends which affect JD Safety Work Jeans. As
the Company's revenue mix has shifted to include a greater volume of uniform
parts and other products, overall seasonality has been reduced.
EMPLOYEES
At June 1, 2000, the Company had 6 employees or contractors all devoting
full-time hours. Of these workers, two are performing executive and marketing
functions, two are performing accounting, financial and office functions, and
two are performing production and fulfillment functions.
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 29, 2000 of
$8,779,451 and incurred a net loss of $2,397,120 for the fiscal year ended
February 29, 2000. At February 28, 1999, the Company had an accumulated deficit
of $6,189,331 and incurred a net loss of $1,692,765 for the fiscal year ended
February 28, 1999. In the fiscal year ended February 29, 2000 the Company made a
prior period adjustment to account for the accrual of interest due ULLICO, which
had not been recorded because of an erroneous treatment as a dividend. Because
the Company is changing its method of marketing and order fulfillment, it is
expected that the Company will continue to sustain losses for part if not all of
the fiscal year ending February 28, 2001, and perhaps thereafter. The Company
had significant negative cash flow from operations during each of fiscal 1999
and 2000 and the Company continued to experience negative cash flow as it built
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 29, 2000 have and will include an explanatory
paragraph expressing substantial doubt with respect to the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NEED FOR ADDITIONAL FINANCING. Cash flow from operations and the investment by
ULLICO provided for working capital needs and principal payments on long-term
debt through most of fiscal 2000. However, the Company will be required to seek
additional financing to provide for working capital needs and principal payments
on long-term debt during fiscal 2001 and to meet its business strategy. Also,
additional capital may be required if adequate levels of revenue are not
realized, if higher than anticipated costs are incurred in the expansion of the
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Company's manufacturing and marketing activities, or if product demand exceeds
expected levels. As a result of the expansion of inventory in contemplation of
sales to union workers as well as the increase in receivables generated through
increased sales, the Company has and continues to experience cash flow
shortages. The Company's inability to timely pay vendors and service providers
as a result of a cash flow shortage will adversely affect the Company's
operations. There can be no assurance that financing will be available to the
Company on acceptable terms, if at all.
MANUFACTURING AND DISTRIBUTION RISKS. Although the Company has established
numerous customer relationships as well as relationships with suppliers and
manufacturers to conduct operations at higher unit volumes, difficulties may be
experienced in inventory management, product distribution and other areas until
the Company's operations have been scaled up for some period of time. Since the
Company entered into manufacturing arrangements with Fine Vines and East Texas
Sportswear and then shifted production from Fine Vines to Magee Apparel,
difficulties such as production delays and quality control problems have been
encountered. The Company has switched manufacturers on four occasions, once
because of the Company's capital constraints in meeting minimum production
levels, once because of the manufacturer's quality control problems, once in
compliance with the terms of the failed ULLICO transaction, and most recently
because the manufacturer discontinued operations. Two of these past incidents
caused an inventory shortage, which adversely affected the Company's operations.
Stockholders should be aware that unanticipated problems, many of which may be
beyond the Company's control, could be encountered. These include, but are not
limited to, product development, marketing and customer support problems,
increased competition, new manufacturer learning curve, and lack of credibility
with suppliers and customers. Moreover, due the limited and sporadic nature of
the Company's production runs, it is not feasible for the Company to expect
vendors to react quickly, efficiently and on a cost-effective basis to the
Company's production demands. There can be no assurance that the Company's
products will achieve broad based market acceptance or that in view of the
extensive manufacturing, sales and marketing and general overhead costs expected
to be incurred by the Company, that any sales will result in positive cash flow
or profitable operations.
LIMITED CUSTOMER BASE; SEASONALITY. A significant amount of the Company's past
sales have been derived from a relatively small number of customers. Failure of
the Company to expand its customer base could have a material adverse effect on
the Company's results of operations. The Company's business has been subject to
seasonal trends based upon climate, because the highly durable denim in JD
Safety Work Jeans is heavier (and consequently warmer) than the materials used
in conventional work jeans. Sales volume for JD Safety Work Jeans is higher
during the fall and winter seasons and declines to lower levels during the
spring and summer seasons. The Company believes that sales of JD Safety Uniform
Pants and the conventional workwear now offered by the Company will be somewhat
less sensitive to the seasonal trends, which affect JD Safety Work Jeans. The
Company believes, therefore, that as its revenue mix changes to include greater
uniform sales volume, overall seasonality will be reduced, but not eliminated.
SALES AND MARKETING. The Company has shifted from a network of non-exclusive
sales representatives to a focus on patent licensing and beginning in fiscal
2001 Internet direct sales. The Company's future growth and profitability will
depend in part, on the success of this Internet sales activity. The Company
continues to develop and continue relationships with traditional and new
accounts.
DEPENDENCE ON LIMITED MANAGEMENT; The success of the Company is substantially
dependant on the efforts and abilities of its founder and President, David N.
DeBaene, and Norman J. Birmingham, its Chief Financial Officer. Decisions
concerning the Company's business and its management are and will continue to be
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made or significantly influenced by Messrs. DeBaene and Birmingham. The loss or
interruption of their continued services would have a materially adverse effect
on the Company's business operations and prospects.
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 32.1% of the outstanding Common Stock. These
persons are and will continue to be able to exercise control over the election
of the Company's directors and the appointment of officers.
POSSIBLE CHANGE IN CONTROL. Pursuant to its agreements with ULLICO, the Series B
Preferred Stock holders shall be entitled to elect one director out of the seven
authorized directors of the Company's board and one director out of the three
directors comprising the Company's Compensation Committee. If certain events
occur or do not occur, such as the failure to pay either a PIK Dividend or cash
dividend to the Series B Preferred Stock holders, the holders of the Series B
Preferred Stock shall be entitled, immediately upon giving written notice, to
elect the smallest number of directors that will constitute a majority of the
authorized number of directors. Moreover, ULLICO holds Series B Preferred Stock,
which is currently convertible into 500,000 shares of Common Stock, and holds
warrants to purchase 799,000 shares of Common Stock. Pursuant to its agreements
with ULLICO, in the event the Company does not reach certain performance
milestones, the Series B Preferred Stock held by ULLICO may be converted into a
greater number of shares of the Company's Common Stock than provided for upon
conversion if the performance targets are met. As a result, ULLICO could
potentially obtain a substantial controlling interest in the Company. There can
be no assurance that the Company will be able to meet the performance targets
set forth in the applicable agreements and, therefore, avoid a possible change
in control of the Company's capital stock. Such a change in control may result
in fundamental changes to the management of the Company and the character of its
business.
ITEM 2. PROPERTIES
In December 1998, the Company purchased the 19,600 square foot building in
Coventry, Rhode Island formerly leased by the Company. The purchase price of the
property was $145,000, of which $125,000 was paid in the form of a promissory
note to the seller bearing interest at 10 1/2 percent, secured by a mortgage on
the property. The promissory note requires monthly payments of $2,686.74, and is
payable in full in January 2002.
As a result of the purchase, management believes that its current facility will
be satisfactory to meet the Company's needs for the foreseeable future; however,
the surrounding land included in the purchase would enable the Company to expand
the size of this facility, if necessary
ITEM 3. LEGAL PROCEEDINGS
There are legal proceedings involving the Company that are not from the normal
course of business.
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.
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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, markdowns or commissions and may not necessarily represent
actual transactions.
Bid Prices
------------------
High Low
------- -------
FISCAL 2000
First Quarter (March 1, 1999 through May 31, 1999) $ 3.625 $ 2.375
Second Quarter (June 1, 1999 through August 31, 1999) $ 3.625 $ 2.50
Third Quarter (September 1, 1999 through November 30, 1999) $ 3.125 $ 1.50
Fourth Quarter (December 1, 1999 through February 29, 2000) $ 2.125 $ 0.90
FISCAL 1999
First Quarter (March 1, 1998 through May 31, 1998) $ 4.75 $ 3.375
Second Quarter (June1, 1998 through August 31, 1998) $4.9375 $2.8125
Third Quarter (September 1, 1998 through November 30, 1998) $ 4.375 $ 3.00
Fourth Quarter (December 1, 1998 through February 28, 1999) $ 4.25 $ 2.75
The closing bid price of the Company's Common Stock as reported by the OTCBB was
$1.1875 on June 9, 2000.
(b) HOLDERS. As of June 12, 2000 there were approximately 330 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
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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
During fiscal 2000 Mission Bay Consultants, Inc. exercised stock options on
three different dates investing in the Company $66,750, and receiving 9,000
common shares on March 8, 1999, 10,000 common shares on June 10, 1999, and
40,000 shares on July 9, 1999. First Dunbar exercised 6,000 warrants on October
15, 1999 investing $18,750 in the Company.
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
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 1993. First commercial shipments of an early version of JD
Safety Uniform Pants were made during 1995. Following the Company's initial
public offering in January 1996, the Company significantly increased its
expenditures for inventory, salaries, advertising and marketing expenditures and
other costs to increase its level of production. In March 1996, 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 2000 and
1999, and expects that it will continue to experience during all or a portion of
fiscal 2001, 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. Most of the losses in the last
twenty-four months are a direct result of the failed union-made marketing
program. In addition, the Company incurred higher than expected costs of goods
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sold because of the low level of production (and commensurately low volume of
raw materials purchases), a higher proportion of sample goods to goods available
for sale, and the initial sewing and cutting of garments at prices significantly
higher than are now available to the Company.
In October 1997, the Company entered into negotiations with ULLICO to make an
equity investment in the Company. The parties initially contemplated that such
an investment could be consummated in January 1998 but the process was not
completed until April 1998. A significant amount of the Company's financial and
management resources, which the Company believes would have otherwise been
utilized in running the day-to-day operations of the Company, were allocated to
the protracted negotiations and the resolution of other issues relating to the
investment. Such resources were also expended in facilitating the shift to
unionized manufacturing and building a marketing effort to sell Company products
to union members. As a result of the agreement to engage union sewing shops to
manufacture Company products new vendors required training in the patented
technological processes of manufacturing these products including, but not
limited to, the procurement and financing of raw materials. Management of the
Company was required to provide steady supervision over all manufacturing
processes to reduce errors in training and application of production techniques
and to ensure that turnaround times would be met. However, management believes
that these arrangements have provided and will continue to provide more
operational flexibility than that offered by prior manufacturers for the
Company, by permitting the Company to better balance its inventory and produce
numerous sizes in a weekly batch run, rather than just one size.
