SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file No. 33-98682
AMERICAN COMMERCE SOLUTIONS, INC.
f/k/a JD American Workwear, Inc.
(Exact name of registrant as specified in its charter)
Delaware 05-0460102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Chamber Dr, Bartow, Florida 33830
(Address of principal executive offices) (Zip Code)
(863) 533-0326
Registrant's telephone number, including area code
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 [ ] No [X]
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: $2,108,640
The aggregate market value of the voting and non-voting common equity of
the registrant held by non-affiliates of the registrant at June 20, 2001 was
approximately $1,252,792 based upon the closing sale price of $.26 for the
Registrant's Common Stock, $.002 par value, as reported by the National
Association of Securities Dealers OTC Bulletin Board on June 1, 2001.
As of June 20, 2001 the registrant had 10,718,432 shares of Common Stock,
$.002 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
American Commerce Solutions, Inc.
Annual Report on Form 10-KSB
For the Fiscal Year Ended February 28, 2001
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business 1
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to Vote of Securities Holders 9
PART II
Item 5. Market for Common Equity and Related Security
Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 12
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 the Exchange Act 16
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners and Management 21
Item 12. Certain Relationships and Related Transactions 25
Item 13. Exhibits and Reports on Form 8-K 26
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are subject to risks, uncertainties, and other factors, which could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. See "Item 1. Business - Forward Looking Statements".
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
American Commerce Solutions, Inc., f/k/a JD American Workwear, Inc. was
incorporated in Rhode Island in May 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.
On June 1, 2000, the Company acquired 100% of the outstanding stock of
Rhode Island Truck and Equipment Corp., the parent corporation of International
Paving, and 100% of the outstanding stock of Patina Corp., the parent
corporation of International Machine and Welding, Inc. In December 2000, the
Company changed its name to American Commerce Solutions, Inc. Concurrently with
the name change, the Company formed a new Rhode Island corporation to operate
as, and under the name of, JD American Workwear, Inc.
American Commerce Solutions, Inc. is a multi-industry holding company for
its operating subsidiaries. As of the close of its most recently completed
fiscal year, the Company had three wholly owned subsidiary operations, each
operating in a different business segment. These subsidiaries consisted of
International Machine and Welding, Inc. in its manufacturing segment, Rhode
Island Truck and Equipment in its construction management segment, and JD
American Workwear, Inc. in its product marketing segment. The Board of Directors
of the Company has determined that it will discontinue the operations of JD
American Workwear, Inc. as of June 1, 2001. The Company is negotiating an
agreement and has entered into a letter of intent with David N. DeBaene, founder
of JD American Workwear, to sell the operations to him.
The Company intends to expand its holdings by acquiring additional
subsidiaries to generate additional revenue within both its current segments and
new business segments. This concept has been a developing business strategy
since August 1999.
SUBSIDIARY OPERATIONS
International Machine and Welding, Inc. provides specialized machining
services for heavy industry. Target customers in the region include mining,
agriculture processing, maritime, power generation and industrial machinery
companies. Additional operations include heavy equipment service to the
construction, forestry, waste and scrap industries. The operation provides
complete service of the equipment, which includes rebuilding undercarriages,
engines, transmissions, final drives and hydraulics. The effective service area
for the operation located in the Southeastern region of the United States is a
prime and lucrative market for such services. Growth in this region of the
United States (population, infrastructure, and building) has created long term
needs for construction equipment. All of these machines require periodic
maintenance, and at certain points major overhauls. In addition to its 38,000
square foot facility, the operation also provides fully equipped field service
vehicles so machines do not have to be removed from the work site. Normally, the
Company as an "independent" is more competitive than the "factory" centers. In
most cases the operation can turn work in a quicker and more cost effective
manner.
International Machine and Welding, Inc. also sells OEM and after-market
repair parts for heavy equipment. The operation has an extensive cross-reference
listing and network of sources. One of the major competitive advantages of the
operation is its ability to determine exactly what the customer needs and
fulfill the requirement. In many cases, the customer may not have service
manuals or to be able to identify parts number. If a customer has more than one
type of machine, which is quite common, they may have to contact a number of
different suppliers to get parts for multiple machines. Our operation identifies
the required parts and arranges the necessary repairs. As a result, the customer
only has to make one phone call for all of their needs. This also makes
International Machine and Welding, Inc. an attractive alternative for sales to
customers outside the United States. Orders can be accumulated throughout the
month and sent on consolidated shipments. This has created a niche market for
the direct parts sales division. Management is in the process of negotiating
with agents in various markets, including South America, the Caribbean, and
Puerto Rico to solicit parts sales. The operation currently has two major
customer relationships in the Caribbean. Management believes that this market
has not been fully targeted by its competitors and is a potential source of
significant business.
JD American Workwear, Inc., a Rhode Island corporation was incorporated in
February 2001 to become a subsidiary and provide the ongoing operations that
were formerly the responsibility of the parent company. This subsidiary was
engaged in the business of designing, manufacturing, marketing and selling
commercial and industrial workwear products. The subsidiary's products consisted
of a 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 operations initial product, JD Safety Work Jeans, was
designed and patented by David N. DeBaene, the subsidiary President, and
assigned to the predecessor company, JD American Workwear, Inc., a Delaware
corporation in January 1995. In June 1997, the Delaware corporation was awarded
a second patent with respect to certain unique functional characteristics of its
Safety Uniform Pants. The operation marketed its products throughout the United
States and internationally principally for industrial and manufacturing
applications.
The Board of Directors of American Commerce Solutions, Inc. has decided to
discontinue the operations JD American Workwear, Inc and is negotiating an
agreement with David N. DeBaene, the founder, to sell the operations to him.
Rhode Island Truck and Equipment Corp. is licensed to sell used trucks and
equipment. Its wholly owned subsidiary, International Paving provides commercial
and residential concrete and paving services. Since being acquired by American
Commerce, International Paving has been able to increase its bonding line and
secure contracts from municipalities in Rhode Island to repair roadways and
rights of way. Currently there is little activity in the truck sales operations
and the used truck sales license is being maintained for a possibility of
reentering this market.
BUSINESS STRATEGY
The Company has adopted a 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 three segments: Manufacturing,
Product Marketing, and Construction Management.
Manufacturing Segment. This segment was formed to house the operations of
International Machine and Welding, Inc. Its operations include a 38,000 square
foot machine shop and sales of heavy equipment, parts and service.
Product Marketing Segment. This segment was formed for sales of JD American
Workwear Products. Operations have been discontinued as of June 1, 2001.
Construction Management Segment. This segment was formed for the operations
of Rhode Island Truck and Equipment Corporation. Rhode Island Truck and
Equipment Corporation is licensed to sell used commercial trucks, construction
equipment and tools, and through its International Paving division provides
hauling, paving, commercial and demolition recycling services.
PRODUCTS, SERVICES AND FEATURES
MANUFACTURING SEGMENT
The Manufacturing Division through International Machine and Welding, Inc.
offers a broad range of products and services to heavy industry through its
three divisions. The operations of Division 1 provide specialized machining of
very large components and machinery repair to industries such as aerospace,
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agricultural processing, chemical, defense, mining, maritime and power
generation. Our 38,000 square foot facility located in Bartow, Florida is one of
the only operations in the Southeast capable of machining components up to 55
feet in length and 20 feet in diameter. Division 2 provides heavy equipment
service (parts and labor), which includes repair and bonded rebuilds of engines,
tracks, undercarriages, transmissions, final drives and hydraulic systems on
heavy equipment. The equipment we repair is from the heavy construction industry
including bulldozers, scrapers, loaders, excavators, large tractors, rollers,
etc. The division provides field service via a fleet of fully equipped service
trucks to provide repairs at the customer's site. Division 3 sells replacement
parts to the heavy equipment market, directly to the end user with most of the
parts exported outside the United States.
PRODUCT MARKETING SEGMENT
The Product Marketing Segment through the JD American Workwear, Inc.
operation offered 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
28, 2001, sales of JD Safety Work Jeans accounted for approximately 23% of
revenues, sales of JD Safety Uniform Pants accounted for approximately 5%, and
sales of JD Rugged 5-pocket Jeans accounted for approximately 72%. 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%.
CONSTRUCTION MANAGEMENT SEGMENT
The Construction Management Segment offers commercial and residential
paving and concrete work through its International Paving operations, a
subsidiary of Rhode Island Truck and Equipment Corp. These operations have
experienced a 600% increase in municipal contracts in the first quarter of
fiscal 2002 with more potential contracts to bid. The bonding line for bid
contracts has been expanded from $100,000 to $600,000 since the acquisition by
American Commerce. The subsidiary intends to expand further by offering
recycling services for concrete, asphalt and other non-putricable commercial
waste that management believes will reduce the seasonality of cash flow
substantially as the inventory of material that may be ground or crushed can be
stockpiled for processing during the seasonal downturns in concrete and paving
work. Rhode Island Truck and Equipment Corp. holds a license to sell used trucks
and construction equipment. While no sales were made in fiscal 2001 the
operation will continue to maintain its license to sell used vehicles. This
subsidiary has substantial room for expansion in its region and can be assisted
in used equipment sales by its sister operations in the manufacturing division.
MANUFACTURING AND SOURCES OF SUPPLY
MANUFACTURING SEGMENT
Supplies and parts used by International Machine and Welding, Inc. are
purchased from several major suppliers including Caterpillar, John Deere, Case
and other major manufacturers and after market parts suppliers. The machining
operations purchase from many suppliers based on the need of specific jobs.
Although the operations do not have any long-term contracts with any of its
suppliers, management believes that it has excellent business relationships with
its current suppliers and it is not exposed to any significant risk in the event
any one source of supply is discontinued, because there are many suppliers.
PRODUCT MARKETING SEGMENT
Proprietary Products. The JD Safety Work Jeans and JD Safety Uniform Pants
were manufactured in the United States exclusively from raw materials produced
in the United States. The division manufactured some of the component parts and
subassemblies; however, final assembly was performed by outside contractors. The
segment had no significant manufacturing activity or purchase of raw materials
during the years ended February 28, 2001 and February 29, 2000.
CONSTRUCTION MANAGEMENT SEGMENT
Because of its regional nature the Construction Management Division
purchases its concrete and supplies and asphalt from local suppliers located
3
near its job sites. This arrangement is consistent with industry standard
practice albeit providing certain risk if the suppliers services were to be
interrupted. In such an event the cost completing certain jobs would increase
and delays could be suffered with the transportation of goods coming from
distant sites.
MARKETING AND SALES
MANUFACTURING SEGMENT
International Machine and Welding, Inc.'s operates three subdivisions at
one location. Division 1 sales have traditionally come from industries within a
100-mile radius of its facilities requiring specialized machining applications.
