SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(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. [ ].
State the issuer's revenues for its most recent fiscal year: $272,065
The aggregate market value of the voting and non-voting common equity of
the registrant held by non-affiliates of the registrant at September 12, 2000
was approximately $1,865,111 based upon the closing sale price of $.625 for the
Registrant's Common Stock, $.002 par value, as reported by the National
Association of Securities Dealers OTC Bulletin Board on September 12, 2000.
As of September 12, 2000 the registrant had 2,984,178 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. Description of Business 3
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to Vote of Securities Holders 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Security Holder Matters 12
Item 6. Management's Discussion and Analysis of Financial
Condition And Results of Operations 13
Item 7. Financial Statements 16
Item 8. Changes in and Disagreements with Accountants on
Accounting And Financial Disclosure 16
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of Exchange Act 17
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial Owners and
Management 21
Item 12. Certain Relationships and Related Transactions 23
PART IV
Item 13. Exhibits and Reports on Form 8-K 24
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FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Exchange Act of 1933, as amended, and is subject to the safe
harbors created by those sections. These forward-looking statements are subject
to significant risks and uncertainties, including information included under
Parts I and II of this annual report, which may cause actual results to differ
materially from those discussed in such forward-looking statements. The
forward-looking statements within this annual report are identified by words
such as "believes", "anticipates", "expects", "intends", "may", "will" and other
similar expressions regarding the Company's intent, belief and current
expectations. However, these words are not the exclusive means of identifying
such statements. In addition, any statements, which refer to expectations,
projections or other characterizations of future events or circumstances, and
statements made in the future tense are forward-looking statements. Readers are
cautioned that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors, many of which are
beyond the control of the Company. The Company undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements, which may be made to reflect events or circumstances occurring
subsequent to the filing of this annual report with the SEC. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this annual report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
JD American Workwear, Inc. was incorporated in Rhode Island in May of 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 is primarily engaged in the business of designing, manufacturing,
marketing and selling commercial and industrial workwear products. The Company's
products consist of an extensive line of commercial and industrial 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 assigned to the Company in January 1995. In June 1997, the
Company was awarded a second patent with respect to certain unique functional
characteristics of its Safety Uniform Pants. See "BUSINESS - Patents and
Proprietary Rights." The Company markets its products throughout the United
States and internationally principally for industrial and manufacturing
applications.
Business Strategy
The Company has adopted a new business strategy that focuses on expansion
and diversification through acquisitions of companies in other lines of
business. Under the new strategy, the Company has developed four divisions:
Consumer Products, Manufacturing and Fabrication, Construction Management, and
High Technology.
CONSUMER PRODUCTS DIVISION. This division was formed for sales of JD
American Workwear Products. Under its new strategy, the Company is seeking to
sell licenses to manufacture and distribute its patented workwear products. By
shipping products directly from licensed manufacturers to its customers, the
Company will reduce the costs of handling and carrying inventory while receiving
revenues from royalties under license agreements.
MANUFACTURING AND FABRICATION DIVISION. This division was formed for the
operations of International Machine and Welding, Inc., a subsidiary acquired on
June 12, 2000. Its operations include a 38,000 square foot machine shop and
sales of heavy equipment, parts and service. (See Recent Developments- Patina
Corp. Acquisition)
CONSTRUCTION MANAGEMENT DIVISION. This division was formed for the
operations of Rhode Island Truck and Equipment Corporation, a subsidiary
acquired on June 10, 2000. Rhode Island Truck and Equipment Corporation sells
commercial trucks, construction equipment and tools, and provides hauling,
paving, commercial recycling and demolition recycling services.
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HIGH TECHNOLOGY. The Company is currently seeking the acquisition of an
operating company. The option agreement with International Commerce and Finance,
Inc. is the first attempt to provide a subsidiary for inclusion in this
division.
Recent Developments
PATINA CORP. ACQUISITION. On December 27, 1999, the Company reported the
purchase of Patina Corp. and its three construction and demolition subsidiaries.
However, Patina Corp. and the Company were unsuccessful in raising $2 million in
capital for the venture to go forward. Patina Corp. cancelled all agreements
with the construction and demolition operations on May 31, 2000.
On June 12, 2000, the Company completed the acquisition of Patina Corp.
Patina Corp. is a holding corporation containing its operating subsidiary,
International Machine and Welding, Inc. International Machine and Welding owns
and operates a 38,000 square foot machine shop, located on 38 acres of
commercially zoned land in Bartow, Florida. The operation also includes heavy
equipment parts and sales. The purchase contract requires Patina Corp. to
provide net assets with an appraised value of $4,500,000. The acquisition is
being funded with 11,300 shares of a newly created 6% Series C Convertible
Preferred Stock with a stated value of $1,000 per share and conversion rights
into common stock at $1.00 per common share, when available. The purchase price
will be reduced by one share of Series C Preferred Convertible Preferred Stock
for each $1,000, in the event of a shortfall in appraised value. Fifteen hundred
shares of the 6% Series C Convertible Preferred Stock are held in escrow for
adjustment to the earn-up provisions of the purchase contract, which require
Patina Corp. to produce $3,000,000 annual revenues for the first two years
following the acquisition. The Preferred Shares pay a dividend of 6% per annum
payable in cash or in kind semi-annually. The 9,800 shares of Series C
Convertible Preferred Stock issued for the acquisition have voting rights equal
to 3,562,500 shares of common stock.
INTERNATIONAL COMMERCE AND FINANCE. On June 1, 2000, the Company signed an
option agreement with International Commerce and Finance, Inc. The agreement
states that the Company shall 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 common shares. The agreement
contains a trading restriction relating to the lack of registration of these
shares pursuant to Rule 144 of the Securities Act of 1933.
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
common stock for each dollar of appraised value of the net assets. The company
expects the value to be approximately $150,000. Rhode Island Truck and Equipment
Corp. engages in sales of commercial trucks and construction related equipment
and tools used in the construction industry. Additionally, they provide hauling,
paving and demolition recycling.
Inventory Write Down and Reclassification
During the fourth quarter of the year ended February 29, 2000, management
determined that, due to the failure of the Company's marketing programs to
produce a satisfactory level of sales, inventory contained a significant amount
of overstocked and obsolete product. As a result, a provision for inventory
losses of $531,438 was charged to operations to write down inventory to its net
realizable value. This was based on the Company's best estimates of product
sales prices in accordance with its revised plans for product marketing.
Management has also reclassified a portion of inventory to long-term assets
based on estimates about the timing of product sales under the revised plan. It
is at least reasonably possible that the estimates used by the Company will be
materially different from the actual results, which could have a materially
adverse effect on the Company's results of operations and financial condition in
the near term. The provision and reclassification were necessary because of
conditions that arose during fiscal 2000.
Other Developments
PRIVATE PLACEMENT OF SERIES B PREFERRED STOCK. On April 9, 1998, the
Company entered into a Securities Purchase Agreement (the "Purchase Agreement")
with The Union Labor Life Insurance Company, a Maryland corporation ("ULLICO"),
and certain additional agreements related to the Purchase Agreement. Pursuant to
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the terms of the Purchase Agreement, the Company issued to ULLICO 2,500 shares
of Series B 12% Cumulative Convertible Preferred Stock, $.001 par value (the
"Series B Preferred Stock"). As a part of the issuance of the Series B Preferred
Stock, the Company also issued to ULLICO a detached ten-year stock purchase
warrant to purchase 799,000 shares of Common Stock at an exercise price of $.01
per share (the "Investor Warrant"). The aggregate purchase price for the Series
B Preferred Stock and the Investor Warrant was $2,500,000. The Company used the
net proceeds to facilitate and expand a program of union labor manufacturing of
its products, to repay certain notes payable and long-term debt and for sales
and administrative salaries, product development, sales and marketing expense,
and other general corporate purposes.
The Series B Preferred Stock is convertible, at the option of the holder,
into the number of shares of Common Stock, which results from dividing the
Conversion Price into $1,000 for each share of Series B Preferred Stock being
converted. The Conversion Price shall be $5.00, subject to adjustment.
The Series B Preferred Stock entitles ULLICO to receive, when and as
declared by the Company's Board, cumulative cash dividends in preference to the
payment of dividends on all other shares of capital stock of the Company. During
the two-year period following issuance of the Series B Preferred Stock (the "PIK
Period") the Company has the option of making payment of the semi-annual
dividends on the Series B Preferred Stock either in cash or by issuing
additional shares of Series B Preferred Stock ("PIK Dividends"). In the event
the Company elects to pay dividends in shares of Series B Preferred Stock, the
Company is required to issue additional detached ten-year dividend warrants (the
"Dividend Warrants") to purchase 54,000 shares of Common Stock at an exercise
price of $.01 per share for each semi-annual dividend period that PIK Dividends
are paid. During the PIK Period the Company may not pay or declare cash
dividends on any stock other than the Series B Preferred Stock. Unless full
dividends on the Series B Preferred Stock for all past dividend periods and the
then current period shall have been paid or declared and a sufficient sum for
the payment thereof set aside in trust for the Series B Preferred Stockholders,
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 Stockholders 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 Stockholders,
the holders of the Series B Preferred Stock shall be entitled, immediately upon
giving written notice, to elect the smallest number of directors that will
constitute a majority of the authorized number of directors.
The Company 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.
Products and Features
The Company's Consumer Products Division offers three main lines of
products: JD Safety Work Jeans, JD Safety Uniform Pants and JD Rugged 5-pocket
Jeans. For the fiscal year ended February 29, 2000, sales of 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 15%. For the fiscal year ended February 28, 1999,
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sales of JD Safety Work Jeans accounted for approximately 38% of revenues, sales
of JD Safety Uniform Pants accounted for approximately 18%, sales of JD Rugged
5-pocket Jeans accounted for approximately 32% and sales of other products
accounted for 12%.