The Company's business has been subject to seasonal trends based upon climate,
because highly durable denim in JD Safety Work Jeans is heavier (and
consequently warmer) than the materials used in conventional work jeans. Sales
volume for JD Safety Work Jeans is higher during the fall and winter seasons and
declines to lower levels during the spring and summer seasons. Sales of JD
Safety Uniform Pants and the conventional workwear now offered by the Company
are less sensitive to the seasonal trends, which affect JD Safety Work Jeans. As
the Company's revenue mix has shifted to include greater uniform sales volume,
overall seasonality has reduced.
Historically, the Company used a team of independent sales representatives,
regional sales directors, and sales agents to generate sales. The Company
established a representative network based principally upon industry grouping of
the account types, which the representative may solicit. During the fiscal year
ended February 1999, the Company shifted focus and added three full-time,
in-house salaried executives to its sales force for the promotion of union made
products pursuant to the UNITE and ULLICO program.
For the reasons stated above, the Company believes that its results of
operations for the years ended February 29, 2000 and February 28, 1999 are not
necessarily indicative of the Company's future results of operations.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Net sales decreased to $103,567 from $1,226,143 in fiscal 1999 a decrease 91.6%.
This decrease was a result of returns on prior years sales of approximately
$179,000 and adopting a strict policy for recording of sales shipped on a
consignment basis. In the prior fiscal year sales included significant inventory
purchases by JC Penney, Cintas, UniFirst and Rhode Island Truck, in the current
fiscal year these sales were substantially reduced to only reorder and fill-in
special orders. The Company had spent the majority of late fiscal 1999 and the
first half of fiscal 2000 in marketing to Union locals and affiliates around the
country. This marketing effort was predicated on demands made by ULLICO and
UNITE to make and sell union products to union locals. However, the marketing
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assistance that was to be provided by ULLICO and UNITE as part of the 1998
funding agreement was not forthcoming until the fourth quarter of 1999 and then
only at approximately 10% of the effort that had been promised resulting in
dismal sales and a loss of Company focus and the expenditure of the majority of
the funds received from ULLICO. The Company removed the marketing staff in the
third quarter of fiscal year 2000 as no capital was available to for any further
efforts.
Gross profit decreased to $18,668 or 18.0% in fiscal 2000 as compared to fiscal
1999. The decrease in gross profit is primarily due to the reduction of sales.
Selling, general and administrative ("SG&A") decreased $586,928 or 30.5% in
fiscal 2000 as compared to fiscal 1999. The Company significantly decreased
marketing and promotional expenses by 68.4 due to decreased trade show and
travel activity. Employee compensation costs were also lower by 29% as a result
of the reduction in staff and consultants. Consulting expenses and professional
fees also decreased by 12% in fiscal 2000 as management sought to reduce overall
expenses.
Interest expense including the reclassification of the ULLICO dividend as
interest because of its mandatory redemption features $608,866 in fiscal 2000
compared to interest expense of $88,911 in fiscal 1999. The increase in interest
expense is primarily due to the interest due ULLICO in fiscal 2000 of $332,873
and the prior period adjustment for fiscal 1999 of $193,591. The reduction of
long-term debt through conversions into common stock that occurred during fiscal
2000 and a reduction in the overall Notes Payable were the primary reason for a
comparative decrease in interest expense of $6,510 related to the same debt
instruments as in fiscal 1999.
The Company's net loss was $ 2,397,120 in fiscal 2000 compared with $1,692,765
for fiscal 1999. This increased loss is mainly attributable to higher interest
costs, substantial decline in gross profit and related sales, and the various
impairments of inventory and accounts receivable described above.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, net cash used by operations was $266,618 as compared to net
cash used by operations of $2,067,479 in fiscal 1999. Accounts receivable
decreased to $65,478 following a year of weak sales and recording impairment to
the accounts receivable of $61,779 and an allowance for an expected return of
$73,371. The decrease in inventory is a direct result of a write down required
under Generally Accepted Accounting principals to impair inventory that is
greater than the cost of goods for items shipped or believed to be saleable
according the financial projections of the Company. This charge was $711,289 in
fiscal 2000.
During fiscal 2000 and 1999, the Company used funds for capital expenditures of
$ 0 and $109,334, respectively. During the fiscal year ended February 28, 1999
the Company updated its computer network, added additional sewing capacity in
its Coventry location and added three new vehicles to support the union program.
During the year ended February 29, 2000 notes totaling $12,500, plus accrued
interest were converted to into 3,788 shares of common stock. During the fiscal
year ending February 28, 1999, notes totaling $480,000, plus accrued interest,
were converted into 153,221 shares of common stock.
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Cash flow from operations and the investment by ULLICO provided for working
capital needs and principal payments on long-term debt through fiscal 2000.
However, the Company will be required to seek additional financing to provide
for working capital needs and principal payments on long-term debt during fiscal
2001 and to meet its business strategy of achieving significant market
penetration of its JD workwear products. Also, additional capital may be
required if adequate levels of revenue are not realized, if higher than
anticipated costs are incurred in the expansion of the Company's manufacturing
and marketing activities, or if product demand exceeds expected levels. There
can be no assurance that financing will be available to the Company on
acceptable terms, if at all.
Inflation is not expected to have a major impact on the Company's operations.
YEAR 2000 ISSUE
GENERAL
The Year 2000 issue arises because many computer programs use two digits rather
than four to define the applicable year. Using two digits could result in system
failure or miscalculations that cause disruptions of operations. In addition to
computer systems, any equipment with embedded technology that involves date
sensitive functions is at risk if two digits have been used rather than four.
The Board of Directors has instructed the Company's Chief Financial Officer to
oversee the Company's Year 2000 readiness project. The project is composed of
the following stages: 1) assessment of the problem, 2) developing a plan of
action, 3) remediation activities and 4) compliance testing.
STATE OF READINESS
The Company is in the process of inventorying and making an assessment of its
information and non-information technology systems (such as telephone and alarm
systems), and expects to complete such assessment by the end of June 1999. A
plan of corrective action using both internal and external resources to enhance
or replace the systems for Year 2000 compliance will be implemented during the
Summer 1999. Internal resources consist of permanent employees of the Company,
where as external resources will be composed of contract programming personnel
that are directed by the Company's management. The Company is in the process of
contacting the appropriate customers, vendors, banks and service providers to
determine their Year 2000 compliance. Remediation for critical systems is
expected by the end of Summer 1999. The testing stage for critical systems
within the entire Company is planned for early Fall 1999.
COSTS
The Company has incurred approximately $12,000 in expenses in updating its
management information system to alleviate potential Year 2000 problems, and
expects to incur an additional $25,000 prior to the end of fiscal year 2000.
These expenditures represent personnel costs related to software remediation of
major impact systems. The Company had previously initiated a hardware upgrade
plan for desktop computers that was independent of the Year 2000 issue, and,
therefore, most hardware upgrades were completed under this plan.
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RISKS
The Company does not anticipate that the costs of its Year 2000 issues or the
risks to the Company, which might arise from the Year 2000 problem are likely to
be material. If the Company's desktop software applications are not compliant,
employees will not be able to use such applications. If the Company's customers
are not Year 2000 compliant, the Company risks not being paid on time, and if
its suppliers, vendors, banks, service providers and internal voice and data
systems are not compliant, the Company risks not being able to timely service
its customers. However, the Company does not have control over third parties,
and as a result, cannot currently estimate to what extent future operating
results may be adversely affected by the failure of third parties to
successfully address their Year 2000 issues. If the Company's plans to address
the Year 2000 issue are not successfully or timely implemented, the Company may
need to devote more resources to the process and additional costs may be
incurred, which could have a material adverse effect on the Company's financial
condition, liquidity and results of operations. There can be no assurance that
the Company's assessment of the impact of Year 2000 is complete and that further
analysis and study, as well as the testing and implementation of planned
solutions, will not reveal the need for additional remedial work. The Company is
potentially vulnerable to mistakes made by key suppliers of products and
services in their advice to the Company with respect to their Year 2000
readiness. The Company is also potentially vulnerable to operational
difficulties in the Company's corporate offices, including the risk of power
outages, banking delays and the potential failure of credit card and check
authorization systems. The financial magnitude of these risks cannot currently
be estimated.
WORST CASE SCENARIO
The Y2K problem may result in the Company's own or other third-party computers
shutting down or performing incorrect computations. If uncorrected, the Year
2000 problem could adversely impact: (a) the reliability of the company's
internal information management systems, such as accounting systems, e-mail and
desktop computers, (b) the physical operation of systems used by the Company
which have embedded technology, such as telephone systems, utility services,
security systems and other physical office infrastructure, (c) the Company's
ability to interface with third parties, such as delivering products to or
receiving payments from customers or obtaining products from vendors on a timely
basis. It is not presently possible to describe a reasonably likely "worst case
Year 2000 scenario" without making numerous assumptions. The Company presently
believes that a most likely worst case scenario would make it necessary for the
Company to replace some suppliers or contractors, rearrange some work plans, and
delay routinely performed management, administrative, operational and financial
activities. Assuming this worst case scenario is correct, the Company believes
that such circumstances could have a materially adverse effect on its financial
condition or results of operations.
CONTINGENCY PLANS
The Company currently does not have contingency plans in place in the event that
it does not complete all of its Year 2000 remediation, some of its systems are
not Year 2000 compliant or some of its major customers, vendors, banks or
service providers are not Year 2000 compliant. However, it expects to have
completed sufficient compliance work by the end of the Summer 1999 and to have
sufficient time to identify those areas for which contingency plans will be
necessary, and it will create those contingency plans as necessary at that time.
Contingency plans may include backup manual bookkeeping and accounting
procedures, shifting production to Y2K compliant vendors and inventory buildup
by the Company prior to December 31, 1999. Any additional inventory buildup by
21
<PAGE>
the Company could generate unfavorable cash flows and inventory valuation
exposures of uncertain amount and duration. Any future contingency plan will be
based on its best estimates of numerous factors, which, in turn, will be derived
by relying on numerous assumptions about future events. However, there can be no
assurance that these assumptions or estimates will have been correctly made,
that the Company will have anticipated all relevant factors or that there will
not be increased costs associated with the Company's Year 2000 problems.