Direct salesmen have established relationships with specific customers and the
Company has expanded the business relationship through quality, rapid turn and
value. While this business is quite lucrative, visibility is limited. The
operation intends to expand its operations in the OEM market, where the
subsidiary provides components to manufacturers of large machines. These types
of accounts generally involve annual contracts with three-month rolling
schedules. The expansion of the market also is expected to increase the
serviceable territory from the Southeast to include the entire United States.
Direct sales personnel who primarily target mid-tier accounts handle sales
for Division 2 and 3. We believe that this broad niche market is largely
untapped by the larger factory-sponsored operations which cater specifically to
very large accounts. Margins are typically very slim in these accounts and a
large percentage of customer base is represented by very few accounts. Because
we are an independent repair facility, we can provide service to a much broader
base of customers with greater margins than the large factory-sponsored
competitors. Division 2 has recently expanded its sales force to address the
total available market. Anticipating growth of sales, the Company has installed
additional specialized equipment to service undercarriages, which represents
approximately 60% of the Company's repair revenue. The recent installation of an
additional track press will allow this division to double its capacity.
PRODUCT MARKETING SEGMENT
The JD Safety Work Jeans, JD Safety Uniform Pants and its private label
conventional workwear were marketed and sold through a network of distributors,
catalog merchants and retail resellers. The marketing and sales efforts were
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. Recent marketing efforts have been limited due to a lack
of cash flow.
CONSTRUCTION MANAGEMENT SEGMENT
Rhode Island Truck and Equipment Corp. has expanded its operations and been
successful in bidding several municipal contracts that are one year in length
with a one-year renewal option. The expansion of the bonding line to $600,000
from $100,000 in fiscal 2001 has created the opportunity for this growth. Direct
marketing through mailings and advertising in regional yellow pages has
increased our visibility. This increased visibility is expected to be a catalyst
in capturing a greater share of the larger market for residential and commercial
paving caused by an extremely harsh winter in fiscal 2001.
COMPETITION
MANUFACTURING SEGMENT
The principal competitors of the Manufacturing Segment consists of regional
companies such as Southern Machinery, Florida Plating and Machine, Arroyo and
Florida Metallizing in the machining operations and national corporations such
as Ringhaver Equipment, Caterpillar, and Case repair facilities in the heavy
equipment parts and service category. Management believes that the ability to
rapidly turn goods or to provide parts on a timely basis gives it a competitive
advantage. We are able to ship parts directly to the consumer, usually on the
same day as the order or to return all service work within the time specified
4
either by completing the work at the customers site or because of immediate
turnaround capabilities.
PRODUCT MARKETING SEGMENT
The principal competitive factors in the JD American Workwear, Inc. markets
include innovative product design, product quality, value, product performance,
durability, availability, established customer relationships, name recognition,
distribution and price. The operation had been able to compete principally on
the basis of its innovative product design, quality, product performance and
value.
JD American Workwear, Inc. competed 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 it. Dominant competitors of conventional
workwear include Carhart Industries, Red Kap Industries, and Angelica Corp.
CONSTRUCTION MARKETING SEGMENT
This segment primarily competes with other local paving contractors located
in its service market. Within the local markets competition is intense.
Significant competitive factors in this business are ability to deliver services
rapidly, quality of work, quality of staff and honesty. The principal
competitors include J.H. Lynch & Sons, Narragansett Improvement Co., and Tilcon
Corp., a national conglomerate.
PATENTS AND PROPRIETARY RIGHTS
The JD American Workwear, Inc.'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. This patent will expire in 2014.
CUSTOMER DEPENDENCE
International Machine and Welding, Inc. has a broad and diverse base of
customers. This segment generates a significant amount of revenues from sales
and services provided to three different industries. The construction industry
accounted for approximately 26.6% of the segment's revenues in fiscal 2001 while
the industrial and mining industries accounted for approximately 17.2% and
16.6%, respectively, of the segment's total revenues. Due to these
concentrations, the results of operations of the segment could be affected by
changes in the economic, regulatory, or other related conditions impacting on
these industries.
For fiscal 2001, JD American Workwear, Inc.'s largest customers were a
liquidator, The Sportman's Guide, that purchased 30.1% and retailers who
combined comprised 8.3%. No customer other than the liquidator purchased more
than 10% of the total sales for the year ended February 28, 2001. The remaining
5
sales were to businesses or individual customers. For fiscal 2000, the Company's
customer's who sales exceeded 10% of the divisions sales were JC Penney with
sales of 14%, and UniFirst Corporation with sales of 18%.
Rhode Island Truck and Equipment Corp. does not rely on recurring customers
to generate its revenues. The shift to more municipal and commercial contracts
in the paving subsidiary is expected to provide the base for future operations.
In fiscal 2001, commercial contracts for paving were 22.5% of the revenue with
all other sales being to residential customers. No customer provided more than
10% of sales.
GOVERNMENTAL REGULATION
Except for certain regulations relating to bidding for, and providing
services to, municipalities by our Construction Management Division, the Company
is not subject to any significant governmental regulations that materially
effect its operations.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
During the past two fiscal years the Company has not incurred any material
costs associated with compliance with federal, state or local environmental law.
EMPLOYEES
At May 14, 2001, the Company and its subsidiaries had twenty-five employees
devoting full-time hours, seven part time employees and seven contractors or
commission representatives. Of these workers, six are performing executive,
management and marketing functions, five 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. The parent operation has three full time
employees and one consultant. The Manufacturing Segment employs eighteen full
time, six part time and six consultants or commission sales personnel; the
Product Marketing Segment had three full time employees; and the Construction
Management Segment had four full time and one part time employee.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB (including the Exhibits hereto) may
contain "forward-looking statements" within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, including,
but not limited to, statements regarding, among other things, the financial
condition and prospects of the Company and its subsidiaries, results of
operations, projections, plans for future business development activities and
the opportunities available within its market areas, capital spending plans,
financing sources, projections of financial results or economic performance,
capital structure, the effects of competition, statements of plans,
expectations, or objectives of the Company, and the business of the Company and
its subsidiaries. These forward-looking statements are typically identified by
words or phrases such as "believe," "expect," "anticipate," "plan," "estimate,"
"intend," and other similar words and expressions, or future or conditional
verbs such as "will," "should," "would," and "could" and other characterizations
of future events or circumstances. In addition, the Company may from time to
time make such written or oral "forward-looking statements" in future filings
with the Securities and Exchange Commission (including exhibits thereto), in its
reports to stockholders, and in other communications made by or with the
approval of the Company.
These forward-looking statements reflect the current views of the Company
at the time they are made and are based on information currently available to
the management of the Company and upon current expectations, estimates, and
projections regarding the Company and its industry, management's belief's with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors (many of which are outside
the control of the Company), which could cause actual results to differ
materially from those expressed or implied by such forward-looking statements.
Such forward-looking statements speak only to the date that such statements are
made, and the Company undertakes no obligation to update any forward-looking
6
statements, whether as the result of new information, future events, the
occurrence of unanticipated events, or otherwise. The following sets forth some,
but not necessarily all, of the factors that may cause the Company's actual
results to vary materially from those which are the subject of any
forward-looking statements.
RISK FACTORS
Accumulated Deficit and Operating Losses and Anticipated Earnings;
Explanatory Language in Auditor's Report. The Company had an accumulated deficit
at February 28, 2001 of $10,010,063 and net income to common shareholders of
$38,375 for the year ended February 28, 2001. At February 29, 2000, the Company
had an accumulated deficit of $8,263,003, and incurred a net loss to common
shareholders, of $2,467,929 for the year ended February 29, 2000. The Company
had negative cash flow from operations during each of the years ended February
28, 2001 and February 29, 2000. 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. While there can be no assurance of this outcome, management
believes its plan of operations will allow the Company to achieve this goal.
Management believes discontinuing the operations of JD American Workwear, Inc.
will improve overall cash flows to allow management to focus on its strategy of
growth through acquisition without the requirement of committing additional
financial resources to the failing segment.
Growth Plans and Risk of Expansion. In recent months, the Company has
adopted and implemented a business strategy, which seeks growth and expansion
through the acquisition of other companies with diversified lines of businesses.
Accordingly, the growth and financial performance of the Company will depend, in
large part, upon the Company's ability to identify and locate suitable
acquisitions, to manage such growth and the resultant expanded diverse
operations, to manage the margins of the acquired operations, and to attract,
hire, train, and retain qualified supervisory personnel and other operational
employees to meet the Company's needs as it expands, as well as the availability
of sufficient working capital. Difficulties resulting from the failure of the
Company to manage and control its growth could materially adversely affect the
Company's operating results and financial condition.
No Assurance of Acquisitions. The Company has limited acquisition
experience and, although from time to time it has had preliminary discussions
with potential acquisition candidates, the Company has not completed any such
transactions since June 2001. The Company does not have any current
understandings, arrangements, or agreements (oral or written) relating to any
specific acquisition but it is engaged in preliminary discussions with potential
acquisition candidates. However, there can be no assurance that any acquisition
candidate will be interested in such a transaction, that an acquisition
transaction will be successfully negotiated or consummated, or that the Company
will be able to finance any such acquisition. Furthermore, there can be no
assurance that the Company will be able to identify other suitable acquisition
candidates in the future that would be interested in such a transaction. To the
extent that acquisitions are consummated, the Company may have difficulty in
successfully integrating the acquired business into the Company or may lack the
management skills or systems necessary to adequately implement the Company's
strategy. Furthermore, once integrated, acquisitions may not achieve comparable
levels of revenues, profitability, or productivity as existing Company
operations, or otherwise perform as expected (including the potential failure to
achieve expected synergies or other anticipated financial benefits). The Company
is unable to predict whether or when any prospective acquisition candidate will
become available or the likelihood that an acquisition will be completed should
any negotiations commence. The Company will face competition for such
acquisitions from entities that have substantially greater resources than the
Company.
Acquisition Risks. Acquisitions involve a number of special risks, some or
all of which could have a material adverse effect on the Company's results of
operations or financial condition. Such risks include, but are not limited to,
the diversion of management's attention from core operations, difficulties in
the integration of acquired operations and retention of personnel, customers,
and suppliers, unanticipated problems or legal liabilities, tax and accounting
issues, and the inability to obtain all necessary governmental and other
approvals and consents.