JD SAFETY WORK JEANS. JD Safety Work Jeans are constructed of heavy denim
and leather, 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 than 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 which provides a
cushion between the knee and any work surface. This feature offers protection
and comfort when kneeling or leaning on surfaces that are hard, damp, cold,
slippery or rough. JD Safety Work Jeans also feature high quality leather
sheathing strategically placed on the seat creating a surface, which is
extremely durable, pliable and slip resistant. The Company believes that JD
Safety Work Jeans increase job productivity by offering the wearer a high level
of protection with much greater ease of movement than found in conventional
(external) 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 when measured against
accepted industry standards. A patent issued in 1991 protects specific
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. They 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 than
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 such as water, pesticides, petroleum fuels, and many chemicals commonly
encountered by industrial workers. In addition, this sheathing material is
extremely durable, highly resistant to abrasion, punctures and tears. The
Company developed this product to meet what it believes is a large and unmet
need for work clothes with the protection, comfort and durability of JD Safety
Uniform Pants. JD Safety Uniform Pants are offered in fifty-five sizes and in
five different colors.
JD RUGGED 5-POCKET JEANS. During fiscal 1999, the Company began marketing
and selling JD Rugged 5-Pocket Jeans, a non-proprietary heavy denim work jean,
to complement its line of JD Safety Work Jeans and JD Safety Uniform Pants. JD
Rugged 5-Pocket Jeans are produced from 100% American made materials
manufactured in America to the Company's strict design specifications and
typically retail in the $25 to $29 price range. JD Rugged 5-Pocket Jeans are
offered in fifty-five sizes.
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. The Company manufactures some of the
component parts and subassemblies; 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. 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 connection with an equity
investment by ULLICO, the Company began producing JD Safety Work Jeans and JD
Safety Work Uniform Pants in contracted facilities covered by collective
bargaining agreements. As a result, the Company established manufacturing
relationships with Fine Vines, Inc. and East Texas Sportswear, Inc. Fine Vines
has subsequently discontinued operations. On November 2, 1998 it was determined
that the Company would no longer maintain the production levels with East Texas
Sportswear. The Company shifted a portion of manufacturing to Magee Apparel
Company and continues to use East Texas Sportswear and Reed to produce certain
products.
The Company believes that its supply arrangement with a limited number of
manufacturers ensures consistency and quality of its products. While the Company
believes that the interruption of production of these products, without
sufficient notice, would have a material adverse effect on the Company's
operations until alternative sources are secured, it also believes that there
are adequate alternative sources of manufacturing services.
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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
within the United States.
Raw Materials. Raw materials used in the manufacture of JD Safety Work
Jeans consist of denim fabric, leather sheathing and closed cell, polymer foam
padding, each of which is supplied by several established sources. The raw
materials used in the manufacture of JD Safety Uniform Pants consist of twill
fabrics (cotton/polyester blends), closed cell polymer foam padding, and a
proprietary mill fabric sheathing composed of commonly available products.
Critical supply or single origins do not limit any of the principal raw
materials used by the Company in the manufacture of its products. 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).
The Company supplies most of the raw materials and components required for
manufacturing 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 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 the supply of these materials would have a material
adverse effect on the Company's operations.
Marketing and Sales
The Company's JD Safety Work Jeans, JD Safety Uniform Pants and its private
label conventional workwear are marketed and sold through a network of
distributors, catalog merchants and retail resellers. Currently, the Company's
marketing and sales efforts are segmented into the following general categories:
(1) direct marketing sales, (2) catalog sales (3) distributor sales, (4) uniform
rental service companies, and (5) retail customers.
Direct Marketing Sales. The Company advertises and markets its products
through direct mailings, participation and exhibition of products at industrial
trade shows and personal solicitations at businesses that 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. The
mailers were included as a companion insert to Mason's own footwear catalog, and
they were mailed to a significant portion of Mason's retail customer base,
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 intends
to continue aggressively pursuing direct marketing opportunities as its customer
base and product line grows.
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
Workwear Catalog and Modern Farms. Approximately twenty million copies of the JC
Penney Catalog displaying JD Safety Work Jeans were mailed in 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% of revenues for the fiscal year ended February
28, 1999.
Distributor Sales. The Company's JD Safety Work Jeans and JD Safety Uniform
Pants are marketed to several distributors for resale to consumers. The
Company's distribution network consists of five domestic distributors.
Typically, distributors maintain inventory levels in order to offer rapid
delivery to their customers. Sales through distributors accounted for
approximately 30% of revenues for the fiscal year ended February 29, 2000 and
34% of revenues for the fiscal year ended February 28, 1999.
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 the fiscal year ended February 28, 1999, the Company began
working with UniFirst Corporation to develop a joint marketing program for JD
Safety Uniform Pants utilizing UniFirst's hundreds of sales representatives and
thousands of uniform route drivers. Sales to uniform rental service customers
accounted for approximately 17% of revenues for the fiscal year ended February
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29, 2000 and approximately 13% of revenues for the fiscal year ended February
28, 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 demands 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 are typically worn by tradesmen and laborers, the Company
believes that its products are better displayed in stores selling hardware,
building materials and farm supplies as opposed to traditional clothing
retailers. Sales to retailers accounted for approximately 8% of revenues 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 with a number of companies, many of which have longer
operating histories, more 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
The Company's first patent, U.S. Patent No. 5,038,408, covers certain
functional features of the JD Safety Work Jeans. 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. The functional
features of the jeans and pants on which patent protection has been granted,
include wear and protective abrasion-resistant, reinforcing panels that are
strategically positioned onto work pant garments in the seat and knees. The wear
and abrasion resistant panels are formed of specially fabricated materials. The
Uniform Patent expires in the year 2008.
On August 29, 2000, U.S. Patent No. 6,108,819 was issued covering certain
functional features to be incorporated in its new product, the JD Safety Back
Brace Pants. The patented features relate to the design of the back brace, its
detachable feature, and its coupling mechanism for attaching the brace to the
pant. While the patents offer a certain degree of protection, there can be no
assurance that they will provide the Company with any meaningful competitive
advantage.
Research and Development
The Company continues to develop new proprietary and non-proprietary
products to add to its product line. During fiscal 1999, in response to customer
requests, the Company developed a tanning process to incorporate blue and other
color leather sheathing into the JD Safety Work Jean 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 of these lines will incorporate the Company's proprietary safety
features. During fiscal 1999, the Company expended approximately $53,000 on
research and development activities. There were no research and development
expenditures in fiscal 2000.
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Customer Dependence
For fiscal 2000, the Company's largest customers each representing more
than 10% of sales accounted for $87,359, or 32%, of the Company's sales. These
customers were JC Penney with sales of $38,172 (14%) and UniFirst Corporation
with sales of $49,187 (18%). For fiscal 1999, the Company's customers who sales
exceeded 10% of the Company's sales were JC Penney with sales of $285,689
(29.2%), UniFirst Corporation with sales of $153,383 (16.5%) and Payless with
sales of $123,060 (12.9%).
Seasonality
The Company's business traditionally has been subject to seasonal trends
based upon climate. Sales volumes for JD Safety Work Jeans have been higher
during the fall and winter seasons and lower during the spring and summer
seasons because the highly durable denim in JD Safety Work Jeans is heavier (and
consequently warmer) than the materials used in conventional work jeans. Sales
of JD Safety Uniform Pants and the conventional workwear now offered by the
Company are less sensitive to the seasonal trends that affect JD Safety Work
Jeans.
Employees
At September 1, 2000, the Company and its subsidiaries had twenty-four
employees devoting full-time hours, six part time employees and six contractors
or commission representatives. Of these workers, six are performing executive,
management and marketing functions, four are performing accounting, financial
and office functions, and one is performing order fulfillment functions, five
provide sales functions and the remainder provide support, maintenance or
fulfill shop operation requirements.
Certain Considerations - Factors that May Affect Results
THIS REPORT ON FORM 10-KSB, OTHER DOCUMENTS OF THE COMPANY AND STATEMENTS
MADE BY MEMBERS OF THE MANAGEMENT OF THE COMPANY MAY CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS.
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
$8,263,003 and incurred a net loss to common shareholders of $2,467,929 for the
year ended February 29, 2000. At February 28, 1999, the Company had an
accumulated deficit of $6,314,242, as restated, and incurred a net loss to
common shareholders, as restated, of $2,244,812 for the year ended February 28,
1999. Because the Company is changing its method of marketing and order
fulfillment, it is expected that the Company will continue to sustain losses
from its clothing subsidiary for part, if not all, of the year ending February
28, 2001, and perhaps thereafter. The Company had significant negative cash flow
from operations during each of the years ended February 29, 2000 and February
28, 1999. 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 and February 28, 1999, include explanatory
paragraphs 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 to meet its business strategy. 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
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experienced in inventory management, product distribution and other areas until
the Company's operations have been scaled up for a period of time. Since the
Company entered into manufacturing arrangements with Fine Vines and East Texas
Sportswear, difficulties including production delays and quality control
problems have been encountered. The Company has switched manufacturers on four
occasions during its history, due to the following factors: 1) the Company's
capital constraints in meeting minimum production levels, 2) the manufacturer's
quality control problems, 3) the need to maintain compliance with the terms of
the ULLICO transaction and 4) a manufacturer discontinued operations. Two of
these past incidents resulted in 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 has been derived from a relatively small number of customers. Failure
of the Company to expand its customer base has had 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 would 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.
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 30.39% of the voting 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 Stockholders, the holders of the
Series B Preferred Stock shall be entitled, immediately upon giving written
notice, to elect the smallest number of directors that will constitute a
majority of the authorized number of directors. Moreover, ULLICO holds Series B
Preferred Stock, which is currently convertible into 641,400 shares of Common
Stock, and holds warrants to purchase 1,032,550 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 10.5%, secured by a mortgage on the
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property. The promissory note requires monthly payments of $2,686.74 and a
balloon payment of approximately $57,934 in January 2002. The Company is in
default on the note and the entire principal balance plus accrued interest is
due immediately. In August 2000, the Company was notified of the intention of
the mortgage holder on the corporate headquarters to begin foreclosure
proceedings unless the arrearage of approximately $32,000 is paid. On June 29,
2000, the building was sold to the mortgage holder in a tax sale. The Company
may redeem the building by paying approximately $4,200 for the taxes and
required interest prior to six months from the date of the sale.