Additionally, there can be no assurance that any contingency plans implemented
by the Company would be adequate to meet the Company's needs without materially
impacting its operations, that any such plan would be successful or that the
Company's results of operations would not be materially and adversely affected
by the delays and inefficiencies inherent in conducting operations in an
alternative manner.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and, along with all other forward-looking statements herein, are made in
reliance on the safe harbor provisions discussed under the caption "Forward
Looking Statements" in Item 1, above.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is included as a separate section of this report
commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective April 1, 1998, the Boston office of Richard A. Eisner & Company, LLP
("RAE") was merged into the Boston office of BDO Seidman, LLP ("BDO"). As this
merger resulted in RAE no longer having an office in the Providence-Boston area,
the Company concluded that it would be appropriate to select a new accounting
firm. By unanimous consent, the Board of Directors of the Company voted on May
5, 1998, to retain BDO to serve as the Company's independent auditors. RAE's
report on the Company's financial statements for the year ended February 28,
1997 contains a statement expressing substantial doubt about the Company's
ability to continue as a going concern. However, during the Company's two most
recent fiscal years or any subsequent interim period, there were no
disagreements between the Company and RAE on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to the satisfaction of RAE, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report on the audited financial statements.
Prior to the engagement of BDO there were no discussions between the Company and
BDO regarding (i) the application of any accounting principle to a specific or
completed transaction (ii) the type of audit opinion that might be rendered on
the Company's financial statements, or (iii) any matter that was the subject of
disagreement with the Company's former auditor on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
The Company requested that RAE furnish it with a letter addressed to the
Securities and Exchange Commission indicating whether RAE agrees with the
statements made by the Company in response to this Item 4, or, if not, stating
the basis upon which RAE disagrees. A copy of said letter has been filed with
the Commission.
On April 5, 1999, JD American Workwear, Inc. (the "Registrant") dismissed BDO
Seidman, LLP as the principal independent accountants for the Registrant.
22
<PAGE>
The report on the Registrant's financial statements prepared by BDO Seidman, LLP
for fiscal year ended February 28, 1998 contains no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
During the two most recent fiscal years and the subsequent interim period, there
were no disagreements with BDO Seidman, LLP or Richard A. Eisner & Company, LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of them, would have caused them to make reference to the subject
matter of the disagreement in connection with its report on the audited
financial statements
The decision to change accountants was recommended and approved by the Board of
Directors of the Registrant.
On April 5, 1999, the Registrant engaged the auditing firm of Bederson &
Company, LLP to audit the Registrant's financial statements for the fiscal year
ended February 28, 1999.
Prior to the engagement of Bederson & Company, LLP, there were no discussions
with representatives of said firm regarding either the application of any
accounting principle to a specific or completed transaction, or the type of
audit opinion that might be rendered on the Registrant's financial statements,
or any matter that was the subject of disagreement with the Company's former
auditor on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
The Registrant requested that BDO Seidman, LLP furnish it with a letter
addressed to the Securities and Exchange Commission indicating whether they
agreed with the statements made by the Registrant in response to this Item 4,
and, if not, stating the respect in which they does not agree. A copy of said
letter was filed with the Commission.
23
<PAGE>
PART III
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:
Name Age Positions with the Company
---- --- --------------------------
David N. DeBaene 41 Chairman of the Board, President and
Chief Executive Officer
Thomas A. Lisi 55 Vice President, Marketing and
Director
Norman J. Birmingham 45 Treasurer, Chief Financial Officer,
and Director
Elizabeth Cotter 38 Director
Camille Barbone 48 Director
Steev Panneton 41 Vice President, Manufacturing and
Operations, Secretary and Director
Herb Canapary 67 Director
DAVID N. DEBAENE, CHAIRMAN OF THE BOARD, PRESIDENT, AND CHIEF EXECUTIVE OFFICER.
Mr. DeBaene is the founder of the Company and was responsible for obtaining the
patent on the original Jaque Dubois Construction Jean. Mr. DeBaene is
responsible for all executive level functions regarding the Company's operations
and also shares responsibility for raw materials sourcing and procurement,
manufacturing arrangements, product development, marketing and sales. Prior to
founding the Company, for 14 years Mr. DeBaene was an owner and/or foreman of a
construction company headquartered in West Warwick, Rhode Island, and also was
involved in nursing home administration from 1984 to 1990.
THOMAS A. LISI, VICE PRESIDENT, MARKETING AND DIRECTOR. Mr. Lisi became a
director of the Company in January 1994, and became Vice President of Marketing
in June 1996. Mr. Lisi brings 25 years of experience in the apparel industry to
the Company. Mr. Lisi is a principal stockholder and Chief Executive Officer of
Geronimo Leathers, Inc. ("Geronimo"), a manufacturer of mens leather apparel and
outerwear with worldwide distribution. Geronimo also specializes as a design and
manufacturing consultant to the outerwear trade and is a high volume private
label manufacturer to prominent merchants. Mr. Lisi is a founder and former
member of the executive committee of the Leather Apparel Association and is
considered by his peers to be a leading authority in the leather apparel
industry. Mr. Lisi and the Company are parties to a sales representative
agreement and a consulting agreement, and Geronimo and the Company are parties
to an overseas agency agreement. See "CERTAIN TRANSACTIONS."
24
<PAGE>
NORMAN J. BIRMINGHAM, TREASURER, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr.
Birmingham currently serves as Chief Financial Officer and Director of Open Door
Online, Inc. since March of 2000, and has served as President of Patina Corp., a
holding company for construction demolition and asbestos abatement companies,
since April of 1999. From September 1998 to January 1999, Mr. Birmingham served
as Chief Financial Officer of Mediforce, Inc., a medical products company. Mr.
Birmingham was Chief Financial Officer for General Environmental Technologies,
Inc., a holding company for three demolition companies, from January 1998 to
September 1998. From November 1995 to August 1997, he served as President and
Chief Financial Officer for Westmark Group Holdings, Inc., a holding company for
wholesale mortgage companies. In addition, he served as President of Heart Labs
of America, Inc. from November 1995 to June 1996. Mr. Birmingham was President
of Budget Services and provided accounting, tax and financial planning services
from September 1986 to July 1997. Mr. Birmingham became an officer of Open Door
Online in February 2000.
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.
CAMILLE BARBONE, DIRECTOR. Ms. Barbone currently serves as Chief Operating
Officer and Director of Open Door Online, Inc., since March 2000. She has been
involved in the music industry for over twenty-two years. She has discovered,
developed and managed many significant artists. From January 1995 to March 1999,
Ms. Barbone has owned and been employed by August Artist Management, where she
has managed several music artists. Camille also produced the Gospel segment of
Woodstock `94 for a crowd of 350,000. She has lectured throughout the country at
seminars, workshops, and conventions and has been interviewed by major
newspapers, magazines and television specials such as 20/20, Entertainment
Tonight and Fox News. Ms. Barbone elected Vice President of Open Door Records,
Inc. in March 1999 and has served as our Chief Operating Officer since March
2000. All prior directors and executive officers of Genesis Media Group, Inc,
our predecessor, tendered their resignations in conjunction with the Acquisition
Agreement dated June 17, 1999.
STEEV PANNETON, VICE PRESIDENT, MANUFACTURING AND OPERATIONS, SECRETARY 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
25
<PAGE>
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 29,
2000 plus February 28, 1999, and 1998, respectively, of the cash and non-cash
compensation awarded, paid or accrued, by the Company to all individuals serving
as the Company's chief executive officer (collectively, the "named executive
officers"). The Company at no time during the last three fiscal years had any
executive officers whose total annual compensation, exceeded $100,000, except as
set forth below.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Name and Fiscal Compensation Options by All Other
Principal Position Year Salary Bonus No. of Shares Compensation
------------------ ---- ------ ----- ------------- ------------
David N. DeBaene, 2000 $150,000 -- -- --
President and CEO 1999(1) $125,000 -- -- --
1998(2) $105,000 -- -- --
----------
(1) Under his employment agreement, Mr. DeBaene was entitled to be paid at a
rate of $125,000 per annum, plus $10,000, which was deferred from fiscal
1997. However, in order to conserve cash, Mr. DeBaene has agreed to defer
approximately $10,000 of such compensation to fiscal 2001 and include an
additional $54,000 deferral for fiscal 2000.
(2) Under his employment agreement, Mr. DeBaene was entitled to be paid at a
rate of $105,000 per annum. However, in order to conserve cash, Mr. DeBaene
agreed to defer approximately $10,000 of such compensation to fiscal 2001.
The Company does not have any annuity, retirement, pension, deferred or
incentive compensation plan or arrangement under which any executive officers
are entitled to benefits, nor does the Company have any long-term incentive plan
pursuant to which performance units or other forms or compensation are paid.
Executive officers who qualify will be permitted to participate in the Company's
1995 Stock Option Plan, which was adopted in February 1995. See "Stock Option
Plan." Executive officers may participate in group life, health and
hospitalization plans if and when such plans are available generally to all
employees.
EMPLOYMENT AGREEMENTS
Effective as of March 1, 1995, the Company entered into an employment agreement
with David N. DeBaene as Chairman and President. The agreement is for a base
term of five (5) years, and is thereafter renewable for additional periods of
three (3) years, unless the Company gives notice to the contrary. In accordance
with his agreement with the Company, Mr. DeBaene's first year base salary was
$65,000, increasing annually thereafter in $20,000 increments. In addition, Mr.
DeBaene is entitled to receive an annual cash bonus based upon a percentage of
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<PAGE>
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.
On January 1, 2000 the prior agreement was cancelled and a new contract signed
providing for a five year term expiring on December 31, 2004. The contract
automatically renews at five year absent any notice 180 days prior to the end of
the term. The Base salary increases on each anniversary at a rate of 13% over
the prior years salary. Mr. DeBaene was granted 25,000 options from upon signing
at an exercise price of $1.59, which was in excess of the $1.30 price per share
on the nearest trading date to the signing of the contract. The contract further
provides for bonuses on the net pre tax profits of the to be formed Consumer
Products Division 4% of the profit of the division if the profit is less than
$2,500,000 and increasing ratably to a maximum of 10% if the profit exceeds
$5,000,001.