7
Need for Additional Financing. Cash flow from operations, loans and the
sale of securities provided the working capital needs and principal payments on
long-term debt through most of fiscal 2001. However, the Company will need to
obtain additional financing in order to finance its acquisition and growth
strategy. There can be no assurance that debt or equity financing will be
available to the Company on acceptable terms, if at all. If the Company does
require additional financing and it cannot be obtained or the terms of such
financings are unfavorable, it may have a material adverse impact on our
operations and profitability, and the Company may need to curtail its business
plan and strategy
Loss of Certain Members of Our Management Team Could Adversely Affect the
Company. The Company is dependent onto a significant extent on the continued
efforts and abilities of our Chairman, Robert E. Maxwell, and President Steven
D. Smith. If the company were to lose the services of any of these individuals
or other key employees or consultants before a qualified replacement could be
obtained, the business could be materially affected.
Expected Volatility in Share Price. From March 1, 2000 through June 30,
2001 the price of our common shares has ranged from $1.9375 to $0.01 per share.
The price of our common stock may be subject to fluctuations in response to
quarter-to-quarter variations in operating results, creation or elimination of
funding opportunities, restriction of the acquisition plans, and favorable or
unfavorable coverage of our officers and Company by the press.
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 68.30% 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 a 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.
Pursuant to the acquisition of Patina Corp., the Company issued 9,800
shares of Series C 6% Convertible Preferred Stock. International Commerce and
Finance, Inc., a corporation wholly-owned by Mr. Hefner, a director of American
Commerce, was issued 8,100 shares of the Series C Preferred Stock. Each share of
Series C Preferred Stock is convertible into 1,000 shares of Common Stock but
only is entitled to 363.52 votes per share. Because the voting rights of the
Series C Preferred Stock is less than its conversion rate, the issuance of
Series C Preferred Stock did not result in a change of control of the Company.
In November 2000, International Commerce and Finance, Inc. converted 4,133
shares of Series C Preferred Stock in to 4,133,000 restricted common shares and,
as a result, currently holds approximately 41.08% of the Company's total
outstanding voting power. If the remaining 3,967 shares of Series C Preferred
Stock held are totally converted into common stock, a change of control would
take place since International Commerce and Finance, Inc. would possess
approximately 50.50% of the total outstanding voting power of the Company.
Furthermore, Mr. Hefner, though his control of International Commerce and
Finance, Inc. and his own personal holdings, currently holds or controls
8
approximately 42.64% of the Company's total outstanding voting power or 43.06%
if his currently exercisable options were exercised. If the Series C Preferred
Stock held by Mr. Hefner and International Commerce and Finance were totally
converted, Mr. Hefner would hold or control approximately 52.43% of the total
outstanding voting power of the Company or 52.72% if his currently exercisable
options were exercised.
Withdrawal of Registration Statements. During the fourth quarter of the
2001 fiscal year, the Company filed a registration statement on Form S-8 on two
separate occasions to register common stock issuable pursuant to options granted
under the Company's stock option plan. Because the Company had failed to make
all of its required filings under the Securities Exchange Act of 1934 prior to
the filing of these Form S-8 registration statements, registration of the shares
on Form S-8 may not have been technically available to the Company. Accordingly,
these registration statements are expected to be withdrawn by the Company in
July 2001. A new Form S-8 will be filed to register the shares underlying
unexercised options, which were intended to be included in the withdrawn Form
S-8's. However, shares previously issued pursuant to exercised options may not
be registered on a Form S-8. Accordingly, any shares issued upon exercise of
options in reliance on the technically defective Form S-8's to be withdrawn
cannot be registered using a subsequent Form S-8 registration statement, leaving
the Company with a potential liability for 619,500 shares issued under the Form
S-8's to be withdrawn.
ITEM 2. PROPERTIES
With the acquisition of Patina Corp. and its subsidiary, International
Machine and Welding, Inc. the Company owns a 38,000 square foot facility in
Bartow, Florida, which currently serves as the principal executive offices of
American Commerce. This building is encumbered under a default judgment in favor
of GE Capital Corp and secured by a mortgage to GE Capital Corp.
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
property. The promissory note required monthly payments of $2,686.74 and a
balloon payment of approximately $57,934 in January 2002. The Company defaulted
on the note and the entire principal balance plus accrued interest was declared
due immediately. In August 2000, the Company was notified that the mortgage
holder intended begin foreclosure proceedings unless the arrearage of
approximately $32,000 was paid. On June 29, 2000, the building was sold to the
mortgage holder in a tax sale. The Company redeemed the building by paying
approximately $4,200 for the taxes and required interest prior to six months
from the date of the sale. The building fell into arrearage thereafter and the
building was sold in March 2001. JD American Workwear, Inc. is currently leasing
the facility from the new owner at $1,670 per month. With the sale of the assets
of this subsidiary in July 2001 the lease will be converted to the name of David
N. DeBaene or assigned as he requires and is acceptable to the lessor.
Rhode Island Truck and Equipment Corp. is housed in an 8,000 square foot
structure in West Warwick, Rhode Island. Alfred Joaquin, who is the father of
the subsidiary's President, owns this building. The subsidiary pays $600 per
month on a month-to-month lease.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, the
following matters were submitted to a vote of the Company's shareholders at an
annual meeting of shareholders: (a) the election of a board of directors, (b) to
increase the authorized common shares to 30,000,000, (c) to increase the
authorized amount of employee stock options to 2,000,000, and (d) to change the
name of the corporation to American Commerce Solutions, Inc. All proposals were
approved by the shareholders and have been implemented.
9
The following directors were elected: Robert E. Maxwell, Daniel L. Hefner,
Norman J. Birmingham, David N. DeBaene and Herbert C. Canapary. Each elected
member received 5,548,382 votes in favor with 3,083 abstaining. There were
7,335,020 votes that could have been cast leaving 1,783,555 that cast no vote on
any proposal.
The proposal to increase the number of authorized shares to 30,000,000 from
7,500,000 passed with 5,414,947 affirmative votes and 136,518 dissenting votes.
The proposal to increase the number of shares available for the 1995 Stock
Option Plan to be increased from 750,000 to 2,000,000 shares passed with
5,526,385 affirmative votes and 25,080 dissenting votes.
The amendment to Articles of Incorporation to change the name of the
corporation to American Commerce Solutions, Inc. passed with 5,535,435
affirmative votes and 16,030 dissenting votes.
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").
Until January 31, 2001 the company's common stock traded under the symbol
"JDAW." In connection with the name change, since February 10, 2001, the common
stock has traded under the symbol "AACS." 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 reflect inter-dealer prices without adjustment for retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.
Bid Prices
------------------
High Low
------- -------
FISCAL 2002
First Quarter (March 1, 2001 through May 31, 2001) $ 0.625 $ 0.25
FISCAL 2001
First Quarter (March 1, 2000 through May 31, 2000) $1.9375 $ 0.88
Second Quarter (June 1, 2000 through August 31, 2000) $1.4375 $0.6875
Third Quarter (September 1, 2000 through November 30, 2000) $ 1.25 $ 0.10
Fourth Quarter (December 1, 2000 through February 28, 2001) $ 1.50 $ 0.01
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
10
On June 1, 2001 the closing bid price of the Company's Common Stock as
reported by the OTCBB was $0.47 and there were approximately 341 shareholders of
record.
DIVIDENDS
The Company has never declared or paid a dividend on its Common Stock, and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company expects to retain, if any, its future earnings
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.
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. The Company was
reinstated in January 2001.
RECENT SALES OF UNREGISTERED SECURITIES
In March 2001, 500,000 common shares were issued to Allen L. Burditt II for
consulting services to be rendered in reliance on a registration statement filed
on Form S-8 under the Securities Act of 1933. This Form S-8 will be withdrawn
and these shares will be included in a registration statement to be filed
subsequently.
On February 14, 2001, 39,350 shares were issued to Randolph Beimel or his
assigns in exercise of options he had been granted in March 2000 with an
exercise price of $0.20 per share. 10,000 common shares were issued to Richard K
Nicholson for the conversion of a $5,000 debt and 250,000 common shares for a
receivable of $125,000. Mr. Nicholson has paid $20,000 of the amount due and has
a remaining balance of $105,000. 200,000 common shares were issued to various
assignees of Jeffrey Joaqui to purchase of Rhode Island Truck and Equipment
Corp. 908,750 common shares were issued to various debtors debt of approximately
$180,000. 25,000 shares each were issued to Bruce Boyer and James Hopstetter to
extend an option to purchase a business they own. 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.
On January 12, 2001, 265,000 common shares were issued for legal services
provided of approximately $30,000 in reliance on a registration statement filed
on Form S-8 under the Securities Act of 1933. This Form S-8 will be withdrawn.
Approximately 119,500 shares acquired upon exercise of options and subsequently
sold in the market cannot be registered in a new Form S-8. The remaining shares
will be registered on a Form S-8 registration statement to be filed following
the filing of this Form 10-KSB.
On November 28, 2000, holders of Series C Preferred Stock shareholders
elected to convert 5,000 preferred shares into 5,000,000 restricted common
shares in accordance with the terms and conditions of the designation. 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. The
preferred shares carry a stated value of $1,000 each and conversion of 1,000
shares of common stock for each preferred share.
In June 2000, 9,800 shares of Series C 6% Convertible Preferred Stock were
issued in conjunction with the acquisition of Patina Corporation. The options
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 options for the issuance of 150,000
shares of common stock at a total exercise price of $30,000. The options were
granted on March 3, 2000. The stock options for 10,000 shares were issued upon
11
the exercise of stock options granted under the 1995 Stock Option Plan and were
issued as free-trading shares pursuant to a registration on Form S-8 previously
filed for all shares authorized under the plan. The additional 150,000 common
shares were issued for the exercise of options granted with reliance on an
exemption from the registration requirements provided for in Section 4(2) of the
Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management's Discussion and Analysis or Plan of Operation presents a
review of the consolidated operating results and financial condition of the
Company for the fiscal years ended February 28, 2001 and February 29, 2000. This
discussion and analysis is intended to assist in understanding the financial
condition and results of operation of the Company and its subsidiaries. This
section should be read in conjunction with the consolidated financial statements
and the related notes.
RESULTS OF OPERATIONS
The Company owns three subsidiaries that operated in three distinct
segments during the fiscal year ended February 28, 2001. These segments are
Manufacturing, Product Marketing and Construction Management. To facilitate the
readers understanding of the Company's financial performance, this discussion
and analysis is presented on a segment basis. There is no comparative data for
the Manufacturing or Construction Management segments.
MANUFACTURING SEGMENT
The manufacturing segment generates its revenues from three divisions.
Division 1 provides specialized machining and repair services to heavy industry
and original equipment manufacturers. Division 2 provides repair and rebuild
services on heavy equipment used in construction and mining as well as sales of
used equipment. Division 3 provides parts sales for heavy equipment directly to
the customer. The primary market of this segment is the majority of central and
south Florida with parts sales expanding its market internationally. The current
operations can be significantly expanded using the 38,000 square foot structure
owned by International Machine and Welding, Inc. Management has implemented an
aggressive marketing campaign and hired additional sales staff in an effort to
improve the utilization of its assets.