Management believes that its current facility will be satisfactory to meet
the Company's needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On October 14, 1999, the Superior Court of New Jersey awarded a final
judgement of default in favor of the law firm of Herten, Burstein, Sheridan,
Cevasco, Bottinelli & Litt, LLC due the failure of the Company to pay the
plaintiff approximately $54,000 for legal services received.
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, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 (June 1, 1998 through August 31, 1998) $4.9375 $2.8125
Third Quarter (September 1, 1998 through November 30, 1998) $ 4.375 $ 3.00
Fourth Quarter (December 1, 1998 through February 28, 1999) $ 4.25 $ 2.75
The closing bid price of the Company's Common Stock as reported by the
OTCBB was $.625 on September 12, 2000.
Holders
As of September 12, 2000 there were approximately 328 record holders of the
Company's Common Stock.
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Dividends
The Company has never declared or paid a dividend on its Common Stock, and
management expects that all or a substantial portion of the Company's future
earnings will be retained for expansion or development of the Company's
business. The decision to pay dividends, if any, in the future is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and other relevant factors
such as contractual obligations. Management does not anticipate that the Company
will pay dividends on the Common Stock in the foreseeable future. Moreover,
there can be no assurance that dividends can or will ever be paid.
Delisting of Securities
On September 12, 2000, the Company's common stock was removed from trading
on the OTC Bulletin Board System because of its non-compliance with the
requirement to timely file its annual report on Form 10-KSB.
Recent Sales of Unregistered Securities
In September 2000, 25,000 common shares were issued to International
Commerce and Finance, Inc. to secure the option agreement signed in June 2000.
These shares were issued with reliance on an exemption from the registration
requirements provided for in Section 4(2) of the Securities Act of 1933.
In June 2000, 9,800 shares of Series C 6% Convertible Preferred Stock were
issued in conjunction with the acquisition of Patina Corporation. These shares
were issued with reliance on an exemption from the registration requirements
provided for in Section 4(2) of the Securities Act of 1933. These shares were
issued ratably to the holders of record of Patina Corporation on June 1, 2000.
On May 19, 2000, Mission Bay Consultants, Inc. exercised stock options for
the purchase of 10,000 common shares and warrants for the issuance of 150,000
shares of common stock for the sum of $30,000. These grants were made on March
3, 2000. The stock options were granted under the 1995 Stock Option Plan and
were issued as free- trading shares pursuant to a registration on Form S-8
previously completed for all shares authorized under the plan. The warrants were
granted with reliance on an exemption from the registration requirements
provided for in Section 4(2) of the Securities Act of 1933.
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 as provided in Section 4(2)
of the Securities Act of 1933, and Rule 506 hereunder. 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-KSB, OTHER DOCUMENTS OF THE COMPANY AND STATEMENTS
MADE BY MEMBERS OF THE MANAGEMENT OF THE COMPANY MAY CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS.
Results of Operations
Since its inception, the Company has been involved in the design and
development of its products, the development of relationships with various
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suppliers and manufacturing contractors and the marketing of its products
through various distribution channels. The first commercial shipments of JD
Safety Work Jeans were made in September 1993, and the 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
marketing and other costs in attempt 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's losses to date have principally been the result of product
design, testing and development expenses, marketing expenses, initial production
and administrative costs, professional fees and the write down of inventory to
net realizable value in fiscal 2000. Most of the losses in fiscal 2000 and 1999
are a result of the failure of the union-made marketing program to produce
sales. In addition, the Company incurred higher than expected costs of goods
sold resulting from the low level of production (and commensurately low volume
of raw materials purchases).
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
and sales agents to generate sales. During fiscal 2000, all marketing personnel
were terminated because the Company's sales did not provide sufficient cash flow
to pay their salaries.
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 $272,065 for the fiscal year ended February 29, 2000
from $953,430, as restated, for the fiscal year ended February 28, 1999, a
decrease of $681,365 or 71.4%. This decrease was principally attributable to
decreased marketing efforts and the failure of the Company's sales program to
union membership. In fiscal 1999, sales included significant inventory purchases
by JC Penney, Cintas, and UniFirst. However, in fiscal 2000, sales to these
customers were substantially reduced as they included only reorders and fill-in
special orders. The Company spent the majority of late fiscal 1999 and the first
half of fiscal 2000 in marketing efforts targeted to union locals and affiliates
around the country. The failure of this marketing program resulted in dismal
sales, a loss of Company focus and the expenditure of a significant portion of
the funds received from ULLICO. The Company terminated the marketing staff in
the third quarter of fiscal year 2000, as no capital was available for any
further efforts.
Gross profit decreased to $72,742 for fiscal 2000 from $194,187, as
restated, for fiscal 1999, a decrease of $121,445 or 62.5%. Gross profit
increased as a percentage of sales to 26.7% from 20.3%.
Selling, general and administrative expenses decreased to $1,432,966 for
fiscal 2000 from $1,945,953 for the fiscal 1999, a decrease of $512,987 or
26.3%. The decrease was attributable, in part, to a reduction in marketing
expenses of $118,678, a decrease in employee compensation expense of $152,609 as
a result of the reduction in staff, and decreased consulting and professional
fees of $46,203, as management sought to reduce overall expenses.
During the fourth quarter of fiscal 2000, inventory adjustment of $531,438
was charged to operations to reflect the reduction of the inventory value to net
realizable value due to the failure of the Company's marketing program in fiscal
2000.
Interest expense decreased to $57,816 for fiscal 2000 from $88,910 for
fiscal 1999, a decrease of $31,094 or 34.9%. The decrease in interest expense is
primarily due to the reduction of long-term debt through conversions into common
stock and a reduction in notes payable.
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The Company's net loss to common shareholders increased to $2,467,929 for
fiscal 2000 from a net loss to common shareholders of $2,244,812, as restated,
for fiscal 1999, an increase of $223,117 or 9.9%. This increased loss is mainly
attributable to higher accretion and dividends on preferred stock, the
substantial decline in sales, and the impairment of inventory to net realizable
value.
RESTATED FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net sales increased to $953,430, as restated, for the fiscal year ended
February 28, 1999 from $482,880 for the fiscal year ended February 28, 1998, an
increase of $470,550, or 97.4%. This increase was attributable to higher unit
sales volumes generated by the Company's expanded in-house sales and marketing
team as well as the increased focus on retail and brand awareness of Company
products.
Gross profit decreased to $194,187, as restated, for fiscal 1999 from
$236,986 for fiscal 1998, a decrease of $42,799, or 18.0%. The decrease in gross
profit is primarily due to the decrease in the gross profit on certain sales to
catalog merchants and rental customers.
Selling, general and administrative increased to $1,945,953 for fiscal 1999
from $1,229,214 for fiscal 1998, an increase of $716,739, or 58.3%. The Company
incurred significantly higher marketing and promotional expenses due to
increased participation in trade shows and travel activity. Employee
compensation rose with the addition of three sales staff members and additional
support staff. Consulting expenses and professional fees increased in fiscal
1999 as management sought outside assistance in developing and implementing
management, sales and marketing, public relations and brand awareness programs.
Interest expense decreased to $88,910 for fiscal 1999 from $169,881 for
fiscal 1998, a decrease of $80,971, or 47.6%. The decrease in interest expense
is primarily due to the reduction of long-term debt through conversion into
common stock that occurred during fiscal 1999. During fiscal 1999, Company
converted approximately $480,000 long-term notes plus accrued interest to common
stock.
The Company's net loss to common shareholders increased to $2,244,812 for
fiscal 1999 from a net loss to common shareholders of $1,162,109 for fiscal
1998, an increase of $1,082,703, or 93.1%. This increased loss is mainly
attributable to higher marketing, employment and consulting expenses.
Liquidity and Capital Resources
During the fiscal years ended February 29, 2000 and February 28, 1999, the
Company used net cash for operating activities of $263,693 and $2,067,482,
respectively. Accounts receivable, following a year of weak sales, decreased to
$48,856 at February 29, 2000 from $478,700 at February 28, 1999, a decrease of
$429,844, or 89.7%. Inventory decreased to $925,844 at February 29, 2000 from
$1,437,212 at February 28, 1999, a decrease of $511,368, or 35.5%. The decrease
in inventory is primarily due to the write down to the lower of cost or market
based on the financial projections of the Company for fiscal 2001.
During fiscal 2000 and 1999, the Company used funds for capital
expenditures of $3,084 and $109,334, respectively. During fiscal 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 fiscal 2000, notes totaling $12,500, plus accrued interest, were
converted into 3,788 shares of common stock. During fiscal 1999, notes totaling
$480,000, plus accrued interest, were converted into 153,221 shares of common
stock.
Cash flows from operations and the investment by ULLICO provided for
working capital needs and principal payments on long-term debt through the third
quarter 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. Also, additional capital may be required if
adequate levels of revenue are not realized. There can be no assurance that
financing will be available to the Company on acceptable terms, if at all.
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Inflation is not expected to have a major impact on the Company's
operations.
Year 2000 Issue
The Company has not experienced any adverse consequences due to year 2000
considerations.
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
On April 5, 1999, JD American Workwear, Inc. (the "Registrant") dismissed
BDO Seidman, LLP as the principal independent accountants for the Registrant.
The report on the Registrant's financial statements prepared by BDO
Seidman, LLP for fiscal year ended February 28, 1998 contains no adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles, except for the qualification and
modification related to the Company's ability to continue as a going concern.
During the fiscal years ending February 28, 1997, February 28, 1998 and the
subsequent interim period, there were no disagreements with BDO Seidman, 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 8,
and, if not, stating the respect in which they do not agree. A copy of said
letter was filed with the Commission.