The agreement also provides for the payment of normal business expenses and a
$750 monthly car allowance for a car lease not to exceed 3 years. A vacation
allows up to 4 weeks of annual vacation during the term.
The contract also provides for certain payments in the event Mr. DeBaene is
terminated without cause or a change in control or position occurs that Mr.
DeBaene has not agreed to. These payments would require the remaining term of
the contract to be paid upon termination and the repurchase by the company of
all outstanding stock owned by Mr. DeBaene.
On January 1, 2000 Norman J. Birmingham signed an employment contract that
provides for a salary of $150,000 in the first year of a five-year term, with
annual increases of 13%. Mr. Birmingham was granted 25,000 options with an
exercise price of $1.59, which was above the $1.30 closing bid price on the
nearest trading day to the contract signing. The contract further provides that
a bonus will be paid on the consolidated pre tax income of the corporation
beginning with 2% if the corporation net pre tax income is less than $2,500,000
and increasing ratably to 4.5% if the pre tax income is over $5,000,001.
The agreement also provides for the payment of normal business expenses and a
$750 monthly car allowance for a car lease not to exceed 3 years. A vacation
allows up to 4 weeks of annual vacation during the term.
The contract also provides for certain payments in the event Mr. Birmingham is
terminated without cause or a change in control or position occurs that Mr.
Birmingham has not agreed to. These payments would require the remaining term of
the contract to be paid upon termination and the repurchase by the company of
all outstanding stock owned by Mr. Birmingham.
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<PAGE>
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, Norman J. Birmingham and Herbert Canapary are members of the
Compensation Committee, which reviews and makes recommendations with respect to
compensation of officers, employees and consultants, including the granting of
options under the Company's 1995 Stock Option Plan.
STOCK OPTION PLAN
THE 1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "Plan")
adopted by the Company's Board of Directors in February 1995 and by the
stockholders in July 1995, provides for the issuance of options ("Options") to
employees, officers and, under certain circumstances, directors of and
consultants to the Company ("Eligible Participants"). Options granted under the
plan may be either "incentive stock options" ("ISOs") as defined in Section 422
of the Internal Revenue Code of 1986, as amended (the "Code") or "nonqualified
stock options" ("NQSOs"). The Plan does not provide for the issuance of stock
appreciation rights but does permit the granting of restricted and
non-restricted stock and deferred stock awards. A total of 250,000 shares of
Common Stock were originally reserved for issuance under the Plan; however, in
January 1998, the Board of Directors voted to amend the Plan and reserve for
issuance under the Plan an additional 500,000 shares, which amendment was
ratified by the stockholders of the Company at the Annual Meeting of
Stockholders held April 15, 1998. The Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"). The Committee has sole
discretion and authority, consistent with the provisions of the Plan, to select
the Eligible Participants to whom Options will be granted under the Plan, the
number of shares which will be covered by each Option and the form and terms of
the agreement to be used. All employees and officers of the Company (except for
members of the Committee) are eligible to participate in the Plan. Directors are
eligible to participate only if they have been declared to be "eligible
directors" by resolution of the Board of Directors. Members of the Committee are
not Eligible Participants. At February 28, 1999, approximately 20 persons were
eligible to receive ISOs under the Plan.
OPTIONS. The Committee is empowered to determine the exercise price of Options
granted under the Plan, but the exercise price of ISOs must be equal to or
greater than the fair market value of a share of Common Stock on the date the
Option is granted (110% with respect to optionees who own at least 10% of the
outstanding Common Stock). The exercise price of NQSOs granted under the Plan
must not be less than 85% of the fair market value of the Common Stock on the
date the Option is granted. The Committee has the authority to determine the
time or times at which Options granted under the Plan become exercisable, but
the Options expire no later than ten years from the date of grant (five years
with respect to Optionees who own at least 10% of the outstanding Common Stock
of the Company). The Options are nontransferable, other than by will and the
laws of descent, and generally may be exercised only by an employee while
employed by the Company or within 90 days after termination of employment (one
year from termination resulting from death or disability).
28
<PAGE>
During fiscal 1998, NQSOs to purchase 200,000 shares were granted to a
consultant at exercise prices ranging from $2.50 to $3.25 per share. Subsequent
thereto, in connection with the extension of the consulting agreement with said
consultant, options to purchase 50,000 of said shares were surrendered, and the
consultant was issued 50,000 shares. In January 1998, the Company issued 9,500
shares to an employee of said consultant in consideration of services rendered
outside of the scope of the consulting agreement. In June 1998, in connection
with an additional extension of the term of the consulting agreement with said
consultant and an expansion in scope of the services to be rendered by said
consultant, the Company issued options to purchase an additional 300,000 shares
of Common Stock at exercise prices ranging from $3.25 to $5.75 per share. Of
these options, 60,000 shares have been exercised, and options to purchase
140,000 shares remain outstanding.
As of the date of this report, there are outstanding NQSOs to purchase 12,500
shares having an exercise price of $1.50 per share as well as options to
purchase 181,000 shares having exercise prices ranging from $3.75 to $5.75 per
share. 5,000 options at $1.00 were granted in February 2000 and 50,000 at $1.59
on January 1, 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
There were two individual grants of stock options or stock appreciation rights
to named executive officers during fiscal 2000 pursuant to the employment
contract signing by Mssrs. DeBaene and Birmingham in the amount of 25,000 each
at an exercise price of $1.59.
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 2000, and Mssrs DeBaene and Birmingham were
the only named executive officers that held any stock options or stock
appreciation rights as of the end of fiscal 2000.
OPTION REPRICING
Not applicable.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
No directors other than those identified above as members of the Compensation
Committee served on that Committee during the last completed fiscal year. None
of the executive officers of the Company has served on the board of directors or
on the compensation committee of any other entity, any of whose officers served
either on the Board of Directors or on the Compensation Committee of the
Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 1, 2000 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
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<PAGE>
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 774,673 (2) 29.7%
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) 2.39%
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Steev Panneton Common Stock 0 **
46 Old Flat River Road Series A Preferred 0 **
Coventry, 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 **
All Officers and Director Common Stock 849,673 (2)(4)(5) 32.61%
Series A Preferred 0 **
As a Group (7 persons) Series B Preferred 0 **
OTHER 5% STOCKHOLDERS
Joseph Lussier Common Stock 191,158 (6) 7.33%
1645 Warwick Avenue
Warwick, RI 02886
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Name and Address or Amount and Nature of Percentage
Number in Group Beneficial Ownership (1) of Class *
-------------------- ------------------------ ----------
<S> <C> <C> <C>
Merit Capital Assoc, Inc. Series A Preferred 20 7.58%
1221 Post Road
Westport, CT
Gerald Hoak Series A Preferred 40 15.16%
1221 Post Road
Westport, CT
Mission Bay Consultants Common Stock 163,000 (6) 11.03%
20946 Avenal Run
Boca Raton, FL 33428
ULLICO Common Stock 1,607,516 (7) 38.16%
111 Massachusetts Ave Series B Preferred 2,500 100.00%
Washington, DC
</TABLE>
----------
(*) Assumes 2,348,645 shares of Common Stock, 235 shares of Series A Preferred
Stock and 2,500 shares of Series B Preferred Stock issued and outstanding.
(**) less than 1%
(1) Except as otherwise indicated, each named holder has, to the Company's
knowledge, sole voting and investment power with respect to the shares
indicated.
(2) 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.
(3) Ms. Cotter is the spouse of David N. DeBaene.
(4) Includes shares issuable upon exercise of 12,500 non-qualified stock
options.
(5) 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.
(6) Includes 163,000 shares of Common Stock issuable upon exercise of
outstanding stock options.
(7) Includes 641,516 shares of Common Stock issuable upon conversion of Series
B Preferred Stock and PIK Dividends as well as 966,000 shares issuable upon
exercise of outstanding warrants. See "Item 1 Business -- Recent
Developments -- Private Placement of Series B Preferred Stock."
ESCROW OF SHARES In accordance with the requirements of certain state securities
administrators, certain of the Company's principal stockholders have agreed to
place into escrow an aggregate of 700,000 shares (the "Escrow Shares") of the
875,000 shares of Common Stock held by them as of the date of the Company's
initial public offering. Under the escrow agreement, the Escrow Shares will be
ratably released to the holders in 25% increments on the sixth, seventh, eighth
and ninth anniversaries, respectively, of the initial public offering. If the
Company meets or exceeds certain net earnings or stock price targets, the
release of the Escrow Shares will be accelerated. Additionally, in accordance
with the requirements of another state securities administrator, the holdings of
all officers, directors and post-offering five percent (5%) stockholders are
subject to certain lock-up restrictions until January 1999.
31
<PAGE>
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 TRANSACTION
CONSULTING AGREEMENTS
WARRANTS TO MESSRS. DURKIN AND LUSSIER. In connection with their agreement to
provide financial consulting services to the Company for a three (3) year period
commencing August 1996, the Company issued on August 6, 1996 to each of Messrs.
Joseph Lussier and William Durkin, warrants to purchase 232,824 shares of Common
Stock expiring August 7, 2003, or a total of 465,648 shares. The warrants were
divided into two (2) classes, time warrants which contain vesting provisions
based solely on the expiration of time, and performance warrants, which
contained vesting provisions based upon the price of the Company's Common Stock
during various periods. Messrs. Durkin and Lussier received 136,200 time
warrants and 96,624 performance warrants each. As of the date of this report,
none of the performance warrants vested and all have expired. At the date
hereof, all of the time warrants have vested and are exercisable. The exercise
price of all of the warrants was originally $4.00 per share, subject to
adjustment under certain circumstances; however as a result of the subsequent
issuance of the Series A Preferred and the Series B Preferred Stock the exercise
price was adjusted to $2.85 per share and the number of time warrants increased
to 191,158 shares each. Mr. Lussier is and Mr. Durkin was formerly affiliated
with Merit Capital Associates, Inc., the underwriter of the Company's Public
Offering. Relative to certain actions deemed detrimental to the Company and its'
shareholders the Warrants currently held by Mr. Durkin are being reviewed by
counsel to derive the feasibility of there cancellation.