The segments sales expectations were met in its first nine months of
operations with the profit minimally short of forecasts due primarily to costs
associated with its financing activities and not as a result of operations. With
the expanded sales and marketing programs in place, and existing capacity of its
facilities the operations are poised for growth in fiscal 2002.
PRODUCT MARKETING SEGMENT
Since its inception, JD American Workwear, Inc. had been involved in the
design and development of its products, the development of relationships with
various 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 previously manufactured by the division.
Segment losses to date had 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 and 2001. Most of the losses in fiscal 2001 and
2000 are a result of the failure of the marketing program to produce sales and
the lack of cash flow to market the products. Historically, the operation used a
team of independent sales representatives and sales agents to generate sales.
During fiscal 2000, all marketing personnel were terminated because the
operational sales did not provide sufficient cash flow to pay their salaries.
12
Management has decided that these operations be discontinued as of June 1, 2001.
An agreement for the sale of the operations, is under negotiation with David N.
DeBaene, founder and current President of JD American Workwear.
CONSTRUCTION MANAGEMENT SEGMENT
This segment derives its income principally from residential and commercial
paving and concrete installation and repair. This segment under-performed in
fiscal 2001, and provided a loss from operations. Management refocused its
efforts during its seasonal downtime in the fourth quarter and readily marketed
itself to municipalities in Rhode Island. During the fourth quarter its
construction bonding lines were increased from $100,000 to $600,000 allowing it
to bid jobs of larger scope. Since fiscal year end, International Paving, Inc.
has been successful in securing an increased amount of contracts with
municipalities. This trend upward is expected to continue.
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
GENERAL
The Company's consolidated net sales increased to $2,108,640 for the fiscal
year ended February 28, 2001, an increase of $1,836,575 from $272,065 for the
fiscal year ended February 29, 2000. This increase was due to the acquisitions
completed during fiscal 2001.
Gross profit for the consolidated operations increased to $1,046,167 for
the fiscal year ended February 28, 2001, from $72,742 for the fiscal year ended
February 29, 2000. Gross profit increased as a percentage of sales to 49.61%
from 26.74% due to the higher margins of the acquired subsidiaries.
Selling, general and administrative expenses increased to $2,263,777 for
fiscal 2001 from $1,432,966 for fiscal 2000, an increase of $830,811 or 57.98%.
The increase was attributable to the addition of the expenses of the new
acquisitions.
The Company's net gain to common shareholders increased to $38,375 for
fiscal 2001 from a net loss to common shareholders of $2,467,929 for fiscal
2000. This was attributable to an extraordinary gain on the troubled debt
extinguishment of mandatory redeemable preferred stock of $1,994,768 from the
restructuring of the Series B Preferred Stock agreement.
MANUFACTURING SEGMENT
The Manufacturing segment provided net sales of $1,653,399 from its
inception on June 1, 2000 through the fiscal year ended February 28, 2001. The
machining operations provided $633,758 or 38.3% of net sales with parts and
service providing $1,019,641 or 61.7% of net sales. Companies whose purchases
exceeded 5% of revenues were IMC Agrico at 5.47% and the City of Jacksonville at
6.06%.
Gross profit from the Manufacturing segment was $907,530 in fiscal 2001
providing a gross profit margin of 54.9%
Selling, general and administrative expenses were $929,026 creating a loss
from operations of $21,496. Interest expenses were $120,994 creating a net loss
for the segment of $142,490.
PRODUCT MARKETING SEGMENT
Net sales of the Product Marketing segment decreased to $187,682 for the
fiscal year ended February 28, 2001 from $272,065 for the fiscal year ended
February 29, 2000, a decrease of $84,383 or 31.0%. This decrease was principally
attributable to decreased marketing efforts and the failure of the segment to
provide adequate cash flow to market its product.
13
Gross profit decreased to $23,774 for fiscal 2001 from $72,742, for fiscal
2000, a decrease of $48,968. Gross profit decreased as a percentage of sales to
13.2% from 26.7% primarily because of the loss on a discounted sale to a
liquidator of approximately $36,000.
Selling, general and administrative expenses decreased to $1,166,727 for
fiscal 2001 from $1,432,966 for fiscal 2000, a decrease of $266,239 or 18.6%.
The decrease was attributable, in part, to a reduction in employee compensation
expense of $106,402 as a result of the reduction in staff, and decreased
consulting fees of $161,588, as management sought to reduce overall expenses.
During the fourth quarter of fiscal 2001, an inventory adjustment of
$341,630 was charged to operations to reflect the reduction of the inventory
value to net realizable value based on the actual sales prices and volumes
attained in fiscal 2001.
Interest expense increased to $62,817 for fiscal 2001 from $57,816 for
fiscal 2000, an increase of $5,001 or 8.6%. The increase in interest expense is
primarily due to the increase in short-term debt through increased borrowing.
A continuing decline in sales and the negative cash flow generated from the
operations caused management to make a decision to sell or discontinue this
operation with no current intention to operate any further in this segment after
June 1, 2001.
CONSTRUCTION MANAGEMENT SEGMENT
The Construction Management segment provided net sales of $267,559 from its
inception on June 1, 2000 through the fiscal year ended February 28, 2001. The
paving operations provided substantially all of the net sales. One customer
provided 7.8% of revenues in fiscal 2001.
Gross profit was $114,863 in fiscal 2001 providing a gross profit margin of
42.9%
Selling, general and administrative expenses were $168,024 creating a loss
from operations of $53,161. Interest expense was $1,055 creating a net loss for
the segment of $54,216.
NON-RECURRING INCOME
On October 23, 2000, the terms of the original agreement between the
Company and ULLICO were substantially modified to meet the changing needs of the
Company. The holder of the Series B Preferred Stock relinquished all mandatory
conversion rights allowing the Company to reclassify the preferred stock to
equity and recognized a gain on the extinguishment of mandatory redeemable
preferred stock of $1,994,768.
INVENTORY WRITE DOWN
During the fourth quarter of the year ended February 29, 2000, management
determined that, due to the failure of JD American Workwear's marketing programs
to produce a satisfactory level of sales, finished goods 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 also reclassified a portion of inventory to
long-term assets based on estimates about the timing of product sales under the
revised plan. During the fourth quarter of the year ended February 28, 2001,
management reevaluated its estimates of net realizable value of inventory based
on actual sales of product styles and liquidation sale pricing. As a result, an
additional provision for loss on inventory of $341,630 was charged to operations
during the fourth quarter of the year ended February 28, 2001.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended February 28, 2001, operations provided the
Company cash of $236,341. During the year ended February 29, 2000, operations
used cash of $263,693. Accounts receivable increased to $254,499 at February 28,
14
2001 from $48,856 at February 29, 2000, an increase of $205,643, or 420.9%.
Inventory increased to $717,709 at February 28, 2001 from $185,169 at February
29, 2000, an increase of $532,540, or 287.5%. The increase in accounts
receivable and inventory is due to the acquisitions of the subsidiaries.
During fiscal 2001 and 2000, the Company used funds for capital
expenditures of $5,452 and $3,084, respectively.
Cash flows from operations, loans and the sale of equity provided for
working capital needs and principal payments on long-term debt through fiscal
2001. To the extent that the cash flows from operations are insufficient to
finance the Company's anticipated growth, or its other liquidity and capital
requirements during the next twelve months, the Company will seek additional
financing from alternative sources including bank loans or other bank financed
arrangements, other debt financing, the sale of equity securities (including
those issuable pursuant to the exercise of outstanding warrants and options), or
other financing arrangements. However, there can be no assurance that any such
financing will be available and, if available, that it will be available on
terms favorable or acceptable to the Company.
RECENT DEVELOPMENTS
In an attempt to stop the negative cash flow of the JD American Workwear,
Inc. subsidiary, the Executive Committee of the Board of Directors made a
decision to discontinue the operation of this subsidiary on June 1, 2001. The
Company is negotiating funding to sell the subsidiary to its President, David N.
DeBaene.
SEASONALITY
The diversity of operations in the Manufacturing Segment protects it from
seasonal trends except in the sales of agricultural processing where the
majority of the revenue is generated while the processors await the next
harvest.
The Construction Management segment is susceptible to seasonal adversity as
paving and concrete work are not done at temperatures below forty degrees which
restricts work between mid December and early March.
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
the terms of the Purchase Agreement, the Company issued to ULLICO 2,500 shares
of Series B 12% Cumulative Convertible Preferred Stock, $0.001 par value per
share (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 $0.01 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.
On October 23, 2000 the terms of the original agreements were substantially
modified to meet the changing needs of the Company. ULLICO relinquished all
mandatory conversion rights allowing the Company to recognize a gain on
extinguishment of mandatory redeemable preferred stock of $1,994,768. Other
changes in the agreement reduced the dividend from 12% to 6% per annum and
extended the period for the payment in kind option an additional four years.
Cash dividends only will be required on pro rata basis of the Series C Preferred
stock, originally issued in the Patina Corp. acquisition, that may be
outstanding at each dividend date as compared with amount originally issued. The
restrictive covenants requiring preapproval of all acquisitions and equity
financing were removed subject to a limitation that no transactions involving
equity could be issued at less than one dollar per share and the termination of
all anti-dilution provisions.
15
ITEM 7. FINANCIAL STATEMENTS
The response to this item is included as a separate section of this report
commencing on page 32.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 controls, 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 re-audit 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.
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, PROMOTERS, AND CONTROL PERSONS OF
THE REGISTRANT
The following table sets forth information about each person who serves as
an executive officers or directors of the Company:
Name Age Positions with the Company
---- --- --------------------------
Robert E. Maxwell 66 Chairman of the Board and Director
Steven D. Smith 47 President and Director
Frank D. Puissegur 42 Acting Chief Financial Officer and Director
Daniel L. Hefner 51 Executive Vice President, Secretary and Director
Herbert C. Canapary 68 Director
Directors of the Company hold office until the earlier of the next annual
meeting of the stockholders and until their successors have been duly elected
and qualified, or their death, resignation, or removal. Three board members were
elected to two-year terms at the annual stockholders meeting held December 15,
2000. Robert Maxwell is the only board member elected to a two-year term that
remains. The other two seats have reverted to annual positions with the
resignation of the members previously elected. Our officers are elected annually
by the board of directors to hold office until the next annual meeting of our
board and their successors have been duly elected and qualified. There are no
family relationships between any of our officers and directors. Set forth below
is a description of the business experience during the past five years or more
and other biographical information for directors and executive officers
identified above:
16
Mr. Maxwell has been a director and the Chairman of the Board of Directors
of the Company since June 2000. Mr. Maxwell is also the 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. Smith has been President of the Company since December 2000 and became
a director in May 2001. He has held the positions of CEO or COO at Paradigm
Manufacturing / Creative Engineering Concepts from March 1998 through November
30, 2000, COO at Apollo International (OTCBB:AIOD) from February 1996 to March
1998, and COO at Manutek, Inc. from 1978 to 1993. During his professional career
he has been awarded to citations in recognition of business achievements by the
Governor of Indiana, was a finalist for Entrepreneur of the Year (1988).