On July 13, 2000 the management of JD American Workwear, Inc. informed the
auditing firm of Bederson and Company, LLP that they were dismissed effective
immediately. This action was taken by the Board of Directors of the Company
after disagreements over internal control, which included the lack of attention
to the general ledger caused by a delay in replacing the Chief Financial Officer
and the treatment of certain contingent or consignment sales issues; audit
documentation requirements; and the schedule for completing the current fiscal
year audit. On July 14, 2000 Bederson and Company LLP informed the Company that
it had become aware of material errors in, and was withdrawing its report dated
June 7, 1999 on, the Company's financial statements for the year ended February
28, 1999. Bederson and Company LLP also stated that it was not currently in a
position to reaudit and reissue its report on the Company's financial statements
for the year ended February 28, 1999 because of a lack of independence. The
independence issue was subsequently rectified as of August 18, 2000 and
accordingly Bederson has reissued its report dated June 7, 1999, except for Note
12, which is as of September 27, 2000, on the Company's financial statements for
the year ended February 28,1999, which report contains explanatory paragraphs
regarding the correction of errors and expressing substantial doubt about the
Company's ability to continue as a going concern.
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The auditing firm of Bella, Hermida, Gilman, Hancock and Mueller was
engaged on July 14, 2000 to audit the Company's financial statements for the
year ended February 29, 2000.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers and directors are as follows:
Name Age Positions with the Company
---- --- --------------------------
David N. DeBaene 41 Chairman of the Board, President and Chief
Executive Officer
Robert E. Maxwell 65 Senior Vice President and Director
Norman J. Birmingham 45 Chief Operating Officer, Treasurer, Chief
Financial Officer, and Director
Elizabeth Cotter 38 Director
Camille Barbone 48 Secretary and Director
Daniel L. Hefner 50 Vice President and Director
Herb Canapary 67 Director
Mr. DeBaene is the founder of the Company and was responsible for obtaining
the patent on the original Jaque Dubois Construction Jean. He has served as
President, Chief Executive Officer and Chairman of the Board since May, 1991,
Mr. DeBaene is responsible for all executive level functions regarding the
Company's operations, and he also shares responsibility for raw materials
sourcing and procurement, manufacturing arrangements, product development,
marketing and sales. For 14 years, prior to founding the Company, Mr. DeBaene
was the owner and foreman of a construction company headquartered in West
Warwick, Rhode Island. Mr. DeBaene is also the Chairman of the Board and
President of Open Door Online, Inc (OTCBB: NTER) and has served in this position
since October 1997.
Mr. Maxwell has been the Senior Vice President and a Director of the
Company since June 2000. Mr. Maxwell is also the Chief Operating Officer and
General Manager of International Machine and Welding, Inc., a recently acquired
subsidiary of the Company. He was the owner/operator of Florida Machine and
Welding, Inc., located in Bartow, Florida, for the past 23 years until the sale
of its assets in June 2000. During the past 31 years Mr. Maxwell also operated
Florida Equipment and Service, Inc., an independently owned construction
equipment sales and service organization. Mr. Maxwell has been an officer and
director of two corporations which each filed for Chapter 11 protection under
the U.S. Bankruptcy Code. Florida Equipment and Service, Inc. was liquidated in
August 1999 and Florida Machine and Welding, Inc. had its plan of reorganization
confirmed in May 2000.
Mr. Birmingham has been the Chief Financial Officer since January 2000, a
director since March 2000, and Chief Operating Officer and Treasurer since June
2000. He has served as President of Patina Corp. since its inception in April
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. (Nasdaq Small Cap: WGHI), a
holding company for wholesale mortgage companies. In addition, he served as
President of Heart Labs of America, Inc. (NMS: CYBR) 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. He has
also served as Chief Financial Officer and Director, since March 2000, of Open
Door Online, Inc.
Ms. Cotter has been a Director with the Company since January 1991. From
1989 to 1991, Ms. Cotter was a mortgage consultant for Providence Funding Corp.
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From March 1985 to 1989, she 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.
Ms. Barbone has served as Secretary and Director since March 1, 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 owned August Artist Management, where she has managed
several music artists. She 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 also serves as Chief Operating Officer and Director of Open
Door Online, Inc. (OTCBB: NTER).
Mr. Hefner has been the Vice President and Director since June 2000. Mr.
Hefner also serves as President of International Commerce and Finance, Inc. a
holding company for manufacturing and high tech companies. Mr. Hefner has been
active for the past ten years as an independent consultant to individuals or
business seeking to begin operations or to create turn arounds of existing
business. During the same period, Mr. Hefner also operated his own independent
real estate brokerage operation where he served as President and Chief Executive
Officer. During 1999, Mr. Hefner was Chief Operating Officer for Chronicle
Communications, Inc. (OTCBB: CRNC), a Tampa based printer.
Mr. Canapary has served as a director since April 1998, pursuant to the
Securities Purchase Agreement dated April 9, 1998, with The Union Labor Life
Insurance Company. Mr. Canapary has been employed by ULLICO, for 17 years, and
presently serves as ULLICO's Vice-President of Investments.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who beneficially own
more than ten percent of the Company's Common stock, to file with the Securities
and Exchange Commission (the "SEC") reports of ownership of Common Stock and
other equity securities in the Company. Officers, directors and more than ten
percent stockholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) reports they file. 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, 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 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
Annual Long-Term
Compensation Compensation
Name and Fiscal ---------------- Options by All Other
Principal Position Year Salary Bonus No. of Shares Compensation
------------------ ---- ------ ----- ------------- ------------
David N. DeBaene, 2000 $145,769 $ 0 25,000 $ 0
President and CEO 1999 125,000 0 0 0
1998 105,000 0 0 0
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 of 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.
17
<PAGE>
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 years and is thereafter renewable for additional periods of
three-years, unless the Company gives notice to the contrary. In accordance with
his agreement with the Company, Mr. DeBaene's first year base salary was
$65,000, increasing annually thereafter in $20,000 increments. In addition, Mr.
DeBaene is entitled to receive an annual cash bonus based upon a percentage of
the Company's pre-tax income 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 provides for the payment of severance compensation of
$250,000 in the event that at any time during the term thereof, the agreement is
terminated by the Company without cause, or terminated by the employee due to a
change in control. 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 in five years absent any notice 180 days prior to
the end of the term. The base salary of $150,000 increases on each anniversary
at a rate of 13% over the prior year's salary. Mr. DeBaene was granted 25,000
options 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 Consumer Products Division at 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 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's 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 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.
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.
18
<PAGE>
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 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
Compensation Committee of the Board of Directors administers the Plan. 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 (including 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. 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 option holders 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 Option holders 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).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(individual grants)
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SAR's
underlying Granted to Exercise or
Options/SAR's Employees in Base
Name Granted Fiscal Year Price ($/Sh) Expiration Date
---- ------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
David N. DeBaene 25,000 50.0 $1.59 December 31, 2004
Norman J. Birmingham 25,000 50.0 $1.59 December 31, 2004
</TABLE>
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.
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 12, 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 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 can 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.
Name and Address or Amount and Nature of Percentage
Number in Group Beneficial Ownership (1) of Class*
--------------- ------------------------ --------
David N. DeBaene Common Stock 787,173 (2) 26.38%
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Series C Preferred 400 4.08%
Elizabeth Cotter Common Stock 12,500 (3) **
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Norman J. Birmingham Common Stock 25,000 (7) **
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Series C Preferred 1,000 10.20%
Herbert Canapary Common Stock 0 (4) **
111 Massachusetts Ave. Series A Preferred 0 (4) **
Washington, DC Series B Preferred 0 **
Daniel L. Hefner Common Stock 0 **
46 Old Flat River Road Series A Preferred 0 **
Coventry, RI Series B Preferred 0 **
Series C Preferred 300 3.06%
All Officers and Directors Common Stock 824,673 (7)(2)(4) 27.63%
As a Group (7 persons) Series A Preferred 0 **
Series B Preferred 0 **
Series C Preferred 1,700 17.35%
Other 5% Stockholders
Joseph Lussier Common Stock 191,158 (5) 6.40%
1645 Warwick Avenue
Warwick, RI 02886
Merit Capital Assoc, Inc. Series A Preferred 20 13.07%
1221 Post Road
Westport, CT
20
<PAGE>
Name and Address or Amount and Nature of Percentage
Number in Group Beneficial Ownership (1) of Class*
--------------- ------------------------ --------
Gerald Hoak Series A Preferred 40 26.14%
1221 Post Road
Westport, CT
ULLICO Common Stock 1,673,950 (6) 56.09%
111 Massachusetts Ave Series B Preferred 3,207 100.00%
Washington, DC
International Commerce Series C Preferred 8,100 82.65%
and Finance, Inc.
Tampa, FL
(*) Assumes 2,984,178 shares of Common Stock, 154 shares of Series A Preferred
Stock, 3,207 shares of Series B Preferred Stock and 9800 shares Series C
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, 48,000
shares owned of record by Mr. DeBaene's mother, and 28,150 shares owned of
record by Mr. DeBaene's sister and 25,000 options granted in his employment
contract. 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) 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 of Investments.
(5) Includes all 191,158 time warrants issued.
(6) Includes 641,400 shares of Common Stock issuable upon conversion of Series
B Preferred Stock and PIK Dividends as well as 1,032,550 shares issuable
upon exercise of outstanding warrants.
(7) Includes 25,000 options granted in his employment contract.
Escrow of Shares. In accordance with the requirements of certain state
securities administrators, certain of the Company's principal stockholders have
agreed to place into escrow an aggregate of 700,000 shares (the "Escrow Shares")
of the 875,000 shares of Common Stock held by them as of the date of the
Company's initial public offering. Under the escrow agreement, the Escrow Shares
will be ratably released to the holders in 25% increments on the sixth, seventh,
eighth and ninth anniversaries, respectively, of the initial public offering. If
the Company meets or exceeds certain net earnings or stock price targets, the
release of the Escrow Shares will be accelerated. Additionally, in accordance
with the requirements of another state securities administrator, the holdings of
all officers, directors and post-offering five percent (5%) stockholders are
subject to certain lock-up restrictions until January 1999.