MISSION BAY CONSULTANTS, INC. On April 2, 1997, the Company entered into a one
(1) year Consulting Agreement with Mission Bay Consulting, Inc., a management
consulting and public relations firm ("Mission Bay"), for certain consulting
services. In connection with this Consulting Agreement the Company issued to
Mission Bay an option under the Company's 1995 Stock Option Plan to purchase an
aggregate of 200,000 shares of common stock, and also issued 28,000 shares of
common stock under the 1995 Stock Option Plan. The Company has also agreed to
reimburse Mission Bay for its accountable expenses incurred in connection with
the Agreement. In September 1997, in consideration of the extension of the
32
<PAGE>
Consulting Agreement, 50,000 of said options were surrendered, and the Company
issued 50,000 shares of Common Stock to Mission Bay Consulting under the 1995
Stock Option Plan. In January 1998, the Company issued 9,500 shares to an
employee of Mission Bay Consulting, in consideration of services rendered
outside of the scope of the Consulting Agreement. In June 1998, in connection
with an additional extension of the term of the consulting agreement with
Mission Bay and an expansion in scope of the services to be rendered by said
Mission Bay, the Company issued options to purchase an additional 300,000 shares
of Common Stock at exercise prices ranging from $3.25 to $5.75 per share. Of
these, options to purchase 119,000 shares have been exercised and options to
purchase 181,000 shares remain outstanding.
RELATED PARTY LOANS
As disclosed in the Notes to the financial statements, the Company has from time
to time borrowed money from or loaned money to related parties. At February 29,
2000, the Company owed approximately $155,000 in the aggregate to the parents of
David N. DeBaene. Approximately $140,000 of these loans bear interest at the
rate of 10% and will be repaid out of operating cash flow at the rate of $5,500
per month until September 1, 2001. In addition, at February 29, 2000, David N.
DeBaene had loaned approximately $35,000 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.
33
<PAGE>
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) List of Exhibits
The exhibits that are filed with this report or that are incorporated
herein by reference are set forth in the Exhibit Index appearing on page
E-1 hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
2000.
34
<PAGE>
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 12, 2000 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.
Signatures Title Date
---------- ----- ----
/s/ David N. DeBaene Chairman of the Board, President June 12, 2000
---------------------------- and Chief Executive Officer
David N. DeBaene (Principal Executive Officer)
/s/ Norman J. Birmingham Treasurer, Chief Financial June 12, 2000
---------------------------- Officer, and Director (Principal
Norman J. Birmingham Financial Officer)
/s/ Thomas A. Lisi
---------------------------- Director June 12, 2000
Thomas A. Lisi
/s/ Elizabeth Cotter
---------------------------- Director June 12, 2000
Elizabeth Cotter
/s/Camille Barbone
---------------------------- Director June 12, 2000
Camille Barbone
/s/ Steev Panneton
---------------------------- Secretary and Director June 12, 2000
Steev Panneton
/s/ Herbert Canapary
---------------------------- Director June 12, 2000
Herbert Canapary
35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Incorporated Documents SEC Exhibit Reference
------- ---------------------- ---------------------
<S> <C> <C>
2.1 Form of Conversion Agreement As filed with the Registrant's Form
between the Registrant and certain SB-2 on October 27, 1995, File No.
holders of the Registrant's 10% 33-98486
Secured Notes, 12% Subordinated
Notes and 20% Demand Notes
3.1 Certificate of Incorporation of the As filed with the Registrant's Form
Registrant, as amended SB-2, on October 27, 1995, File No.
33-98486
3.2 By-Laws of the Registrant, as As filed with the Registrant's Form
amended SB-2 on October 27, 1995, File No.
33-98486
4.1 Form of Warrant Agreement As filed with the Registrant's Form
SB-2, on October 27, 1995, File No.
33-98486
4.2 Form of Warrant of the Registrant As filed with the Registrant's Form
issued in the Registrant's January SB-2 on October 27, 1995, File No.
1995 Private Placement 33-98486
4.3 Form of Unit Purchase Option issued As filed with the Registrant's Form
to Merit Capital Associates, Inc. SB-2 on October 27, 1995, File No.
33-98486
4.4 Form of 11% Convertible As filed with the Registrant's Form
Subordinated Note of the Registrant SB-2 on October 27, 1995, File No.
issued in the Registrant's August, 33-98486
1995 Private Placement
4.5 Form of Warrant of the Registrant As filed with the Registrant's Form
issued in the Registrant's August, SB-2 on October 27, 1995, File No.
1995 Private Placement 33-98486
4.6 Securities Purchase Agreement dated As filed with the Registrant's
April 9, 1998 Form 10KSB on June 13, 1999
4.7 Certificate of Designation of As filed with the Registrant's
Series B Preferred Stock. Form 10 KSB on June 13, 1999
4.8 Stockholders' Agreement dated April As filed with the Registrant's
9, 1998. Form 10 KSB on June 13, 1999
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Incorporated Documents SEC Exhibit Reference
------- ---------------------- ---------------------
<S> <C> <C>
4.9 Registration Rights Agreement dated As filed with the Registrant's
April 9, 1998 Form 10 KSB on June 13, 1999
4.10 Warrant Certificate issued to As filed with the Registrant's
ULLICO Form 10 KSB on June 13, 1999
4.11 Escrow Agreement As filed with the Registrant's
Form 10 KSB on June 13, 1999
4.12 Certificate of Designations of As filed with the Registrant's
Series A Preferred Stock Form 10-KSB on June 11, 1998
10.1 Lease Agreement for the As filed with the Registrant's Form
Registrant's Coventry, RI facility SB-2 on October 27, 1995, File No.
33-98486
10.2 Loan Agreement with Home Loan and As filed with the Registrant's Form
Investment Bank SB-2 on October 27, 1995, File No.
33-98486
10.3 Employment Agreement with David N. As filed with the Registrant's Form
DeBaene SB-2 on October 27, 1995, File No.
33-98486
10.4 Employment Agreement with Elizabeth As filed with the Registrant's Form
Cotter SB-2 on October 27, 1995, File No.
33-98486
10.5 Consulting Agreement with Thomas A. As filed with the Registrant's Form
Lisi SB-2 on October 27, 1995, File No.
33-98486
10.6 Overseas Agency Agreement with As filed with the Registrant's Form
Geronimo Leathers SB-2 on October 27, 1995, File No.
33-98486
10.7 Registrant's 1995 Stock Option Plan As filed with the Registrant's 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 Form
Registrant's 1995 Stock Option Plan SB-2 on October 27, 1995, File No.
33-98486
10.9 Form of Sales Representative As filed with the Registrant's
Agreement Form SB-2 on October 27, 1995,
File No. 33-98486
10.10 Special Accounts Director Agreement As filed with the Registrant's
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 Form
dated May 6, 1998 8-K on May 13, 1998
16.2 Letter of BDO Seidman LLP As filed with the Registrant's Form
8-K/A on April 1, 1999
99.1 United States Patent #5,038,408 As filed with the Registrant's 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 Form SE
on June 11, 1998
</TABLE>
E-2
<PAGE>
FILED HEREWITH
Exhibit No.
-----------
10.31 Employment Agreement with David DeBaene
10.11 Employment Agreement with Norman J. Birmingham
10.12 Consulting Agreement with Richard Sullivan
10.13 Consulting Agreement with Art Lang
10.14 Option to Purchase Businesses between Registrant and
International Commerce and Finance, Inc.
10.15 Stock Purchase Agreement between Registrant and Patina
Corporation
10.16 Stock Purchase Agreement with Rhode Island Truck and
Equipment Corp.
99.3 United States Patent # Pending on Pants with Back Brace
E-3
<PAGE>
JD AMERICAN WORKWEAR, INC.
BALANCE SHEET
February 29,2000
----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,523
Accounts receivable, net of allowances 73,371 65,478
Inventories 680,670
Prepaid expenses, current portion 148,019
Loans receivable, employees 74,480
-----------
Total current assets 980,170
Property and equipment, net 205,382
Intangible assets, net 52,360
Prepaid expenses, long-term 4,779
Other assets --
-----------
$ 1,242,691
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 254,372
Accounts payable and accrued expenses 333,201
Accrued interest on notes payable 277,529
Short term notes 127,435
-----------
Total current liabilities 992,537
-----------
Long-term debt, net of current portion 135,960
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock; authorized 1,000,000 shares;
Series A, $.001 par value, 154 shares issued and
Outstanding liquidating preference $385,000 --
Series B, $.001 par value, 2,500 shares issued and
outstanding(liquidating preference $2,500,000) 3
Common stock, $.002 par value; authorized 7,500,000 shares;
Issued and outstanding, 2,605,427 shares 5,211
Additional paid-in-capital 5,842,431
Detachable warrant 3,196,000
Unearned warrants (150,000)
Accumulated deficit (8,779,451)
-----------
Total stockholders' equity 114,194
-----------
$ 1,242,691
===========
F-1
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF OPERATIONS
Years Ended
----------------------------
February 29, February 28,
2000 1999
----------- -----------
Net sales $ 103,567 $ 1,226,143
Cost of goods sold 84,899 928,826
----------- -----------
Gross profit 18,668 297,317
Inventory Impairment 711,289
Selling, general and administrative expenses 1,337,244 1,924,172
----------- -----------
Loss from operations (2,048,533) (1,626,855)
Gain on sale of fixed assets 2,244 --
Other Income 24,848
Interest income 596 23,001
Interest (expense) (394,943) (88,911)
----------- -----------
Net loss $(2,397,120) $(1,692,765)
=========== ===========
Weighted average net loss per common share $ (0.97) $ (0.82)
=========== ===========
Weighted average common shares outstanding 2,460,700 2,069,152
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CASH FLOWS
Years Ended
---------------------------
February 29, February 28,
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(2,397,120) $(1,885,765)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 72,700 54,542
Securities issued for services 203,775 194,500
Securities issued for interest 152,084 193,000
Changes in operating assets and liabilities :
Accounts receivable 685,919 (547,712)
Inventories 586,958 (209,844)
Prepaid expenses and other assets 133,602 84,143
Accounts payable and accrued expenses 395,464 49,657
----------- -----------
Net cash used by operating activities (266,618) (2,067,479)
----------- -----------
Cash flows from investing activities:
Capital expenditures -- (109,334)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 85,500 133,250
Proceeds from notes and long-term debt -- 106,530
Proceeds from sales of preferred stock and
detachable warrant -- 2,500,000
Issuance costs for preferred stock -- (166,442)
Principal payments on notes, long-term debt
and short-term loans 18,169 (238,985)
----------- -----------
Net cash provided by financing activities 103,669 2,334,353
----------- -----------
Increase (decrease) in cash and cash equivalents (162,949) 157,540
Cash and cash equivalents, beginning of year 174,472 16,932
----------- -----------
Cash and cash equivalents, end of year $ 11,523 $ 174,472
=========== ===========
Supplemental cash flow disclosures:
Interest paid $ 361,703 $ 71,787
=========== ===========
Non-cash investing and financing activities: During the fiscal year
ended February 29, 2000:
(1) Equity securities totaling $357,584 were issued in satisfaction
of notes payable and accrued interest.