Mr. Puissegur joined the Company in June 2001. He became a Certified Public
Accountant with his certificate from the State of Florida and the creation of a
sole practitioner office in 1982. The practice grew and has evolved into its
current form as the partnership of Puissegur, Finch, & Slivinski, P.A., a full
service accounting firm. He is a member of the American and Florida Institutes
of Certified Public Accountants and the National and Polk County Estate Planning
Councils. The American Institute of Tax Studies has awarded Mr. Puissegur the
designation of "Certified Tax Professional." He also holds the designation from
the State of Florida as a Certified Family Mediator.
Mr. Hefner has been Executive Vice President, Secretary and Director of the
Company since June 2000. Mr. Hefner currently serves as President of
International Commerce and Finance, Inc. a holding company for manufacturing and
technology companies, and he has held this position since August 1999. 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 turnarounds 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 of the Company 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 18 years, and presently serves as ULLICO's Vice-President of Investments.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth cash and non-cash
compensation awarded, paid or accrued, for the past three fiscal years the
Company's Chief Executive Officers, and all other, if any, whose total annual
compensation exceeded $100,000 for the fiscal year ended February 28, 2001
(collectively, the " Named Executive Officers").
17
SUMMARY COMPENSATION TABLE
Compensation
Awards (1)
Annual ------------
Compensation Securities
Name and Fiscal ----------------- Underlying All Other
Principal Position Year Salary Bonus Options Compensation (3)
------------------ ---- ------ ----- ------- ----------------
David N. DeBaene 2001 $ 87,500 $ 0 125,000 $ 840
Subsidiary President (2) 2000 145,769 0 0 0
1999 125,000 0 0 $5,160
Steven D. Smith, 2001 15,000 3,750 100,000 0
President (2)
----------
(1) The Company does not have a long-term compensation program that includes
long-term incentive payments. However, the Company's 1995 stock option plan
provides participants with performance-based compensation in the form of
incentive stock options. See "Stock Option Plan."
(2) The Company's Board of Directors accepted the resignation of Mr. DeBaene
from his position as President of J.D. American Workwear, Inc., on December
15, 2000 and immediately elected Mr. Smith to serve as President of the
Company.
(3) The Company had a medical insurance plan in fiscal 1999 and reinstated it
in December 2000. Mr. Smith did not qualify for inclusion until after the
fiscal year ended February 28, 2001.
The Company does not have any annuity, retirement, pension, deferred or
incentive compensation plan or arrangement under which any executive officers
are entitled to benefits, nor does the Company have any long-term incentive plan
pursuant to which performance units or other forms 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. All other compensation consisted solely of health care premiums.
EMPLOYMENT AGREEMENTS
On December 1, 2000 the Company entered into an employment agreement with
Steven D. Smith. The contract provides for a five-year term expiring on November
30, 2004, contains a base salary of $60,000, a minimum cash bonus of $15,000 per
year and a 4% annual increase of the base pay. Stock options are granted on the
signing and December 1 of each contract year at the rate of 100,000 common share
equivalents with the exercise price at 110% of the closing price on the date of
the grant. The contract also provides for a $750 per month car allowance and the
payment of all insurance, fuel and maintenance costs and all perquisites related
to health, dental, life or disability as may be offered to the executive
management staff and contains equivalent terms in relation to termination as
described below.
On January 1, 2000, the prior employment agreement with David N. DeBaene
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
18
the contract to be paid upon termination and the repurchase by the company of
all outstanding stock owned by Mr. DeBaene.
This contract was amended at June 1, 2000 reducing the salary to $60,000; a
minimum cash bonus of $15,000 per year and a 4% annual increase of the base pay.
Stock options are granted on the signing and June 1 of each contract year at the
rate of 100,000 common share equivalents. The contract also provides for a $750
per month car allowance and the payment of all insurance, fuel and maintenance
costs and all perquisites related to health, dental, life or disability as may
be offered to the executive management staff. All other provisions of the
previous contract related to capital raises or warrant or exercise revenue were
omitted except for the termination provisions stated above. Mr. DeBaene resigned
from this contract effective May 19, 2001with all amounts currently due accrued
for future payment.
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.
This contract has been amended retroactive to June 1, 2000 reducing the
salary to $60,000, providing a minimum cash bonus of $15,000 per year and a 4%
annual increase of the base pay. Stock options are granted on the signing and
June 1 of each contract year at the rate of 100,000 common share equivalents at
110% of the closing price of the Common Stock on the day of the grant. The
contract also provides for a $750 per month car allowance and the payment of all
insurance, fuel and maintenance costs. The amended contract includes the
termination described above and omits the prior bonus method. Mr. Birmingham
resigned on April 6, 2001 with all amounts accrued currently due and accrued for
future payment. The contract has been terminated.
DIRECTOR COMPENSATION
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.
COMPENSATION COMMITTEE
Robert E. Maxwell, Daniel L. Hefner 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
19
the Company at the Annual Meeting of Stockholders held April 15, 1998. The plan
was further amended at an Annual Shareholders meeting December 15, 2000 at which
time an increase of 1,250,000 shares were ratified. 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).
At February 28, 2001, the Company did not have any long-term incentive
plans nor had it awarded any restricted shares to any Named Executive Officer.
The set forth below contains information with respect to the award of stock
options during the fiscal year ended February 28, 2001 to the Named Executive
Officers covered by the Salary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of % of Total
Securities Options/SAR's
underlying Granted to Exercise
Options/SAR's Employees in or Base
Name Granted (1) Fiscal Year (2) Price ($/Sh) Expiration Date
---- ----------- --------------- ------------ ---------------
David N. DeBaene 100,000 (3) 25.0 $1.30625 May 31, 2005
Steven D. Smith 100,000 (4) 25.0 $0.61875 November 30, 2005
----------
(1) These options were granted to employees under the 1995 JD American
Workwear, Inc. Employee Stock Option Plan. The material terms of all
options granted during the 2001 fiscal year are as follows: (i) all options
are directly related to the employment agreement of the individual grantee,
(ii) all have an exercise price of 110% of the fair market value on the
date of the grant, (iii) all have a ten year term and are fully
exercisable, (iv) no options will be exercisable more than three months
following the termination of employment (except in the case of disability,
in which case such options will be exercisable up to one year thereafter)'
and (v) all options are otherwise subject to the 1995 JD American Workwear,
Inc Employee Stock Option Plan.
(2) During the fiscal year ended February 28, 2001, employees of the Company
were granted and aggregate of 400,000 options under the 1995 JD American
Workwear, Inc. Employee Stock Option Plan.
(3) These options were granted on June 1, 2000.
(4) These options were granted on December 1, 2000.
20
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth, for each Named Executive Officer in the
Summary Compensation Table who holds stock options, the number of shares
acquired pursuant to the exercise of stock options during fiscal 2001, the
number of stock options held on February 28, 2001 and the realizable gain of
stock options that are "in-the-money."
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year End At Fiscal Year End (1)
Acquired on Value ------------------------------------ ------------------------------------
Name Exercised (#) Realized Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
---- ------------- -------- --------------- ----------------- --------------- -----------------
David N. DeBaene 0 $ 0 100,000 0 0 0
Steven D. Smith 0 0 100,000 0 100,000 0
----------
(1) Based upon the closing price of the Common Stock as quoted on the Over The
Counter Bulletin Board on February 28, 2001 of $1.00 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of June 1, 2001, by: (i)
each director and nominee for director of the Company, (ii) each Named Executive
Officer, (iii) all directors and executive officers of the Company as a group,
and (iv) each person known to the Company beneficially owning more than 5% of
the outstanding Common Stock. Except as otherwise indicated, the persons named
in the table have sole voting and investment power with respect to all of the
Common Stock owned by them.
21
Name and Address or Amount and Nature of Percentage
Number in Group Beneficial Ownership (1) of Class (2)
--------------- ------------------------ ------------
Directors and Executive Officers
Robert E. Maxwell 0 **
Steven D. Smith (3) 100,000 (3) **
Frank D. Puissegur 0 **
Herbert Canapary (4) 1,673,950 (4) 11.71%
111 Massachusetts Ave.
Washington, DC
Daniel L. Hefner (5) 8,522,000 (5) 63.76%
1400 Chamber Dr.
Bartow, FL
All Directors and Executive 10,295,950 (7) 71.01%
Officers as a Group (6 persons)
Other Beneficial Holders
David N. DeBaene 1,128,000 (6) 8.42%
46 Old Flat River Road
Coventry, RI
Norman J. Birmingham 1,125,000 (8) 8.39%
5950 Windwood Dr.
Lakeland, FL
ULLICO 1,673,950 (10) 11.71 %
111 Massachusetts Ave
Washington, DC
International Commerce and 7,975,000 (9) 60.12%
Finance, Inc.
Tampa, FL
----------
(**) less than 1%
(1) In accordance with Rule 13d-3 promulgated pursuant to the Securities
Exchange Act of 1934, a person is deemed to be the beneficial owner of a
security for purposes of the rule if he or she has or shares voting power
or dispositive power with respect to such security or has the right to
acquire such ownership within sixty days. As used herein, "voting power" is
the power to vote or to direct the voting of shares, and "dispositive
power" is the power to dispose or direct the disposition of shares,
irrespective of any economic interest therein.
(2) In calculating the percentage ownership for a given individual or group,
the number of shares of Common Stock outstanding includes unissued shares
subject to options, warrants, rights or conversion privileges exercisable
within sixty days held by such individual or group, but are not deemed
outstanding by any other person or group.
(3) Includes 100,000 shares of Common Stock, which may be acquired pursuant to
currently exercisable options.
(4) Includes the following shares of Common Stock beneficially owned by ULLICO,
a company for which Mr. Canapary serves as Vice President of Investments
and by reason of his position shares voting power and may be deemed to be
the beneficial owner of such shares: (a) 1,032,550 shares of Common Stock
that may be acquired pursuant to currently exercisable warrants, and (b)
660,600 shares of Common Stock upon conversion of 3,303 shares of Series B
Preferred Stock.