Possible Change in Control. Pursuant to its agreements with ULLICO, the
Series B Preferred Stock holders shall be entitled to elect one director out of
the seven authorized directors of the Company's board and one director out of
the three directors comprising the Company's Compensation Committee. If certain
events occur or do not occur, such as the failure to pay either a PIK Dividend
or cash dividend to the Series B Preferred Stock holders, the holders of the
Series B Preferred Stock shall be entitled, immediately upon giving written
notice, to elect the smallest number of directors that will constitute a
majority of the authorized number of directors. Moreover, ULLICO holds Series B
Preferred Stock, which is currently convertible into 500,000 shares of Common
Stock, and holds warrants to purchase 799,000 shares of Common Stock. Pursuant
to its agreements with ULLICO, in the event the Company does not reach certain
21
<PAGE>
performance milestones, the Series B Preferred Stock held by ULLICO may be
converted into a greater number of shares of the Company's Common Stock than
provided for upon conversion if the performance targets are met. As a result,
ULLICO could potentially obtain a substantial controlling interest in the
Company. There can be no assurance that the Company will be able to meet the
performance targets set forth in the applicable agreements and, therefore, avoid
a possible change in control of the Company's capital stock. Such a change in
control may result in fundamental changes to the management of the Company and
the character of its business.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting Agreements
WARRANTS TO MESSRS. DURKIN AND LUSSIER. In connection with their agreement
to provide financial consulting services to the Company for a three (3) year
period commencing August 1996, the Company issued on August 6, 1996 to each of
Messrs. Joseph Lussier and William Durkin, warrants to purchase 232,824 shares
of Common Stock expiring August 7, 2003, or a total of 465,648 shares. The
warrants were divided into two 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. All of the time
warrants have vested and are exercisable. The exercise price of all of the
warrants was originally $4.00 per share, subject to adjustment under certain
circumstances; however as a result of the subsequent issuance of the Series A
Preferred and the Series B Preferred Stock the exercise price was adjusted to
$2.85 per share and the number of time warrants increased to 191,158 shares
each. Mr. Lussier is and Mr. Durkin was formerly affiliated with Merit Capital
Associates, Inc., the underwriter of the Company's Public Offering.
MISSION BAY CONSULTANTS, INC. On April 2, 1997, the Company entered into a
one year Consulting Agreement with Mission Bay Consulting, Inc., a management
consulting and public relations firm, 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 expenses incurred in connection with the Agreement. In September
1997, in consideration of the extension of the Consulting Agreement, 50,000 of
said options were surrendered, and the Company issued 50,000 shares of Common
Stock to Mission Bay Consulting under the 1995 Stock Option Plan. In January
1998, the Company issued 9,500 shares to an employee of Mission Bay Consulting,
in consideration of services rendered outside of the scope of the Consulting
Agreement. In June 1998, in connection with an additional extension of the term
of the consulting agreement with Mission Bay and an expansion in scope of the
services to be rendered by said Mission Bay, the Company issued options to
purchase an additional 300,000 shares of Common Stock at exercise prices ranging
from $3.25 to $5.75 per share. Of these, options to purchase 100,000 shares have
been exercised and options to purchase 150,000 shares have expired leaving
50,000 options outstanding and exercisable at February 29, 2000.
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 $145,000 in the aggregate to the
parents of David N. DeBaene. 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, when
cash is available. In addition, at February 29, 2000, David N. DeBaene had
loaned approximately $35,000 to the Company. Interest has been imputed on this
loan at 7%.
Stockholders Agreement
A Stockholders Agreement dated April 9, 1998 was entered into among ULLICO,
the Company, David N. DeBaene, Annette DeBaene, Norman DeBaene, Thomas Lisi, and
Steve Panneton (each, a "Holder"). The Stockholders Agreement provides that the
Company shall have a right of first refusal before any Holder may transfer any
shares of Common Stock. 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 (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
22
<PAGE>
to purchase any of ULLICO's 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").
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits
The exhibits that are filed with this report or that are incorporated
herein by reference are set forth in the Exhibit Index appearing on page E-1.
(b) Reports on Form 8-K
Two reports were filed on Form 8-K during the fourth quarter of fiscal
2000. On January 11, 2000, a Form 8-K was filed announcing the Patina
Corporation transaction. On January 14, 2000, an amendment was filed to the
January 11, 2000 form to include the Patina contract as an exhibit.
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: October 27, 2000 By: /s/ David N. DeBaene
------------------------------------
David N. DeBaene, President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Company and in the capacities and on the
dates indicated sign this Report below.
Signatures Title Date
---------- ----- ----
/s/ David N. DeBaene Chairman of the Board, President October 27, 2000
------------------------- and Chief Executive Officer
David N. DeBaene (Principal Executive Officer)
/s/ Norman J. Birmingham Chief Operating Officer, October 27, 2000
------------------------ Treasurer, Chief Financial
Norman J. Birmingham Officer, and Director
(Principal Financial Officer)
/s/ Robert E. Maxwell Senior Vice President and October 27, 2000
------------------------ Director
Robert E. Maxwell
/s/ Elizabeth Cotter Director October 27, 2000
------------------------
Elizabeth Cotter
/s/Camille Barbone Secretary and Director October 27, 2000
------------------------
Camille Barbone
/s/ Daniel L. Hefner Vice President and Director October 27, 2000
------------------------
Daniel L. Hefner
/s/ Herbert Canapary Director October 27, 2000
------------------------
Herbert Canapary
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Incorporated Documents SEC Exhibit Reference Numbered
---------------------- --------------------- --------
<S> <C> <C> <C>
3.1 Certificate of Incorporation As filed with the Registrant's N/A
of the Registrant, as amended Form SB-2, on October 27,
1995, File No. 33-98486
3.2 By-Laws of the Registrant, As filed with the Registrant's N/A
as amended Form SB-2 on October 27, 1995,
File No. 33-98486
4.1 Form of Warrant Agreement As filed with the Registrant's N/A
Form SB-2, on October 27,
1995, File No. 33-98486
4.2 Form of Warrant of the As filed with the Registrant's N/A
Registrant issued in the Form SB-2 on October 27, 1995,
Registrant's January 1995 File No. 33-98486
Private Placement
4.3 Form of Unit Purchase Option As filed with the Registrant's N/A
issued to Merit Capital Form SB-2 on October 27, 1995,
Associates, Inc. File No. 33-98486
4.4 Form of 11% Convertible As filed with the Registrant's N/A
Subordinated Note of the Form SB-2 on October 27, 1995,
Registrant issued in the File No. 33-98486
Registrant's August, 1995
Private Placement
4.5 Form of Warrant of the As filed with the Registrant's N/A
Registrant issued in the Form SB-2 on October 27, 1995,
Registrant's August, 1995 File No. 33-98486
Private Placement
4.6 Securities Purchase Agreement As filed with the Registrant's N/A
dated April 9, 1998 Form 10KSB on June 13, 1999
4.7 Certificate of Designation of As filed with the Registrant's N/A
Series B Preferred Stock. Form 10 KSB on June 13, 1999
4.8 Stockholders' Agreement dated As filed with the Registrant's N/A
April 9, 1998. Form 10 KSB on June 13, 1999
4.9 Registration Rights Agreement As filed with the Registrant's N/A
dated April 9, 1998 Form 10 KSB on June 13, 1999
4.10 Warrant Certificate issued As filed with the Registrant's N/A
to ULLICO Form 10 KSB on June 13, 1999
4.11 Escrow Agreement As filed with the Registrant's N/A
Form 10 KSB on June 13, 1999
4.12 Certificate of Designations As filed with the Registrant's N/A
of Series A Preferred Stock Form 10-KSB on June 11, 1998
10.1 Lease Agreement for the As filed with the Registrant's N/A
Registrant's Coventry, RI Form SB-2 on October 27, 1995,
facility File No. 33-98486
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Incorporated Documents SEC Exhibit Reference Numbered
---------------------- --------------------- --------
<S> <C> <C> <C>
10.3 David N. DeBaene Employment As filed with the Registrant's N/A
Agreement Form SB-2 on October 27, 1995,
File No. 33-98486
10.6 Overseas Agency Agreement As filed with Registrants Form N/A
with Geronimo Leathers SB-2 on October 27, 1995, File
No. 33-98486
10.7 Registrant's 1995 Stock As filed with the Registrant's N/A
Option Plan Form SB-2 on October 27, 1995,
File No. 33-98486
10.8 Form of Option Agreement As filed with the Registrant's N/A
under the Registrant's 1995 Form SB-2 on October 27, 1995,
Stock Option Plan File No. 33-98486
10.10 Special Accounts Director As filed with the Registrant's N/A
Agreement with Shawnmark Form SB-2 on October 27, 1995,
Industries dated July 25, 1995 File No. 33-98486
10.11 Employment Agreement with As filed with Registrant's N/A
Norman Birmingham Form 10-KSB on June 12, 2000
10.12 Consulting Agreement with As filed with Registrant's N/A
Richard Sullivan Form 10-KSB on June 12, 2000
10.13 Consulting Agreement with As filed with Registrant's N/A
Art Lang Form 10-KSB on June 12, 2000
10.14 Option to Purchase Businesses As filed with Registrant's N/A
between Registrant and Form 10-KSB on June 12, 2000
International Commerce and
Finance
10.15 Stock Purchase Agreement As filed with Registrant's N/A
between Registrant and Form 10-KSB on June 12, 2000
Patina Corporation
16.1 Letter of Bederson and As filed with Registrant's N/A
Company, LLP dated August 2000 Form 8K/A in August, 2000
99.1 United States Patent As filed with Registrant's N/A
#5,038,408 Form SB-2 on October 27, 1995,
File No. 33-98486
99.2 United States Patent As filed with Registrant's N/A
#5,634,215 Form 10-KSB June 11, 1998
As filed herewith
4.13 Certificate of Designation
Series C Preferred Stock
10.16 Employment Agreement with
David DeBaene
99.3 United States Patent
#6,108,819 Back Brace Pants
</TABLE>
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports F-2
Balance Sheets F-4
Statements of Operations F-6
Statements of Cash Flows F-7
Statements of Changes in Stockholders' Equity (Deficit) F-9
Notes to the Financial Statements F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of JD American Workwear, Inc.