During the fiscal year ended February 28, 1999:
(1) Land and building of $125,000 was financed by mortgage note
payable provided by the seller.
(2) Equity securities totaling $534,761 were issued in satisfaction
of notes payable and accrued interest.
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Preferred stock
$.002 Par Value $.001 Par Value Additional
------------------------- --------------- Paid-in Detachable Accumulated
Shares Amount Shares Amount Capital Warrant Deficit Total
----------- ----------- ------ ------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1998 1,984,899 $ 3,970 313 $ 0 $5,046,637 $ 0 (4,496,566) $ 554,041
Issuance of preferred stock
and detachable warrant -- -- 2,500 3 (696,003) 3,196,000 -- 2,500,000
Issuance costs of preferred
stock -- -- -- - (166,442) -- -- (166,442)
Shares issued to retire
11% notes 97,909 196 -- - 376,744 -- -- 376,940
Preferred stock conversion 19,121 38 (14) - (38) -- -- --
shares issued to retire
10% notes 55,312 110 -- - 157,711 -- -- 157,821
Common shares issued for
services 50,000 100 -- - 162,400 -- -- 162,500
Options issued for services -- -- -- - 32,000 -- -- 32,000
Exercise of stock options 41,000 82 -- - 133,168 -- -- 133,250
Net loss -- -- -- - -- -- (1,692,765) (1,692,765)
----------- ----------- ----- --- ---------- ---------- ----------- -----------
Balance, February 28, 1999 2,248,241 $ 4,496 2,799 $ 3 $5,046,177 $3,196,000 $(6,189,331) $ 2,057,345
----------- ----------- ----- --- ---------- ---------- ----------- -----------
As previously reported,
adjusted (193,000) (193,000)
Shares issued to retire
11% notes 3,788 8 -- - 14,576 -- -- 14,584
Common shares issued for
services 87,500 175 -- - 198,600 -- -- 198,775
Preferred shares issued for
Interest payment -- -- 343 - 343,000 -- -- 343,000
Common shares issued for
Dividend on converted Series
A Preferred 54,898 110 -- - -- -- -- 110
Stock options issued -- -- -- - 5,000 -- -- 5,000
Exercise of stock options 65,000 130 -- - 85,370 -- -- 85,500
Preferred stock conversion 146,000 292 (146) - (292) -- -- 0
Net loss $(2,397,120) (2,397,120)
----------- ----------- ----- --- ---------- ---------- ----------- -----------
Balance, February 29, 2000 2,605,427 $ 5,211 2,996 $ 3 $5,692,431 $3,196,000 $(8,779,451) $ 114,194
=========== =========== ===== === ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
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. The Company is modifying
its approach to marketing to stem the flow of losses and reduce overhead and
handling costs. The Company has begun an orderly liquidation of all current
inventory and has begun negotiations to license its patents to major
manufacturers and/or distributors. Future revenue from this change could come
from royalties received for these licensing rights and from direct sales using
the Internet site that has been developed. The manufacturers would produce all
products and act as fulfillment houses to deliver the product orders received
from the Internet site. The Company expects to generate between $800,000 and
$1,000,000 from the distribution of its current inventory over the next 18
months starting in September 2000, and up to $500,000 from the initial payments
for licensing rights. The Internet site may well provide the Company with
$500,000 in revenue during fiscal 2001. 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.
DETERMINATION REQUESTED FROM THE SECURITIES AND EXCHANGE COMMISSION
The presentation of the financial statements is unaudited pending the
determination of certain accounting treatment to comply with GAAP. These items
include the rate of charges to earnings for the warrants issued in the financing
arrangements in 1998 with Union Labor Life Insurance Company and the discount to
be amortized for the difference between the conversion price and the market
price on the day the Series A Preferred Stock was issued. The Company is seeking
to reduce the charges that would be required for these items. No charges were
taken in the years of issuance and may require prior year adjustments back to
fiscal 1998. The Company expects to have an amendment to this document
immediately following the receipt of the determination, in writing, from the
SEC.
The auditing firm, Bederson and Company LLP has reserved the right to withhold
their opinion on the fairness and accuracy of the presentation of the financial
information until they have received the determination letter. No dispute
between Bederson and Company LLP and the Company exists.
The Company does not expect any substantive changes to the operating statement
except for the changes required by the determination letter.
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.
F-6
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities 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. The inventory has been impaired by $711,289 to more accurately
reflect the values that may be attained in the liquidation of product. This
impairment is directly related to the reduced levels of sales and the conversion
to a new strategy for marketing.
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:
Asset Classification Estimated Useful Lives
-------------------- ----------------------
Building 39 years
Furniture and fixtures 5 - 7 years
Machinery and equipment 5 - 7 years
Office equipment 5 - 7 years
Trucks and autos 5 years
INTANGIBLE ASSETS
Organization costs are stated at cost and are being amortized over 60 months.
Loan origination fees are stated at cost and are amortized over the life of the
loan. Patent costs are stated at cost and are being amortized over the estimated
useful life of the patent.
REVENUE RECOGNITION
The Company recognizes revenue when the product is shipped, except for
consignment sales which are carried as consignment inventory until the receipt
of payment or sell-through is acknowledged by the consignee.
The Company has a return that depends solely on the type of sale transacted. For
retail sales to the end user we allow returns for 10 days after the sale. Sales
are booked at the time shipment is made and an adjustment is made for a 10%
allowance against the shipments of the last ten business days of each quarter.
For wholesale sales, returns are allowed only with the pre-approval of
management, and only within the period that the invoice is current. These sales
are booked when shipment is made and an adjustment is made at the end of each
quarter reflecting a percentage of the current shipments x returns of the last
twelve months/last twelve months shipments.
Damaged or defective goods may be returned at any time for customer satisfaction
purposes.
This policy is effective starting in March 2000.
OTHER MANUFACTURING EXPENSES
As a result of the agreement to engage union sewing shops to manufacture the
Company's products, during the fourth quarter of fiscal 1998, the Company
entered into new manufacturing arrangements with two union sewing contractors.
During fiscal 1999, one of these contractors closed their sewing facility, which
resulted in a further shift of production to a third sewing plant. These changes
in manufacturing contractors required training in the patented technological
process of manufacturing these products. In addition management of the Company
was required supervise all aspects of the manufacturing process during these
transitions in order to insure quality and yields. During fiscal 1999 the
Company incurred approximately $75,000 in non-recurring costs in conjunction
with these production changes, such costs are included in selling, general and
administrative expenses. No additional expenses were incurred in fiscal 2000.
F-7
<PAGE>
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $52,490 and $172,761
during the years ended February 29, 2000 and February 28, 1999, respectively.
STOCK-BASED COMPENSATION
The Company has adopted Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") which establishes a fair-value-based
method of accounting for stock-based compensation plans.
BASIC AND DILUTED LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding for each fiscal year. Common stock
equivalents are not considered in loss years because they are anti-dilutive.
2. INVENTORIES
Inventories consist of the following:
Raw materials $ 52,235
Work-in-process --
Need to fix Finished goods 628,434
--------
$680,670
========
3. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment, at cost, consists of the following:
Land and building $225,957
Furniture and fixtures 25,182
Machinery and equipment 84,039
Office equipment 23,996
Trucks and autos 64,720
--------
423,894
Less accumulated depreciation 218,512
--------
$205,382
========
Depreciation expense for the years ended February 29, 2000 and February 28, 1999
was $63,080 and $21,481, respectively.
Intangible assets, at cost, consists of the following:
Patents $ 70,970
Offering costs 189,563
Loan origination fees 39,075
Organization costs 10,500
--------
310,108
Less accumulated amortization 257,748
--------
$ 52,360
========
F-8
<PAGE>
Amortization expense for the years ended February 29, 2000 and February 28, 1999
was $8,981 and $15,106, respectively.
4. NOTES PAYABLE AND LONG-TERM DEBT
The Company's notes payable and long-term debt as of February 29, 2000 consists
of the following:
10.5% mortgage note payable, collateralized by the land and
building, due in monthly installments of $2,687 through
December, 2001 with a final payment of $57,934 due in
January, 2002. $108,150
10% note payable to the parents of the President of the
Company, payable in monthly installments of $5,494. Final
payment due September, 2002. 140,747
11% convertible subordinated notes due to investors. The
notes matured on September 30, 1998. The notes are
subordinate in right of payment to all indebtedness of the
Company outstanding as of August 15, 1995 or to be incurred
in the future. In conjunction with these notes, the Company
issued warrants to purchase 112,500 shares of the Company's
common stock at a price of $2.00 per share. The warrants
expire on September 30, 2000. The value assigned to the
warrants, amounting to $112,500 is being accounted for as a
debt discount and is being amortized over the period of time
the notes are outstanding. The effective interest rate,
including amortization of the discount is approximately 17%.
These notes, including accrued interest are convertible at
the option of the holder, into common stock at $3.85 per
share, subject to adjustment as defined in the agreement.
During the year ended February 29, 2000, notes totaling
$12,500, plus accrued interest, were converted into common
stock. 75,000
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 President of the Company. 40,000
Short-term stockholder notes are typically non-interest
bearing and range in duration from one week to one year.