22
(5) Includes (a) 100,000 shares of Common Stock, which may be acquired pursuant
to currently exercisable options and 147,000 shares of Common stock
issuable upon conversion of 147 shares of Series C Preferred Stock, and (b)
the following shares of Common Stock beneficially owned by International
Commerce and Finance, Inc., a Florida corporation, which is beneficially
owned by Mr. Hefner: (i) 4,008,000 shares of Common Stock, and (ii)
3,967,000 shares of Common Stock issuable upon conversion of 3,967 shares
of Series C Preferred Stock.
(6) Includes (a) 12,500 shares of Common stock owned by Mr. DeBaene's wife, (b)
48,000 shares of Common Stock owned of record by Mr. DeBaene's father, (c)
152,000 shares of Common Stock owned of record by Mr. DeBaene's mother,
104,000 shares of Common Stock would be issued upon the conversion of 104
shares of Series C Preferred Stock, and (d) 125,000 shares of Common Stock
that may be acquired pursuant to currently exercisable options.
(7) Includes (a) 200,000 shares of Common Stock subject to options, (b)
1,032,550 shares of Common Stock subject to warrants, and (c) 788,400
shares of Common Stock issuable upon conversion of the preferred stock,
which may be acquired by directors and officers as a group upon exercise of
the options, warrants and conversion of the Preferred Stock held by them.
(8) Includes (a) 125,000 shares of Common Stock, which may be acquired pursuant
to currently exercisable options, and (b) 489,000 shares of Common Stock
issuable upon conversion of 489 shares of Series C Preferred Stock.
(9) Includes 3,967,000 shares of Common Stock issuable upon of 3,967 shares of
Series C Preferred Stock. This corporation is wholly owned by Mr. Hefner.
(10) Includes 1,032,550 shares of Common Stock, which may be acquired pursuant
to currently exercisable warrants and 660,600 shares of Common Stock
issuable upon conversion of 3,303 shares of Series B Preferred Stock.
The Company has three classes of preferred stock outstanding comprised of
110 shares of Series A Preferred Stock, 3,303 shares of Series B Preferred Stock
and 4,800 shares of Series C Preferred Stock. Each outstanding class of
preferred stock has voting rights and is convertible into Common Stock. Each
share of Series A Preferred Stock converts to 1,289 shares of Common Stock and
votes on an as converted basis. Each share of Series B Preferred Stock is
convertible into 200 shares of Common Stock and votes on an as converted basis.
Each share of Series C preferred Stock converts to 1,000 shares of Common Stock
and has voting rights of 363.52 votes per preferred share.
Gerald Hoak, owner of 20 shares or 18.18% of Series A Preferred Stock, and
Merit Capital Associates, owner of 40 shares or 36.36% of Series A Preferred
Stock are the only owners of more than 5% of the class. All outstanding shares
of Series B Preferred Stock are owned by Union Labor Life Insurance Company, a
Delaware corporation over which Mr. Canapary, a director of the Company, shares
voting power. No director or officer is the beneficial owner of any of the
Series A or Series B Preferred Stock, except as stated above. The Series C
Preferred Stock beneficially owned by directors or executives, and each person
owning more than 5% of the outstanding shares of Series C Preferred Stock are as
follows: (a) 3,967 shares or 82.65% are beneficially owned by International
Commerce and Finance, Inc, a corporation wholly-owned by Mr. Hefner, (b) Mr.
Hefner individually holds 147 shares, or 3.06%, and 489 shares, or 10.19% are
beneficially owned by Norman J. Birmingham.
23
BENEFICIAL VOTING POWER HELD
The following table sets forth the voting power in the Company's equity
securities, as of June 1, 2001, held by: (i) each director of the Company, (ii)
each Named Executive Officer, (iii) all directors and executive officers as a
group, and (iv) each person known by the Company to own more than 5% of any
class of outstanding equity security of the Company. The voting power set forth
in this table is the beneficial voting power held, directly and indirectly, by
such person as of the date indicated assuming no conversion of the preferred
stock (i.e., includes shares that may be acquired within 60 days by reason of
option or warrant exercise but not those that could be obtained upon conversion
of preferred stock).
Percent of Outstanding
Name Voting Power Held(1)
---- --------------------
Directors and Executive Officers
Robert E. Maxwell *
Steven D. Smith *
Herbert Canapary (2)(11) 11.84%
David M. DeBaene (3)(11) 9.61%
Daniel L. Hefner (4)(11)(14) 43.06%
All directors and executive officers
as a group (5 persons) (5) 60.43%
Other Equity Holders
Norman J. Birmingham (6)(11)(14) 6.08%
Gerald Hoak (7)(12) *
International Commerce and Finance (8)(11)(14) 41.08%
Merit Capital Assoc. (9)(12) *
ULLICO (10)(11)(13) 11.84%
----------
* Less than 1%
(1) Based upon 10,718,432 outstanding shares of common stock, 110 outstanding
shares of Series A Preferred Stock, 3,303 outstanding shares of Series B
Preferred Stock, and 4,800 outstanding shares of Series C Preferred Stock.
Each share of Common Stock is entitled to one vote per share. Each
outstanding share of Series A Preferred Stock, B Preferred Stock, and C
Preferred Stock is entitled to 1,289 votes, 200 votes, and 363.52 votes,
respectively. Accordingly, as of June 20, 2001, the Series A Preferred
Stock, Series B Preferred Stock, and Series C Preferred Stock are entitled
to an aggregate of 141,790 votes, 660,600 votes, and 1,744,896 votes
respectively. Voting rights are calculated in the same manner described in
footnote 2 to table above disclosing the Security Ownership of Management
and Certain Beneficial Owners ("Beneficial Ownership Table"). Totals exceed
100% due to such calculations and overlapping beneficial voting rights held
between holders as set forth herein.
(2) Consisting of the following votes beneficially held by ULLICO, a company
for which Mr. Canapary is the Vice President of Investments and shares
voting power: (a) 1,032,550 votes with respect to Common Stock, and (b)
660,600 votes with respect to 3,303 shares of Series B Preferred Stock.
(3) Consisting of (a) 1,100,150 votes with respect to shares of Common Stock
held individually and certain family members referenced in the Beneficial
Ownership Table, (b) 61,798.4 votes with respect to 170 shares of Series C
Preferred Stock held individually and certain family members referenced in
the Beneficial Ownership Table, and (c) 125,000 votes upon exercise of
currently exercisable options to purchase Common Stock.
(4) Consisting of: (a) 100,000 votes upon exercise of currently exercisable
options to purchase Common Stock, 153,000 shares of Common Stock held and
53,437.44 votes with respect to 147 shares of Series C Preferred Stock held
individually, and (b) the following votes held by ICF: (i) 4,008,000 votes
with respect to Common Stock, and (iii) 1,442,083.8 votes with respect to
3,967 shares of Series C Preferred Stock.
24
(5) Consisting of (a) 100,000 votes upon exercise of currently exercisable
options to purchase Common Stock held by Steven D. Smith, and (b) Item 2
above, and (c) Item 3 above, and (d) Item 4 above totaling in aggregate
8,983,619.6 votes.
(6) Consisting of 125,000 votes upon exercise of currently exercisable options
to purchase Common Stock and 177,761.28 votes with respect to 489 shares of
Series C Preferred Stock.
(7) Consisting of 25,780 votes with respect to 20 shares of Series A Preferred
Stock held.
(8) Consists of 4,008,000 votes with respect to Common Stock and 1,442,083.8
votes with respect to 3,967 shares of Series C Preferred Stock.
(9) Consisting of 51,560 votes with respect to 40 shares of Series A Preferred
Stock.
(10) Consisting of 1,032,550 votes upon exercise of currently exercisable
warrants to purchase Common Stock and 660,640 votes with respect to 3,303
Series B Preferred Stock.
(11) Holder in excess of 5% of the outstanding Common Stock, excluding any
conversion of the preferred stock.
(12) Holder in excess of 5% of the outstanding Series A Preferred Stock.
(13) Holder in excess of 5% of the outstanding Series B Preferred Stock.
(14) Holder in excess of 5% of the outstanding Series C Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY LOANS
The Company has from time to time borrowed money from or loaned money to
related parties. At February 28, 2001, 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 28, 2001,
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
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").
25
CONSULTING AGREEMENTS
Prior to the implementation of the Company's current business strategy, the
Company engaged the services of Mission Bay Consulting, Inc., a management
consultant and public relations firm, to provide it with guidance and assist
with respect to investor relations and as a finder of lenders or investors. On
April 2, 1997, the Company entered into a one-year Consulting Agreement with
Mission Bay. In connection with this Consulting Agreement, the Company issued to
Mission Bay an option 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 also agreed to reimburse Mission Bay for expenses
incurred in connection with the Consulting 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 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 related to business expansion opportunities outside of the
scope of the Consulting Agreement. In June 1998, in connection with an
additional extension of the term of the Consulting Agreement and an expansion in
scope of the services to be rendered by 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. A new
agreement with Randolph Beimel, a principal in Mission Bay, was agreed to on
March 3, 2000 that provided a grant of 200,000 additional options pursuant to
which 100,000 were exercisable at $0.10 and 100,000 were exercisable at $0.20.
Unexercised options under the contract expired February 28, 2001. Mr. Beimel
provided services as a finder of short-term loans and continued to assist with
shareholder relations.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
29.
(b) Reports on Form 8-K
None
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN COMMERCE SOLUTIONS, INC.
Date: July 18, 2001 By: /s/ Steven D. Smith
-------------------------------------
Steven D. Smith, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Robert E. Maxwell Chairman of the Board July 18, 2001
--------------------------- and Director
Robert E. Maxwell
/s/ Daniel L. Hefner Executive Vice President, July 18, 2001
--------------------------- Secretary and Director
Daniel L. Hefner
/s/ Herbert C. Canapary Director July 18, 2001
---------------------------
Herbert C. Canapary
/s/ Frank D. Puissegur Acting Chief Financial Officer July 18, 2001
--------------------------- (Principal Financial Officer)
Frank D. Puissegur and Director
/s/ Steven D. Smith President and Director July 18, 2001
--------------------------- (Principal Executive Officer)
Steven D. Smith
27
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
(1) No annual report covering the registrant's last fiscal year has been or
will be sent to security holders of the registrant
(2) The proxy statement and form of proxy delivered to the registrant's
securities holders in connection with the annual meeting of shareholders
was filed with the Commission on December 4, 2000, and is incorporated
herein by reference. No other proxy statements, proxies, or other proxy
soliciting material was sent to the registrant's shareholders during the
past fiscal year.