We have audited the balance sheet of JD American Workwear, Inc. (a Delaware
Corporation) as of February 29, 2000, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those statements require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides for a
reasonable basis for our opinion.
In our opinion, the 2000 financial statements referred to above present fairly,
in all material respects, the financial position of JD American Workwear, Inc.
as of February 29, 2000, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, existing conditions raise substantial doubt about the
ability of JD American Workwear, Inc. to continue as a going concern.
Management's plans regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Respectfully submitted,
/s/ BELLA, HERMIDA, GILLMAN, HANCOCK & MUELLER
Certified Public Accountants
Plant City, Florida
September 27, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of JD American Workwear, Inc.
We have audited the accompanying balance sheet (as restated) of JD American
Workwear, Inc. as of February 28, 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows (as restated) for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 restated financial statements referred to above present
fairly, in all material respects, the financial position of JD American
Workwear, Inc. as of February 28, 1999, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
As more fully discussed in Note 12 to the financial statements, certain errors
regarding the 1999 financial statements were discovered by management of the
Company, including among other things, certain errors regarding revenue
recognition and the related net sales, cost of goods sold, accounts receivable
and inventory, and certain errors regarding accounting for Series B mandatory
redeemable preferred stock. Accordingly, the 1999 financial statements have been
restated and adjustments made to correct these errors.
The accompanying 1999 financial statements have been prepared assuming the
Company will continue as a going concern. However, through February 28, 1999,
the Company experienced substantial losses and as of February 28, 1999 had an
accumulated deficit of $6,314,242, as restated, has not paid all obligations as
they became due and expects to incur additional losses before it achieves
profitable operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to this matter were discussed in Note 1 (which is not presented herein) to the
1999 financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BEDERSON & COMPANY, LLP
West Orange, New Jersey
June 7, 1999, except for Note 12,which is as of September 27, 2000
F-3
<PAGE>
JD AMERICAN WORKWEAR, INC.
BALANCE SHEETS
February 29, February 28,*
2000 1999
---------- ----------
Current Assets:
Cash and cash equivalents $ 11,523 $ 174,472
Accounts receivable,
net of allowances of $10,000 (2000)
and $52,200 (1999) 48,856 478,700
Inventories 185,169 1,437,212
Prepaid expenses -- 2,929
Loans receivable, employees 5,020 20,193
---------- ----------
Total current assets 250,568 2,113,506
Property and equipment, net 208,289 269,322
Intangible assets, net 174,677 205,988
Inventory, long term 740,675 --
Other assets -- 4,998
---------- ----------
TOTAL ASSETS $1,374,209 $2,593,814
========== ==========
* As Restated
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
JD AMERICAN WORKWEAR, INC.
BALANCE SHEETS (CONTINUED)
February 29, February 28,*
2000 1999
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 380,168 $ 306,674
Accounts payable 361,381 255,073
Accrued interest on notes payable 65,359 30,367
Accrued expenses 155,648 29,827
----------- -----------
Total current liabilities 962,556 621,941
Long-term debt, net of current portion 135,999 205,756
Mandatory redeemable preferred stock,
Series B, cumulative and convertible,
authorized 3,950 shares,$.001 par value,
2,843 and 2,693 shares issued and
outstanding, respectively, redemption
amount $3,039,950 (2000) and
$2,998,790 (1999) 1,906,304 1,387,136
Stockholders' equity (deficit):
Preferred stock, authorized
1,000,000 shares, Series A,
$.001 par value, cumulative and convertible,
154 and 299 shares issued and outstanding,
respectively, liquidation preference
$478,150 (2000)and $747,500 (1999) -- --
Common stock, authorized 7,500,000 shares,
$.002 par value, issued and outstanding,
2,750,427 and 2,248,241 shares, respectively 5,501 4,496
Additional paid-in-capital 7,116,100 7,021,487
Common stock receivables (489,248) (332,760)
Accumulated deficit (8,263,003) (6,314,242)
----------- -----------
Total stockholders' equity (deficit) (1,630,650) 378,981
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY (DEFICIT) $ 1,374,209 $ 2,593,814
=========== ===========
* As Restated
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF OPERATIONS
For the Year Ended
---------------------------
February 29, February 28,*
2000 1999
----------- -----------
Net sales $ 272,065 $ 953,430
Cost of goods sold 199,323 759,243
----------- -----------
Gross profit 72,742 194,187
Selling, general and administrative expenses 1,432,966 1,945,953
----------- -----------
Loss from operations (1,360,224) (1,751,766)
Provision for loss on inventory (531,438)
Interest income 717 23,000
Interest expense (57,816) (88,910)
----------- -----------
Net loss (1,948,761) (1,817,676)
Accretion of discount and dividends on
mandatory redeemable preferred stock (519,168) (427,136)
----------- -----------
Net loss to common shareholders $(2,467,929) $(2,244,812)
=========== ===========
Net loss per common share $ (1.00) $ (1.08)
=========== ===========
Weighted average common shares outstanding 2,466,263 2,069,152
=========== ===========
* As Restated
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended
---------------------------
February 29, February 28,*
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(1,948,761) $(1,817,676)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 95,428 76,337
Securities issued for services 358,207 17,218
Increase or decrease in:
Accounts receivable 445,017 (275,015)
Inventories 511,368 (379,428)
Prepaid expenses and other assets 7,930 261,425
Accounts payable and accrued expenses 267,118 49,657
----------- -----------
Net cash used in operating activities (263,693) (2,067,482)
----------- -----------
Cash flows from investing activities:
Capital expenditures (3,084) (109,334)
----------- -----------
Net cash used in investing activities (3,084) (109,334)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 85,500 133,250
Proceeds from short-term loans and notes 132,792 106,530
Proceeds from sales of preferred stock and
detachable warrants -- 2,333,558
Principal payments on long-term debt
and short-term loans (114,464) (238,985)
----------- -----------
Net cash provided by financing activities 103,828 2,334,353
----------- -----------
Increase (decrease) in cash and
cash equivalents (162,949) 157,537
Cash and cash equivalents, beginning of year 174,472 16,935
----------- -----------
Cash and cash equivalents, end of year $ 11,523 $ 174,472
=========== ===========
* As Restated
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Year Ended
------------------------
February 29, February 28,
Supplemental cash flow disclosures: 2000 1999
--------- ---------
Cash paid for interest $ 18,161 $ 71,787
========= =========
Supplemental schedule of non-cash investing and financing activities:
Purchase of property financed by seller $ - $ 125,000
========= =========
Securities issued for debt repayment $ 14,592 $ 534,761
========= =========
Securities issued for receivables $ 336,450 $ 194,500
========= =========
Securities issued for Series B dividends $ 150,000 $ 193,000
========= =========
* As Restated
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
JD AMERICAN WORKWEAR, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
<TABLE>
<CAPTION>
Common stock Preferred stock
$.002 Par $.001 Par Additional
------------------ ---------------- Paid-in Stock Accumulated
Shares Amount Shares Amount Capital Receivable Deficit Total
--------- ------ ------ ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1998 1,984,899 $3,970 313 $ -- $ 5,046,638 $(315,542) $(4,496,566) $ 238,500
Issuance of detached warrants
in connection with sale of
Series B preferred stock -- -- -- -- 1,540,000 -- -- 1,540,000
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
Options issued for services -- -- -- -- 162,500 (162,500) -- --
Common share issued for
services 50,000 100 -- -- 31,900 (32,000) -- --
Exercise of stock options 41,000 82 -- -- 133,168 -- -- 133,250
Accretion of discount and
dividends on mandatory
redeemable preferred
stock (as restated) -- -- -- -- (427,136) -- -- (427,136)
Stock receivable paid in
services -- -- -- -- -- 177,282 -- 177,282
Net loss (as restated) -- -- -- -- -- -- (1,817,676) (1,817,676)
--------- ------ ------ ------ ----------- --------- ----------- -----------
Balance, February 28, 1999
(as restated) 2,248,241 $4,496 299 $ 0 $ 7,021,487 $(332,760) $(6,314,242) $ 378,981
--------- ------ ------ ------ ----------- --------- ----------- -----------
Shares issued to retire
11% notes 3,788 8 -- -- 14,583 -- -- 14,591
Common shares issued
for services 17,500 35 -- -- 26,240 -- -- 26,275
Common shares issued for
receivable 165,000 330 -- -- 186,120 (186,450) -- --
Options issued for services -- -- -- -- 1,000 -- -- 1,000
Exercise of stock options 115,000 230 -- -- 385,270 (150,000) -- 235,500
Preferred stock conversion 200,898 402 (45) -- (402) -- -- --
Accretion of discount and
dividends on mandatory
redeemable preferred stock -- -- -- -- (519,168) -- -- (519,168)
Contributed capital -- -- -- -- 970 -- -- 970
Stock receivable paid in
services -- -- -- -- -- 179,962 -- 179,962
Net loss -- -- -- -- -- -- (1,948,761) (1,948,761)
--------- ------ ------ ------ ----------- --------- ----------- -----------
Balance, February 29, 2000 2,750,427 $5,501 154 $ 0 $ 7,116,100 $(489,248) $(8,263,003) $(1,630,650)
========= ====== ====== ====== =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
JD American Workwear, Inc. was incorporated in May of 1991. The Company
designs, markets and distributes commercial and industrial workwear
throughout the United States.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less, when acquired, to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a standard cost basis that approximates the first-in, first-out method.
Market is determined based on net realizable value. Appropriate
consideration is given to obsolescence, excessive levels, deterioration and
other factors in evaluating net realizable value.