Interest will be imputed on these loan amounts to accurately
reflect all costs to operate the Company. 149,031
Capitalized lease on equipment 4,839
--------
Total $517,767
Less current portion 381,807
--------
NET LONG-TERM DEBT $135,960
========
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<PAGE>
SEE NOTE 7 WITH RESPECT TO THE CONVERSION OF DEBT
The scheduled repayment of debt at February 29, 2000 is as follows:
Year ending February 29, Amount
------------------------ ------
2001 $ 381,807
2002 135,960
---------
$ 517,767
=========
5. RELATED PARTY TRANSACTIONS:
As stated in Note 4, the Company has borrowing transactions with related
parties. Certain of these related party obligations are not formalized by any
written agreements and are non-interest bearing. Accordingly, for the year ended
February 29, 2000 imputed interest at 7% has been applied in the amount of
$5,900. The Company has adopted a policy of imputing interest at 7% in the 2000
fiscal year and did not impute interest in any prior year.
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 his 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 no fees in 2000, $12,500 during 1999 and
$28,300 during 1998 in consulting fees for marketing assistance provided to the
Company. See Note 6 with regards to a consulting agreement between the Company
and the aforementioned Director of the Company.
6. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENT
The Company has an employment agreement with two key employee. The President
began fiscal 2000 with a salary of $145,000 which was raised to $150,000 on
January 1, 2000. On January the Chief Financial Officer signed an employment
contract stipulating to $150,000 salary. Both current agreement also contains a
bonus stipulation based upon a percentage of the Company's pre-tax income (as
defined) in accordance with a sliding scale schedule contained in the agreement.
F-10
<PAGE>
CONSULTING
During fiscal year 2000 the consulting agreement with First Dunbar Securities
was cancelled resulting in the return of 192,000 warrants previously issued. The
termination was caused by the lack of performance of the two principal
recipients of the warrants Mr. Frank Spellman for First Dunbar and Mr. William
Durkin. The Company is consulting with counsel for the cancellation of the
warrants, issued in conjunction with agreement below, belonging to Mr. Durkin
for conduct detrimental to the Company.
In connection with their agreement to provide financial consulting services to
the Company for a three (3) year period commencing August 1996, the Company
issued on August 6, 1996 to each of Messrs. Joseph Lussier and William Durkin,
warrants to purchase 232,824 shares of Common Stock expiring August 7, 2003, or
a total of 465,648 shares. The warrants are divided into two classes, time
warrants which contain vesting provisions based solely on the expiration of
time, and performance warrants, containing vesting provisions based upon the
price of the Company's Common Stock during various periods. Messrs. Durkin and
Lussier received 136,200 time warrants and 96,624 performance warrants each. As
of the date of this report, all of the performance warrants have expired. At the
date hereof, an aggregate of 217,920 (or 108,960 per holder) of the time
warrants have vested and are exercisable. The exercise price of the warrants is
$2.85 per share, subject to adjustment under certain circumstances. Mr. Lussier
is affiliated with Merit Capital Associates, Inc., the underwriter of the
Company's Public Offering. As permitted by generally accepted accounting
principles, the warrants were valued at the estimated value of the services to
be performed. The value assigned to the warrants was amortized over the term of
the consulting agreements, resulting in amortization expense of $0 and $92,000
for the fiscal years ended February 28, 1999 and 1998, respectively.
In 1997, the Company entered into a consulting agreement which expired in
August, 1999. The agreement provides for commissions to be paid at a rate of 10%
(ten percent) of paid invoices; in cash or in common stock, not to exceed
300,000 shares, at the option of the consultant. Commission expense relating to
this consulting agreement totaled less that $1,000 in each of the years ended
February 29, 2000 and February 28, 1999.
CASH IN BANK
The Company maintains bank accounts, which at times contain balances, which
exceed the amounts insured by the FDIC.
7. CAPITALIZATION
AUTHORIZED NUMBER OF SHARES OF COMMON STOCK
On April 15, 1998, the shareholders of the Company approved an amendment to the
Company's Certificate of Incorporation that increased the number of authorized
shares of Common Stock of the Company from 4,500,000 shares to 7,500,000 shares.
PUBLIC OFFERING OF SECURITIES
In February 1996, the Company completed a first closing of its initial public
offering of units (as defined below) whereby the Company sold 250,000 units for
net proceeds, after offering costs, of approximately $1,562,500. 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 $486,500.
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<PAGE>
In 1996, the underwriter of the public offering, pursuant to the underwriting
agreement, received options to purchase 32,768 units at a price of $8.4375 per
unit. The options become exercisable in January 1998 and expire in January 2001.
The value of each of the issuances above was $6.25 based upon the fair value of
the common stock on the opening of trading for the commons hares including in
these offerings. No accounting charges were taken for any of the options or
warrants as all were above the fair market value at its most measurable date.
In conjunction with the offering, the holders of certain notes payable exercised
their right of conversion and converted approximately $1,134,000 of notes and
accrued interest thereon into 349,225 shares of common stock.
SERIES A 10% MANDATORILY CONVERTIBLE PREFERRED STOCK
The Company sold 313 shares of Series A 10% Mandatorily Convertible Preferred
Stock through a Private Placement dated August 26, 1997, at a price of $2,500
per Preferred Share. Dividends, when and if declared, are payable at a rate of
10% annually, payable in kind at the option of the Company. The Series A
Preferred Stock was convertible, at the option of the holder, into shares of the
Company's Common Stock at an initial conversion rate equal to 1,000 shares of
Common Stock for each share of Series A Preferred Stock (representing a
conversion price of $2.50 per share of Common Stock); however, as a result of
the subsequent issuance of Series B Preferred Stock, the Series A Preferred
Stock is convertible at the rate of 1,289 shares of Common Stock for each share
of Series A Preferred Stock (representing a conversion price of $1.94 per share
of Common Stock), subject to adjustment. The shares convert automatically upon
the registration of the underlying common stock issuable upon the conversion.
Holders of Series A Preferred Stock vote on an as converted basis with the
common stockholders.
COMMON STOCK OPTIONS
The Company's 1995 Stock Option Plan provides for the granting of stock and
options to purchase stock up to 750,000 shares of common stock. Option activity
for the years ended February 28, 1999 and February 28, 1998 is summarized as
follows:
Weighted-average
Number of exercise price
Shares per share
------ ---------
Options outstanding, February 28, 1998 12,500 $1.50
Granted 300,000 4.50
Exercised (41,000) 3.25
Canceled (0)
------- -----
Options outstanding, February 28, 1999 271,500 1.50
Granted 105,000 2.03
Exercised (85,000) 2.95
Canceled (0) --
------- -----
Options outstanding, February 29, 2000 291,500 $2.13
======= =====
F-12
<PAGE>
Options for 291,500 shares are exercisable at February 29, 2000 at an exercise
price and a weighted average exercise price of $2.13 per share, with a weighted
average remaining contractual life of 5 years on 231,000 options and one year on
60,500 options. At February 29, 2000, there were 217,000 shares available for
grant under the plan.
In April 1997, the Company entered into a consulting agreement and a
nonqualified stock option agreement with a consulting firm. In accordance with
the consulting agreement, 78,000 shares of common stock were issued as
compensation as well as options to purchase an additional 200,000 shares, which
were granted at exercise prices of $2.50 per share with respect to 100,000
options and $3.25 per share with respect to 100,000 options. Subsequently,
options to purchase 50,000 shares at $3.25 were canceled. In June 1998, in
connection with an additional extension of the term of the consulting agreement
with said consultant and an expansion in scope of the services to be rendered by
said consultant, the Company issued options to purchase an additional 300,000
shares of Common Stock at exercise prices ranging from $3.25 to $5.75 per share.
Of these options, 41,000 shares have been exercised, and options to purchase
259,000 shares remain outstanding. The consulting agreement has been extended to
and expires in March, 2001. Consulting expense related to the issuances of stock
and stock options under the agreements totaled $171,182 and $190,200 for the
fiscal years ended February 28, 1999 and 1998, respectively.
WARRANTS
The Company has issued warrants to purchase common stock in connection with the
issuance of notes payable, the sale of units, and as compensation for
professional service providers. Warrants outstanding at February 28, 2000 are as
follows: Must fix chart per sec letter
Number
Exercise Price
Warrants to Purchase of Shares Per Security Expiration Date
-------------------- --------- ------------ ---------------
Common stock and
Class A warrant 327,768 $7.00 January 3, 2001
Common stock 112,500 $2.00 September 30, 2000
Common stock 50,000 $1.50 December 31, 2000
Common stock 68,550 $2.00 July 31, 2000
Common stock 382,318 $2.85 August 7, 2003
Additionally, the Company has reserved 327,768 shares of common stock for
exercise of the Class B warrants.
SERIES B 12% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 9, 1998, the Company authorized the issuance and sale of 3,950 shares
of Series B 12% Cumulative Convertible Preferred Stock and sold 2,500 of these
shares to an investor. In addition, the Company issued a detached ten-year stock
purchase warrant to purchase 799,000 shares of the Company's common stock at an
exercise price of $0.01 per share to the investor for an aggregate purchase
price of $2,500,000. Dividends may be paid through the issuance of additional
shares of Series B preferred stock and warrants to purchase common stock. A
Stockholders Agreement dated April 9, 1998 (the "Stockholders Agreement") was
entered into among the acquirer of the Series B Preferred Stock (the
"Acquirer"), and all officers of the Company and certain other affiliates ("the
F-13
<PAGE>
Holders") whereby, the Company shall have a right of first refusal before any
shares of Common Stock may be transferred by any Holder. The Acquirer has a
right of second refusal and co-sale rights, if the Company does not elect to buy
all of the securities it is offered. If the Acquirer enters into an agreement to
transfer, sell or otherwise dispose of all of its Preferred Stock, Warrants and
any Common Stock issued upon conversion or exercise of the former ("Purchased
Shares") (such agreement referred to as a "Tag-Along Sale"), each Holder has the
right to participate in the Tag-Along Sale. If the Acquirer, alone or with
another person, accepts an offer from any party who is unaffiliated with it to
purchase any Purchased Shares which results in such party having the ability to
elect a majority of the Company's Board of Directors, then, at the request of
the Acquirer, each Holder shall sell all shares of Common Stock held by such
Holder (referred to as a "Drag-Along Sale"). The Series B Preferred Stock is
convertible, at the option of the Acquirer, into the number of shares of Common
Stock, which results from dividing the Conversion Price into $1,000 for each
share of Series B Preferred Stock being converted. The Conversion Price shall be
$5.00, subject to adjustment.