28
EXHIBIT INDEX
Incorporated Documents SEC Exhibit Reference
---------------------- ---------------------
3.1 Certificate of Incorporation of the As filed with the Registrant's
Registrant, as amended Form SB-2, on October 27, 1995,
File No. 33-98486
3.2 By-Laws of the Registrant, as amended As filed with the Registrant's
Form SB-2 on October 27, 1995, File
No. 33-98486
4.1 Form of Warrant Agreement As filed with the Registrant's
Form SB-2, on October 27, 1995,
File No. 33-98486
4.2 Form of Warrant of the Registrant As filed with the Registrant's Form
issued in the Registrant's January 1995 SB-2 on October 27, 1995, File No.
Private Placement 33-98486
Form of Unit Purchase Option issued to As filed with the Registrant's Form
4.3 Merit Capital Associates, Inc. SB-2 on October 27, 1995, File No.
33-98486
4.4 Form of 11% Convertible Subordinated As filed with the Registrant's Form
Note of the Registrant issued in the SB-2 on October 27, 1995, File No.
Registrant's August, 1995 Private 33-98486
Placement
4.5 Form of Warrant of the Registrant As filed with the Registrant's Form
issued in the Registrant's August, SB-2 on October 27, 1995, File No.
1995 Private Placement 33-98486
4.6 Securities Purchase Agreement dated As filed with the Registrant's Form
April 9, 1998 10KSB on June 13, 1999
4.7 Certificate of Designation of Series B As filed with the Registrant's Form
Preferred Stock. 10 KSB on June 13, 1999
4.8 Stockholders' Agreement dated April 9, As filed with the Registrant's Form
1998. 10 KSB on June 13, 1999
4.9 Registration Rights Agreement dated As filed with the Registrant's Form
April 9, 1998 10 KSB on June 13, 1999
4.10 Warrant Certificate issued to ULLICO As filed with the Registrant's Form
10 KSB on June 13, 1999
4.11 Escrow Agreement As filed with the Registrant's Form
10 KSB on June 13, 1999
EXHIBIT INDEX
Incorporated Documents SEC Exhibit Reference
---------------------- ---------------------
4.12 Certificate of Designations of Series A As filed with the Registrant's
Preferred Stock Form 10-KSB on June 11, 1998
4.13 Certificate of Designation of Series C As filed with the Registrant's Form
Preferred Stock 10-KSB on June 12, 2000
10.1 Lease Agreement for the Registrant's As filed with the Registrant's Form
Coventry, RI facility SB-2 on October 27, 1995, File No.
33-98486
10.2 David N. DeBaene Employment Agreement As filed with the Registrant's Form
SB-2 on October 27, 1995, File No.
33-98486
10.3 Registrant's 1995 Stock Option Plan As filed with the Registrant's Form
SB-2 on October 27, 1995, File No.
33-98486
10.4 Form of Option Agreement under the As filed with the Registrant's Form
Registrant's 1995 Stock Option Plan SB-2 on October 27, 1995, File No.
33-98486
10.5 Employment Agreement with Norman As filed with Registrant's Form
Birmingham 10-KSB on June 12, 2000
10.6 Consulting Agreement with Richard As filed with Registrant's Form
Sullivan 10-KSB on June 12, 2000
10.7 Option to Purchase Businesses between As filed with Registrant's Form
Registrant and International Commerce 10-KSB on June 12, 2000
and Finance
10.8 Stock Purchase Agreement between As filed with Registrant's Form
Registrant and Patina Corporation 10-KSB on June 12, 2000
10.9 Employment Agreement with David DeBaene As filed with Registrant's Form
January 1, 2001 10-KSB on June 12, 2000
16.1 United States Patent #5,038,408 As filed with Registrant's Form
SB-2 on October 27, 1995,
File No. 33-98486
99.1 United States Patent #5,634,215 As filed with Registrant's Form
10-KSB June 11, 1998
99.2 United States Patent #5,634,215 As filed with Registrant's Form
10-KSB June 11, 1998
99.3 United States Patent #6,108,819 As filed with Registrant's Form
Back Brace Pants 10-KSB June 11, 1998
EXHIBIT INDEX
Incorporated Documents SEC Exhibit Reference
---------------------- ---------------------
As Filed Herewith
4.14 Amendment to Series B Preferred
Certificate
4.15 Amendment to the Articles of
Incorporation of JD American Workwear,
Inc. for name change to American
Commerce Solutions, Inc. and the
increase in authorized shares
10.10 Employment Agreement with Steven D.
Smith dated December 2000
10.11 Employment Agreement with Daniel L.
Hefner dated June 2000
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Commerce Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of American
Commerce Solutions, Inc. (a Delaware Corporation) and subsidiaries as of
February 28, 2001 and February 29, 2000, and the related consolidated statements
of operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those statements require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide for a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Commerce
Solutions, Inc. and subsidiaries as of February 28, 2001 and February 29, 2000,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2, the Company's
significant operating losses and negative working capital raise substantial
doubt about its ability to continue as a going concern. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Respectfully submitted,
BELLA, HERMIDA, GILLMAN, HANCOCK & MUELLER
June 29, 2001
Certified Public Accountants
Plant City, Florida
F-2
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, February 29,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 34,885 $ 11,523
Accounts Receivable, net of Allowances
of $46,881 (2001) and $10,000 (2000) 254,499 48,856
Inventories 717,709 185,169
Loans Receivable 235,356 --
Loans Receivable, Employees 12,451 5,020
---------- ----------
Total Current Assets 1,254,900 250,568
Property and Equipment, Net of
Accumulated Depreciation of $438,205
(2001) and $221,153 (2000) 5,586,766 208,289
Intangible Assets, Net 67,324 174,677
Inventory, Long Term -- 740,675
Land Held For Resale 240,000 --
Equipment Held For Resale 476,000 --
---------- ----------
TOTAL ASSETS $7,624,990 $1,374,209
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
F-3
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, February 29,
2001 2000
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current Portion of Notes Payable $ 807,957 $ 380,168
Bank Overdraft 8,649 --
Accounts Payable 624,159 361,381
Accrued Interest on Notes Payable 151,696 65,359
Accrued Expenses 46,988 78,436
Accrued Payroll 465,845 77,212
------------ -----------
Total Current Liabilities 2,105,294 962,556
LONG-TERM LIABILITIES 1,755,949 135,999
------------ -----------
Total Liabilities 3,861,243 1,098,555
------------ -----------
MANDATORY REDEEMABLE PREFERRED STOCK -- 1,906,304
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, Series A, cumulative
and convertible, authorized 1,000,000 shares,
$.001 par value, 110 and 154 shares issued
and outstanding, respectively, liquidation
preference $375,690 (2001) and $478,150 (2000)
Preferred Stock, Series B, cumulative and convertible,
authorized 3,950 shares, $.001 par value, 3,207 and
2,843 shares issued and outstanding, respectively 3
Preferred Stock, Series C, cumulative and convertible,
authorized 20,000 shares $.001 par value, 4,800 shares
issued and outstanding, liquidating preference $5,166,000 5
Common Stock, authorized 30,000,000 and 7,500,000 shares
respectively, $.002 par value, issued and outstanding,
9,617,589 and 2,750,427 shares, respectively 19,235 5,501
Additional Paid-in-Capital 14,011,567 7,116,100
Common Stock Receivables (257,000) (489,248)
Accumulated Deficit (10,010,063) (8,263,003)
------------ -----------
Total Stockholders' Equity (Deficit) 3,763,747 (1,630,650)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIT) $ 7,624,990 $ 1,374,209
============ ===========
F-4
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
------------------------------
February 28, February 29,
2001 2000
----------- -----------
SALES $ 2,108,640 $ 272,065
COST OF GOODS SOLD 1,062,473 199,323
----------- -----------
GROSS PROFIT 1,046,167 72,742
Selling, General and Administrative Expenses 2,263,777 1,432,966
----------- -----------
LOSS FROM OPERATIONS (1,217,610) (1,360,224)
OTHER (INCOME)EXPENSES:
Provision for loss on inventory 341,630 531,438
Loss on disposal of assets 3,400
Interest income (446) (717)
Interest expense 184,866 57,816
----------- -----------
NET LOSS (1,747,060) (1,948,761)
----------- -----------
Accretion of Discount and Dividends on
Mandatory Redeemable Preferred Stock 209,333 519,168
Gain on Extinguishment of Mandatory
Redeemable Preferred Stock (1,994,768)
----------- -----------
NET PROFIT(LOSS) TO COMMON SHAREHOLDERS $ 38,375 $(2,467,929)
=========== ===========
NET PROFIT (LOSS) PER COMMON SHARE $ 0.01 $ (1.00)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,249,215 2,466,263
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-5
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
Common Stock Preferred Stock Additional
$.002 Par $.001 Par Paid-in Stock Accumulated
Shares Amount Shares Amount Capital Receivable Deficit Total
------ ------ ------ ------ ------- ---------- ------- -----
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 (145) -- (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)
Preferred Shares issued for
Acquisition -- -- 9,800 10 4,446,159 -- -- 4,446,169
Common Shares issued for
Services 347,500 695 -- -- 42,305 -- -- 43,000
Common shares issued for
Debt Repayment 10,000 20 -- -- 4,980 -- -- 5,000
Common Shares Surrendered in
Cancellation of Stock
Receivable (130,000) (260) -- -- (146,640) 146,900 -- --
Exercise of Stock Options
and Warrants 199,350 399 -- -- 231,354 (7,870) -- 223,883
Preferred stock
conversion 5,081,562 10,163 (5,044) (5) (10,158) -- -- --
Common shares issued for
payables 908,750 1,817 -- -- 179,932 7,870 -- 189,619
Common shares issued for
acquisition 200,000 400 -- -- 237,600 -- -- 238,000
Stock receivable paid in
Services -- -- -- -- -- 192,348 -- 192,348
Extinguishment of Series B
Mandatory Redeemable Stock -- -- 3,207 3 1,994,768 -- -- 1,994,771
Stock receivable paid in cash -- -- -- -- -- 20,000 -- 20,000
Common shares issued for
receivables 250,000 500 -- -- 124,500 (127,000) -- (2,000)
Accretion of discount and
dividends on mandatory
redeemable preferred stock -- -- -- -- (209,333) -- -- (209,333)
Net loss -- -- -- -- -- -- (1,747,060) (1,747,060)
---------- -------- ------ ---- ------------ --------- ------------ -----------
Balance, February 28, 2001 9,617,589 $ 19,235 8,117 $ 8 $ 14,011,567 $(257,000) $(10,010,063) $ 3,763,747
========== ======== ====== ==== ============ ========= ============ ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-6
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
-----------------------------
February 28, February 29,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,747,060) $(1,948,761)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 308,565 95,428
Provision for Doubtful Accounts 36,881
Provision for Losses on Inventory 341,630 531,438
Stock Issued for Services 465,101 358,207
Loss on Disposal of Assets 3,400
Changes in Operating Assets and Liabilities
Net of Effects of Acquisitions:
Accounts Receivable 90,925 445,017
Inventories 173,782 (20,070)
Prepaid Expenses and Other Assets 7,930
Accounts Payable and Accrued Liabilities 519,468 267,118
Equipment Held for Resale 35,000
Bank Overdraft 8,649
----------- -----------
Net Cash Provided by (Used in) Operating Activities 236,341 (263,693)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Loans Receivable (250,636) --
Payments on Loans Receivable 9,649 --
Increase in Shareholder Loans 19,846 --
Payments Made on Shareholder Loans (800) --
Cash Acquired in Acquisition Transaction 2,465 --
Capital Expenditures (5,452) (3,084)
----------- -----------