Depreciation and Amortization
Property and equipment are stated at cost. The Company computes
depreciation and amortization expense using straight-line and accelerated
methods 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
F-10
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and Amortization (Continued)
Patent costs include the direct costs of obtaining the patents. Upon
issuance of the patent, the costs are capitalized and amortized over the
estimated useful life of the patent, generally five to seventeen years,
using the straight-line method.
Direct costs incurred with the issuance of notes and mandatory redeemable
preferred stock are deferred and amortized using the effective interest
method, through the maturity date.
Revenue Recognition
Sales are recorded when products are shipped to retail customers.
Provisions for discounts and rebates to customers, estimated returns and
allowances and other adjustments are provided for in the same period the
related sales are recorded. The Company grants certain distributors
guaranteed rights of return on unsold products. Product revenue on
shipments to distributors that have rights of return are recognized upon
sale by the distributor.
Advertising Costs
Advertising costs are expensed as incurred and totaled $54,083 and $172,761
during the years ended February 29, 2000 and February 28, 1999,
respectively.
Stock-Based Compensation
The Company accounts for stock issued to employees as provided in
Accounting Principles Board Opinion No. 25, whereby compensation expense is
recorded on the date the options are granted equal to the excess of the
market price of the underlying stock over the exercise price and provides
pro forma disclosure of the application of Statement of Financial
Accounting Standards No. 123.
Basic and Diluted Loss Per Share
Net loss per common share is computed by dividing net loss to common
shareholders 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.
F-11
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
Fair Value of Financial Instruments
At February 29, 2000 and February 28, 1999, the fair values of cash and
cash equivalents, accounts receivable, and accounts payable approximate
their carrying value due to their short-term nature. The fair value of debt
is estimated at its carrying value based upon current rates available to
the Company.
NOTE 2: GOING CONCERN
The Company has incurred substantial operating losses since inception.
During the year ended February 29, 2000, the Company experienced a
significant loss of sales and major customers, in part, due to its failure
to meet obligations related to the marketing of its products. Additionally,
the Company has been unable to meet obligations to its creditors as they
have become due. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent on its ability to
reverse negative operating trends, raise additional capital and obtain debt
financing.
Management has revised its approach to marketing its patented workwear
products to include an emphasis on sales using the Internet, the
liquidation of overstocked inventory and future sales of product licenses.
Management believes that its new approach will reduce costs and improve
profitability in its workwear sales. The Company has also begun expansion
into other lines of business through acquisitions of, and contracts with,
other companies in exchange for the Company's stock. Management believes
that these acquisitions and agreements will provide an increase in revenues
that will attract additional equity investment and assets that will serve
as collateral for debt financing.
However, there can be no assurance that the Company will be able to raise
capital, obtain debt financing or improve operating results sufficiently to
continue as a going concern.
F-12
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 2: GOING CONCERN (CONTINUED)
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. These financial statements do not
include any adjustments relating to the recoverability and classification
of recorded assets or the amounts and classification of liabilities that
might be necessary if the Company is unable to continue as a going concern.
NOTE 3: INVENTORIES
Inventories consist of the following:
2000 1999
---------- ----------
Raw Materials $ 32,859 $ 165,749
Work-in-process 21,496
Finished Goods, Current Portion 152,310 1,249,967
Finished Goods, Long Term 740,675
---------- ----------
$ 925,844 $1,437,212
========== ==========
During the fourth quarter of the year ended February 29, 2000, management
determined that, due to the failure of the Company's marketing programs to
produce a satisfactory level of sales, inventory contained a significant
amount of overstocked and obsolete product. As a result, a provision for
inventory losses of $531,438 was charged to operations to write down
inventory to its net realizable value. This was based on the Company's best
estimates of product sales prices in accordance with its revised plans for
product marketing. Management has also reclassified a portion of inventory
to long-term assets based on estimates about the timing of product sales
under the revised plan. It is at least reasonably possible that the
estimates used by the Company will be materially different from the actual
results, which could have a materially adverse effect on the Company's
results of operations and financial condition in the near term. The
provision and reclassification were necessary because of conditions that
arose during fiscal 2000.
F-12
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 4: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment, at cost, consists of the following:
2000 1999
-------- --------
Land and Building $225,957 $225,957
Furniture and Fixtures 25,182 25,182
Machinery and Equipment 89,587 86,799
Office Equipment 23,996 23,996
Trucks and Autos 64,720 64,720
-------- --------
429,442 426,654
Less: Accumulated Depreciation 221,153 157,332
-------- --------
$208,289 $269,322
======== ========
Depreciation expense for the years ended February 29, 2000 and February 28,
1999 was $64,117 and $34,187, respectively.
Intangible assets, at cost, consists of the following:
2000 1999
-------- --------
Patents $ 70,970 $ 70,970
Loan Origination Fees 39,075 39,075
Organization Costs 10,500 10,500
Offering Costs, Debt 356,005 356,005
-------- --------
476,550 476,550
Less: Accumulated Amortization 301,873 270,562
-------- --------
$174,677 $205,988
======== ========
Amortization expense for the years ended February 29, 2000 and February 28,
1999 was $31,311 and $36,901, respectively.
F-13
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT
The Company's notes payable and long-term debt consist of the following:
2000 1999
--------- ---------
10.5% mortgage note payable,
collateralized by the land and
building, payable in monthly
installments of $2,687, principal
and interest, through December
2001, in default, entire amount due. $ 112,218 $ 123,407
10% note payable to the parents of the
President of the Company, stockholders,
payable in monthly installments of
$5,494, principal and interest,
maturing September, 2002. 142,004 144,993
10% note due to an investor, due on
December 31, 1997, collateralized
by a mortgage on real estate owned
by the President of the Company. 40,000 40,000
Loans from stockholders, interest
imputed at 7% annually, non-interest
bearing in 1999. 116,701 107,000
Various loans from individuals, no
written terms, interest imputed at 7%
annually. 21,500
Capitalized lease on equipment, monthly
payments of $291.75, principal and
interest, in default, entire balance due. 8,744 9,530
11% convertible subordinated notes due to
investors, matured September 30, 1998.
The notes are subordinate in rights of
payment to all indebtedness of the Company
outstanding as of August 15, 1995 or to
be incurred in the future. In conjunction
F-14
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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. These 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
amortized over the period 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. During the year ended
February 29, 2000, notes of $12,500 were
converted into common stock. No penalty
provision is applicable for the default
on the payment of these notes. 75,000 87,500
--------- ---------
Total 516,167 512,430
Less, Current Portion 380,168 306,674
--------- ---------
NET LONG-TERM DEBT $ 135,999 $ 205,756
========= =========
The aggregate principal maturing in subsequent years are:
Year Ending February 29, Amount
------------------------ ---------
2001 $ 380,168
2002 83,879
2003 52,120
---------
$ 516,167
=========
NOTE 6: RELATED PARTY TRANSACTIONS
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
F-15
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
agreement does not contain any minimum payments. Under another consulting
arrangement with the Director, he received approximately $12,500 during
1999 in consulting fees for marketing assistance provided to the Company.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with two key employees. The President
began fiscal 2000 with an annual salary of $145,000, which was raised to
$150,000 on January 1, 2000. At that time, the Chief Financial Officer also
signed an employment contract stipulating an annual salary of $150,000.
Both current agreements also contain a bonus stipulation based upon a
percentage of the Company's pre-tax income in accordance with a sliding
scale schedule contained in the agreement.
Cash in Bank
The Company maintains bank accounts, which at times contain balances, which
exceed the amounts insured by the FDIC.
NOTE 8: MANDATORY REDEEMABLE 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
detached ten-year stock purchase warrants 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. A mandatory
redemption of 1,250 shares, at $1,250,000, is required on each of the first
business days of April, 2004 and 2005. Proceeds of $960,000 were allocated
to the carrying value of the Series B Preferred Stock and $1,540,000 to the
detached warrants based on their relative fair values at date of issue. The
difference between the carrying value of the Series B and its mandatory
redemption amount is being accreted to retained earnings or, in the absence
of retained earnings, to additional paid in capital over the period until
redemption using the effective interest rate method.
During the two-year period following the sale, dividends may be paid
through the issuance of additional shares of Series B Preferred Stock and
warrants to purchase common stock. The Series B Preferred Stock has rights
F-16
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 8: MANDATORY REDEEMABLE PREFERRED STOCK (CONTINUED)
to receive cumulative cash dividends in preference to the payment of
dividends on all other shares of capital stock of the Company. No dividends
may be declared or paid on any other shares of stock until the full amount
of the cumulative dividends on the Series B Preferred Stock has been paid.
Cumulative dividends amounted to $341,160 and $273,790 at February 29, 2000
and February 28, 1999, respectively. Dividends paid in additional shares
and warrants were $150,000 for the year ended February 29, 2000 and
$193,000 for the year ended February 28, 1999.
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 of $5.00 per common share into $1,000 for each share of
Series B Preferred Stock being converted. 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.
Holders of Series B Preferred Stock vote on an as converted basis with the
common stockholders on all matters to be brought to a vote of the
shareholders. The Series B Preferred Stock holders shall be entitled to
elect one director out of the seven authorized directors of the Company's
board. If certain events occur or do not occur, such as the failure to pay
dividends 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.
NOTE 9: 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.
F-17
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9: CAPITALIZATION (CONTINUED)
Public Offering of Securities
In February 1996, the Company completed a first closing of its initial
public offering of units whereby the Company sold 250,000 units for net
proceeds, after offering costs, of approximately $1,044,000. Each unit
consists of one share of common stock and one redeemable Class A common
stock purchase warrant. The Class A warrants, which expire in January 2001,
enable the holder to purchase a unit for $7.00, 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. The Class B warrants also expire in January 2001.
In April 1996, the Company had a second closing of its initial public
offering of units whereby the Company sold an additional 77,768 units for
net proceeds, after offering costs, of approximately $425,000.
In 1996, the underwriter of the public offering, pursuant to the
underwriting agreement, received options to purchase 32,768 units at a
weighted-average exercise price of $8.4375 per unit. All of these options
are outstanding and exercisable at February 29, 2000 and have a
weighted-average remaining contractual life of ten months.