The Series B Preferred Stock entitles the Acquirer to receive, when and as
declared by the Company's Board, cumulative cash dividends in preference to the
payment of dividends on all other shares of capital stock of the Company. During
the two-year period following issuance of the Series B Preferred Stock (the "PIK
Period") the Company has the option of making payment of the semi-annual
dividends on the Series B Preferred Stock either in cash or by issuing
additional shares of Series B Preferred Stock ("PIK Dividends"). In the event
the Company elects to pay dividends in shares of Series B Preferred Stock, the
Company is required to issue additional detached ten-year dividend warrants (the
"Dividend Warrants") to purchase 54,000 shares of Common Stock at an exercise
price of $.01 per share for each semi-annual dividend period that PIK Dividends
are paid. During the PIK Period the Company may not pay or declare cash
dividends on any stock other than the Series B Preferred Stock. Unless full
dividends on the Series B Preferred Stock for all past dividend periods and the
then current period shall have been paid or declared and a sufficient sum for
the payment thereof set aside in trust for the Series B Preferred Stock Holders,
no dividend (other than a dividend payable solely in Common Stock) shall be paid
or declared, and no distribution made, on any other shares of stock.
The Company may, at its own option and at any time after the third anniversary
of the original issuance of the Series B Preferred Stock, redeem the Series B
Preferred Stock, in whole but not in part. In such event, the Company is
obligated to pay holders of the Series B Preferred Stock the investment value
per share, plus a redemption premium equal to a 20% internal rate of return on
the investment value. A mandatory redemption of 1,250 shares of Series B
Preferred Stock is required on each of the first business days of April 2004 and
2005.
Each holder of Series B Preferred Stock is entitled to vote on all Company
matters and is entitled to the number of votes equal to the largest number of
full shares of Common Stock into which such shares of Series B Preferred Stock
are convertible. The Series B Preferred Stock holders shall be entitled to elect
one director out of the seven authorized directors of the Company's board and
one director out of the three directors comprising the Company's Compensation
Committee. If certain events occur or do not occur, such as the failure to pay
either a PIK Dividend or cash dividend to the Series B Preferred Stock holders,
the holders of the Series B Preferred Stock shall be entitled, immediately upon
giving written notice, to elect the smallest number of directors that will
constitute a majority of the authorized number of directors.
The Company and the Acquirer entered into a Registration Rights Agreement dated
April 9, 1998, which requires the Company, upon written request, to file a
registration statement for the public resale of the Common Stock issued on
conversion of the Series B Preferred Stock. The Company is required to file and
cause to become effective a maximum of two registration statements, excluding
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<PAGE>
registration statements on Form S-3. The Company shall not be obligated to
affect more than one registration and Form S-3 during any six-month period and
shall be obligated to file and cause to become effective no more than six
registration statements on Form S-3. No registration statement is required to be
filed unless the proposed public offering price of the securities under such
registration shall be at least $5 million prior to deducting underwriting
discounts and commissions). The Registration Rights Agreement also provides for
incidental registration.
The proceeds from the sale of 2,500 shares of preferred stock and the detachable
warrants were allocated to additional paid in capital and the detachable warrant
based on their respective fair market values as of the date of sale and the
dividend imputed.
8. INCOME TAXES
At February 29, 2000, the Company had no current or deferred tax liability.
At February 29, 2000, the Company had net operating loss carryforwards for
federal income tax purposes amounting to approximately $8,800,000 that expire
through 2015. The Company had deferred tax assets due to the net operating loss
carryovers and temporary differences amounting to approximately $2,397,000
(February 29, 2000) $2,200,000 (February 28, 1999) and $1,500,000 (February 28,
1998), all of which have been fully reserved since the likelihood of the
realization of the benefits cannot be established.
The Internal Revenue Code contains provisions which may limit the net operating
loss carry over available for use in any given year if significant changes in
ownership interest of the Company occur.
9. MAJOR CUSTOMERS AND MAJOR SUPPLIERS
For fiscal 2000, the Company's largest customers each representing more than 5%
of gross shipments accounted for approximately $128,163, or 56.5%, of the
Company's fiscal 2000 gross shipments. These customers, their respective
purchases and the % of the Company shipments include Cintas $15,046 6.6%, JC
Penney $38,172 16.8%, Mason Shoe Company $14,693 6.5%, Safety Shoe Distributors
$11,065 5%, and Unifirst Corporation $49,187 21.7%. For fiscal 1999, the
Company's customers who exceeded 5% of sales were JC Penney 23%, UniFirst 13%,
RI Truck and Equipment Co. 11% and New England Seed Co. 11%. The Company is
presenting this information on shipments as opposed to sales because the sales
were impacted by $179,000 in returns from prior years so as to make percentages
meaningless.
For fiscal 2000, the Company purchased negligible amounts of product so that the
presentation of suppliers is of no tangible worth for the reader.
10. PRIOR QUARTER ADJUSTMENTS
The third quarter Form 10-QSB did not properly reflect the returns of $179,000
and there associated gross profit reduction of approximately $146,500. The sales
for the fourth quarter of fiscal 2000 were $64,000 with gross profit of $15,400.
Interest expense was increased by $332,873 in the fourth quarter for interest
that was earned May 31, 2000 of $161,589 and November 30, 2000 of $171,284 and
not recorded. in the respective quarters. The third quarter comparative
information was actually the fiscal 1998, second quarter and the Form 10-QSB has
not been amended.
11. PRIOR YEAR ADJUSTMENTS
The Company identified in the fourth quarter of fiscal 2000 an adjustment of
$193,000 in interest payable that had not been accrued in fiscal 1999. The
interest was directly attributable to the interest due ULLICO on Preferred
Series B stock owned by them. Additional prior year adjustments are expected as
a direct result of the determination letter requested from the SEC.
F-15
<PAGE>
12. SUBSEQUENT EVENTS
PATINA CORP. ACQUISITION
On June 12, 2000 the Company completed the acquisition of 100% of Patina Corp.,
which includes assets of its subsidiary International Machine and Welding, Inc.
Patina Corp. is a holding corporation that acquires going concerns and/or assets
of various businesses. Patina Corp. was formed in April 1999 for such functions
and immediately undertook to find acquisitions and purchased its first
subsidiaries in August 1999. Patina Corp. immediately began to seek funding
using various assets of its demolition, construction and asbestos abatement
subsidiaries. Funding was not secured for the various contracts and
opportunities that arose between inception and May 31, 2000. On May 31, 2000 all
agreements related to the subsidiaries ceased and the assets were returned to
their respective owners. While Patina Corp. or JD American Workwear, Inc.
through its construction management division anticipates doing business with
these associates the original contract and the assets that were described in the
anticipated transaction announced in August 1999 are no longer under the control
of Patina Corp.
However, the assets acquired on June 1, 2000 in an agreement between
International Commerce and Finance, Inc. and Patina Corp. allows the terms and
conditions of the amended contract with Patina Corp. to close.
These assets include a 28,000 square foot machine shop and 38 acres of
commercially zoned land in Bartow, Florida and all the tools and machinery to
make this facility the largest machine shop South of Jacksonville, Florida. The
operation also includes a heavy equipment and parts sales operation. The
combined entities expect a minimum of $3 million in revenue in its first full
fiscal year. Certain management of the former business located at this site are
employees of the Company and are well known in the area. These management
personnel have been responsible for sales well in excess of the Company
projections, each year, over the last thirty years. It is anticipated that this
subsidiary will provide $500,000 in net operating profits in its first full
fiscal year.
The contract terms require up to $6,250,000 of assets to be included based on
the appraised value of the equipment, machinery, land buildings, receivables and
other assets and $3,000,000 in sales contracts or commitments to be included.
Patina Corp. awaits the signing of a $3,000,000 contract to repair and
rehabilitate a structure for the New York State Department of Transportation.
The award letter has been received and all the requirements have been fulfilled
and have been returned to the agency. It is anticipated that the project will
begin in July 2000. This contract, when signed, will be managed by the JD
American construction management division. Simultaneous with the receipt of the
contract an additional $1 million dollars in heavy equipment will be added to
the asset base.
The acquisition is being funded with 11,300 shares of a newly created 6% Series
B Convertible Preferred Stock with a stated value $1,000 per share and
conversion rights into common stock at $1.00 per share when available. 1,500 of
these shares are issued and outstanding but held in escrow for use in paying the
earn-up provisions expected to be included in the employment agreements of the
management of the subsidiary. Additionally, the Preferred Shares pay a dividend
of 6% per annum payable in cash or in kind semi-annually. These shares have
voting rights equaling 3,562,500 shares.
F-16
<PAGE>
INTERNATIONAL COMMERCE AND FINANCE, INC.
On June 1, 2000 the Company signed an option agreement with International
Commerce and Finance, Inc. to have the right of first refusal to acquire any and
all projects that are currently under contract or may be conceived, acquired or
partnered for two years for the sum of 25,000 restricted common shares.
International Commerce and Finance, Inc. currently has the management contract
and an option to purchase a going concern with a one stop solution to the
banking industries needs and desire to integrate their branch banking system
with personal computer networks relieving themselves of expensive hardware,
programming and a technical staff to run the infrastructure. The solutions
company has been successful in maintaining an average of $5,000,000 in sales for
the last several years. The solutions company anticipates growth from newly
signed contracts to produce up to an additional $3,000,000 in revenue this
fiscal year with profit margins of 10% or greater. Additional contracts are in
the final negotiation stage.
RHODE ISLAND TRUCK AND EQUIPMENT CORP.
The Company completed the acquisition of Rhode Island Truck and Equipment, Corp.
on June 10, 2000. The Stock Purchase Agreement requires JD American Workwear,
Inc. to pay one share of restricted common stock for each dollar of appraised
value of the assets.
Rhode Island Truck and Equipment, Corp. provides sales of commercial trucks and
construction related equipment and tools. Additionally they provide hauling,
paving and commercial and demolition recycling. With an additional bonding line
substantial growth for its operations are expected. Total annual revenues are
expected to be $1,000,000 from the construction services sector and $200,000 in
construction equipment. Net pre tax profit is expected to be in the 10% to 20%
range.
Founded in 1995 the operations reached sales of in excess of $500,000 with
limited or no funding with profits of between 5% and 25% through their operating
history.
F-17