Series A 10% Convertible Preferred Stock
The Company sold 313 shares of Series A 10% Convertible Preferred Stock
through a Private Placement dated August 26, 1997, at a price of $2,500 per
Preferred Share. Dividends are payable at a rate of 10% annually, payable
in kind at the option of the Company. The shares convert automatically upon
the registration of the underlying common stock to be issued upon the
conversion. Holders of Series A Preferred Stock vote on an as converted
basis with the common stockholders on all matters to be brought to a vote
of the shareholders.
Payments of annual dividends have been deferred by the Company's board of
directors on the outstanding Series A shares because of losses sustained by
the Company. As of February 29, 2000, preferred dividends in arrears
amounted to $95,625 or $625 per share.
F-18
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9: CAPITALIZATION (CONTINUED)
Stock Receivable
Stock receivable represents amounts due to the Company for shares issued
and outstanding at year-end. The Company holds a note receivable issued in
connection with an exercise of stock options in the amount of $150,000. The
note bears interest at 7% and matures on December 31, 2000. In addition,
the Company had non-interest bearing accounts receivable of $186,450 for
shares held in escrow and a prepaid consulting receivable of $152,798 at
February 29, 2000. Stock receivable consists of a prepaid consulting
receivable of $332,760 at February 28, 1999. Common Stock Options
The Company's 1995 Stock Option Plan authorizes up to 750,000 shares of
common stock for grants of both incentive stock options and non-qualified
stock options to key employees, officers, directors and consultants.
Options granted under the Plan must be exercised with ten years of the date
of the grant. The exercise price of options granted may not be less than
85% of the fair market value of the stock.
A summary of the Company's stock option plan activity is as follows:
Number Weighted-Average
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
---------
Options Outstanding,
February 28, 1999 271,500 $ 4.55
Granted 126,000 2.21
Exercised (115,000) 3.35
Expired (150,000) 4.75
---------
Options Outstanding,
February 29, 2000 132,500 $ 3.14
=========
F-19
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9: CAPITALIZATION (CONTINUED)
At February 29, 2000, 132,500 options, with a weighted-average contractual
life of 2.6 years, were outstanding at exercise prices ranging from $1.25
to $5.75. Of this amount, 116,500 options with a weighted-average exercise
price of $3.35 were fully vested and exercisable.
During the year ended February 28, 1999, the Company issued 50,000 shares
of common stock and options to purchase 300,000 additional shares in
connection with the extension of a consulting agreement. The Company has
recorded deferred consulting expense of $171,182, which is to be expensed
over the life of the agreement. During the year ended February 29, 2000,
the Company granted 76,000 stock options to consultants with a fair value
of $165,160. The related compensation is being expensed over the lives of
the consulting agreements. The Company also granted 50,000 stock options to
two key employees in connection with their employment agreements. The
following summarizes information about options granted during the years
ended February 29, 2000 and February 28, 1999:
Number Weighted- Weighted-
of Average Average Fair
Shares Exercise Price Value Per Share
------ -------------- ---------------
Options Granted in 2000
whose exercise price:
Equals Market Price 54,000 $ 2.89 $ 2.82
Exceeds Market Price 64,000 $ 1.81 $ 0.52
Is Below Market Price 8,000 $ 1.13 $ 0.48
Options Granted in 1999
whose exercise price:
Equals Market Price 50,000 $ 3.25 $ 0.21
Exceeds Market Price 250,000 $ 3.96 $ 0.07
Stock-based compensation to non-employees is valued using the Black-Scholes
pricing model. The Company uses the intrinsic value method under APB 25 to
account for stock option compensation granted to employees. Because the
exercise price at the date of grant to employees was above the market
price, no compensation expense has been recorded. Had compensation cost
been recognized under FAS 123, the amount would have been $24,000 and $0
for the years ended February 29, 2000 and February 28, 1999, respectively.
The pro forma disclosures required under FAS 123 are as follows:
F-20
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 9: CAPITALIZATION (CONTINUED)
2000 1999
----------- -----------
Loss Attributable to
Common Stockholders:
As Reported $(2,467,929) $(2,244,812)
Pro forma $(2,491,929) $(2,244,812)
Loss per Common Share:
As Reported $ (1.00) $ (1.08)
Pro forma $ (1.01) $ (1.08)
The following assumptions were used to estimate the fair value of stock
options using the Black-Scholes method:
2000 1999
----------- -----------
Dividend Yield 0% 2.5%
Expected Volatility 105% 30%
Average Expected Option Life 2 Years 1.5 Years
Risk-Free Interest Rate 6.54% 7.5%
Warrants
The Company has warrants outstanding that were issued in prior years as
compensation for consulting and legal services. The warrants issued by the
Company generally contain provisions requiring proportionate adjustment of
the exercise price in the event of a stock split, stock dividend, or
dilutive financing. At February 28, 1999 and February 29, 2000,
compensation related warrants to purchase 432,318 shares of common stocks
at a weighted-average exercise price of $2.69 were outstanding and
exercisable. The weighted average remaining contractual life of these
warrants is 2.2 years.
NOTE 10: INCOME TAXES
The Company recognizes the amount of taxes payable or refundable for the
current year and recognizes deferred tax liabilities and assets for the
expected future tax consequences of events and transactions that have been
F-21
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 10: INCOME TAXES (CONTINUED)
recognized in the Company's financial statements or tax returns. The
Company currently has substantial net operating loss carry-forwards that
may be applied against future income. These losses create a deferred tax
asset at February 29, 2000 and February 28, 1999. The Company has recorded
a 100% valuation allowance against net deferred tax assets due to
uncertainty of their ultimate realization.
2000 1999
---------- ----------
Deferred Tax Assets Resulting
from Net Operating Losses $1,114,118 $ 831,087
Less, Valuation Allowance 1,114,118 831,087
---------- ----------
Net Deferred Tax Assets $ 0 $ 0
========== ==========
The Internal Revenue Code contains provisions, which may limit the net
operating loss carryforward available for use in any given year if
significant changes in ownership interest of the Company occur.
The loss carryforwards expire as follows:
Years of Expiration Amount
------------------- -----------
2009 $ 241,269
2010 581,952
2011 1,144,859
2012 786,579
2013 1,131,271
2014 1,654,653
2015 1,886,872
-----------
$ 7,427,455
===========
NOTE 11: MAJOR CUSTOMERS
For the year ended February 29, 2000, the Company's largest customers each
representing more than 10% of gross sales accounted for $87,359, or 32%, of
the Company's sales. These customers were JC Penney with sales of $38,172,
or 14%, and Unifirst Corporation with sales of $49,187, or 18%. For the
year ended February 28, 1999, the Company's individual customers who sales
F-22
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 11: MAJOR CUSTOMERS (CONTINUED)
exceeded 10% of sales amounted to $562,132 in the aggregate, or 59%. Of
this amount, JC Penney accounted for $285,689 or 30% of the Company's
sales, Unifirst Corporation for $153,383, or 16.1%, and Payless for
$123,060, or 12.9%.
NOTE 12: RESTATEMENT OF PRIOR PERIOD
The accompanying financial statements for the year ended February 28, 1999
have been restated for the Series B Preferred Stock and related detached
warrants, accretion of discount and dividends, in accordance with generally
accepted accounting principles and the Securities and Exchange Commission's
guidelines for accounting for mandatory redeemable preferred stock. These
changes resulted in an increase in net loss to common stockholders of
$448,934. Additionally, the financial statements have been restated for
sales subject to guaranteed right of return, which were recognized as
revenue prematurely. This change resulted in an increase in net loss of
$103,113. The aggregate increase in net loss to common stockholders was
$552,047, an increase of $0.26 in net loss to common shareholder per share.
NOTE 13: ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS
During the fourth quarter of the year ended February 29, 2000, the Company
determined that a write down of inventory to net realizable value of
$531,438 was required as discussed in Note 3. Additionally, the entire
annual accretion of discount and dividends on mandatory redeemable
preferred stock totaling $519,168 were not recorded until the fourth
quarter. The aggregate effect of these year-end adjustments was to increase
net loss for the fourth quarter by $1,050,606, or $.45 per common share.
NOTE 14: SUBSEQUENT EVENTS
Acquisitions
The Company completed the acquisition of Rhode Island Truck and Equipment
Corporation on June 10, 2000. The stock purchase agreement requires JD
F-23
<PAGE>
JD AMERICAN WORKWEAR, INC.
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 14: SUBSEQUENT EVENTS (CONTINUED)
Acquisitions (Continued)
American Workwear, Inc. to pay one share of common stock for each dollar of
appraised value of the assets. The value of the assets is estimated at
approximately $145,000, pending the results of the appraisal. Rhode Island
Truck and Equipment Corporation sells commercial trucks, construction
equipment and tools, and provides hauling and paving recycling services.
For the year ended December 31, 1999, Rhode Island Truck and Equipment
Corporation had sales of approximately $175,707 and a net loss of $1,027.
On June 12, 2000, the Company completed the acquisition of Patina
Corporation and its subsidiary International Machine and Welding. Patina
Corporation is a holding company. International Machine and Welding
operates a large machine shop and sells heavy equipment and parts. In
connection with the acquisition, the Company has authorized and issued
11,300 shares of 6% Series C Convertible Preferred Stock with a par value
of $1,000 per share. These acquisitions will be accounted for under the
purchase method, whereby the purchase price will be allocated to the
underlying assets and liabilities based on their estimated fair values.
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 common shares.
Tax Sale and Foreclosure of Property
On June 29, 2000, the building housing the headquarters of the Company at
46 Old Flat River Road, Coventry, Rhode Island was sold to the current
mortgage holder in a tax sale. The Company may redeem the building by
paying approximately $4,200 for the taxes and required interest prior to
six months from the date of the sale. In August 2000, the Company was
notified of the intention of the mortgage holder on the corporate
headquarters to begin foreclosure proceedings unless the arrearage of
approximately $32,000 is paid.
F-24