Net Cash Used in Investing Activities (224,928) (3,084)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank Overdraft Assumed in Acquisition (42,875) --
Exercise of Stock Options -- 85,500
Proceeds from Short-Term Debt 78,300 132,792
Proceeds from Long-Term Debt 19,955 --
Principal Payments on Long-Term Debt (41,355) (114,464)
Principal Payments on Short-Term Debt (22,076) --
Proceeds Received on Common Stock
Receivable 20,000 --
----------- -----------
Net Cash Provided by Financing Activities 11,949 103,828
----------- -----------
NET INCREASE (DECREASE) IN CASH 23,362 (162,949)
CASH, BEGINNING OF YEAR 11,523 174,472
------- ---------
CASH, END OF YEAR $34,885 $ 11,523
======= =========
F-7
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Year Ended
----------------------------
February 28, February 29,
2001 2000
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Year for Interest $ 92,913 $ 18,161
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Securities Issued for Debt Repayment $ 5,000 $ 14,592
========== ========
Securities Issued for Payables $ 181,749 $ --
========== ========
Securities Surrendered $ 146,900 $ --
========== ========
Securities Issued for Receivables $ 125,000 $336,450
========== ========
Conversion of Preferred Stock $ 5 $ --
========== ========
Securities Issued for Acquisition $ 238,000 $ --
========== ========
In connection with the acquisition of all
of the outstanding common stock of Rhode
Island Truck and Equipment Corp. for
$238,000 in common stock, the Company
acquired assets with a fair value of
$324,155 and assumed liabilities of $103,613
Preferred Stock Issued for Acquisition $4,446,159 $ --
========== ========
In connection with the acquisition of all of
the common stock of International Machine
and Welding, Inc. for $4,446,159 in preferred
stock, the Company acquired assets with a
fair value of $6,752,883 and assumed
liabilities of $2,306,724
Accretion of Dividends and Discount on
Mandatory Redeemable Preferred Stock $ 209,333 $ --
========== ========
Gain on Extinguishment of Mandatory
Redeemable Preferred Stock $1,994,768 $ --
========== ========
The accompanying notes are an integral part of
these consolidated financial statements
F-8
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY
The Company, a Delaware Corporation, was founded in 1991 and formerly
manufactured patented industrial and commercial safety clothing under the name
of JD American Workwear, Inc. During the fiscal year ended February 28, 2001,
the Company completed the acquisition of two subsidiaries and changed its name
to American Commerce Solutions, Inc. The operations of JD American Workwear,
Inc. were reincorporated as a subsidiary and American Commerce Solutions, Inc.
became the parent corporation to the three operating subsidiaries.
International Machine and Welding, Inc., located in Bartow, Florida, provides
machining, heavy equipment repair and parts sales. Rhode Island Truck and
Equipment d/b/a International Paving, located in Coventry, Rhode Island,
provides paving and concrete services. JD American Workwear, also located in
Coventry, Rhode Island, sells the industrial and commercial safety clothing that
it formerly manufactured. The Company is discontinuing JD American Workwear's
operations and is attempting to liquidate its inventory or to sell the
operations back to its founder.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the activity of
American Commerce Solutions, Inc. and its wholly owned subsidiaries. All
intercompany transactions and accounts have been eliminated.
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.
F-9
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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, repairs or parts are shipped or delivered to
the customer. 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.
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.
F-10
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At February 28, 2001 and February 29, 2000, 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.
RECLASSIFICATION
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the impairment of long-lived assets and for long-lived assets to
be disposed of," long-lived assets, including goodwill and patents, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
NOTE 2: GOING CONCERN
The Company has incurred substantial operating losses since inception. The
Company recorded losses from operations of $ 1,217,610 and $1,360,224 for the
years ended February 28, 2001 and February 29, 2000, respectively. Current
liabilities exceed current assets by $ 850,394 and $711,988 at February 28, 2001
and February 29, 2000. Additionally, the Company has been unable to meet
obligations to its creditors as they have become due. The ability of the Company
to continue as a going concern is dependent upon its ability to reverse negative
operating trends, raise additional capital and obtain debt financing.
F-11
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29,
NOTE 2: GOING CONCERN (CONTINUED)
Management has revised its business strategy to include expansion into other
lines of business through acquisition of other companies in exchange for the
Company's stock. During the current fiscal year, the Company acquired two
subsidiaries (See Note 3). Management is currently negotiating new debt
financing, the proceeds from which would be used to settle outstanding debts at
more favorable terms, to finance operations and to complete additional business
acquisitions.
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. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset or the amounts and classification of liabilities that might be
necessary if the Company is unable to continue as a going concern.
NOTE 3: ACQUISITIONS
On June 1, 2000, the Company completed the purchase of International Machine and
Welding, Inc. by acquiring all of the outstanding capital stock of its holding
company Patina Corporation for a total purchase price of $4,446,159. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, International Machine and Welding, Inc.'s results of operations
have been included in the consolidated financial statements since the date of
acquisition. The acquisition was funded by the issuance of 9,800 shares of
Series C preferred stock. The Company may also issue up to 1,500 additional
shares of Series C preferred stock based on the profits of the acquired business
through February 28, 2002.
The following table presents the allocation of the acquisition cost to the
assets acquired and liabilities assumed:
Cash and Cash Equivalents $ 2,465
Accounts Receivable 324,394
Inventories 279,027
Property, Plant and Equipment 5,395,997
Other Noncurrent Assets 751,000
-----------
Total Assets $ 6,752,883
Accounts Payable (323,682)
Other Current Liabilities (40,784)
Long-Term Liabilities (1,942,258)
-----------
Total Liabilities (2,306,724)
-----------
Total Acquisition Cost $ 4,446,159
===========
F-12
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 3: ACQUISITIONS (CONTINUED)
On June 1, 2000, the Company also completed the purchase of Rhode Island Truck
and Equipment, Inc. also doing business as International Paving, Inc. by
acquiring all of the outstanding capital stock of Rhode Island Truck and
Equipment, Inc. for a total purchase price of $238,000. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
acquired company's results of operations have been included in the consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the estimated fair value of assets acquired of $17,458 has been
recorded as goodwill and is being amortized using the straight line method over
40 years. The acquisition was funded by the issuance of 200,000 shares of common
stock.
The following table presents the allocation of the acquisition cost to the
assets acquired and liabilities assumed:
Accounts receivable $ 10,855
Inventories 28,250
Goodwill 17,458
Property, plant and equipment 285,050
---------
Total Assets 341,613
---------
Accounts Payable (40,657)
Other Current Liabilities (62,956)
---------
Total Liabilities (103,613)
---------
Total Acquisition Cost $ 238,000
=========
The following (unaudited) pro forma consolidated results of operations have been
prepared as if the acquisitions had occurred at March 1, 1999:
February 28, 2001 February 29, 2000
----------------- -----------------
Revenues $2,172,812 $ 448,003
Loss from continuing operations 1,209,912 1,303,852
Net Income (Loss) 46,385 (1,893,636)
Net Income (Loss) per common
share - basic 0.01 (0.77)
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated as of that time, nor is it
intended to be a projection of future results. The pro forma information
includes the results of operations of Rhode Island Truck and Equipment, Inc.
from March 1, 1999. Patina Corporation and International Machine and Welding,
Inc. had no operations prior to the date of acquisition.
F-13
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 4: INVENTORIES
Inventories consist of the following:
2001 2000
-------- --------
Raw Materials $ -- $ 32,859
Work-in-process 12,217 --
Finished Goods, Current Portion 428,031 152,310
Finished Goods, Long Term -- 740,675
Supplies 277,461 --
-------- --------
Total Inventories $717,709 $925,844
======== ========
During the fourth quarter of the year ended February 29, 2000, management
determined that, due to the failure of the JD American Workwear's marketing
programs to produce a satisfactory level of sales, finished goods 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 also reclassified a portion of inventory to
long-term assets based on estimates about the timing of product sales under the
revised plan. During the fourth quarter of the year ended February 28, 2001,
management reevaluated its estimates of the net realizable value of inventory
based on actual sales of product styles and liquidation sale pricing. As a
result, an additional provision for loss on inventory of $341,630 was charged to
operations during the fourth quarter of the year ended February 28, 2001.
NOTE 5: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment, at cost, consist of the following:
2001 2000
---------- --------
Land and Building $3,183,763 $225,957
Furniture and Fixtures 25,182 25,182
Machinery and Equipment 2,341,433 89,587
Office Equipment 39,454 23,996
Trucks and Autos 425,826 64,720
Small Tools 9,313 --
---------- --------
Total 6,024,971 429,442
Less: Accumulated Depreciation 438,205 221,153
---------- --------
Net Property and Equipment $5,586,766 $208,289
========== ========
F-14
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 5: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (CONTINUED)
Depreciation expense for the years ended February 28, 2001 and February 29, 2000
was $304,619 and $64,117, respectively.
Intangible assets, at cost, consist of the following:
2001 2000
-------- --------
Patents $ 70,970 $ 70,970
Goodwill 17,458 --
Offering Costs -- 356,005
-------- --------
Total 88,428 426,975
Less: Accumulated Amortization 21,104 252,298
-------- --------
Net Intangible Assets $ 67,324 $174,677
======== ========
Amortization expense for the years ended February 28, 2001 and February 29, 2000
was $3,619 and $31,311, respectively.
NOTE 6: NOTES PAYABLE AND LONG-TERM DEBT
The Company's notes payable and long-term debt consist of the following:
2001 2000
-------- --------
10.5% note payable, secured by a mortgage
on the Rhode Island property, payable
in monthly installments of $2,687,
principal and interest, through December
2001, in default, entire amount due $106,323 $112,218
10% note payable to stockholders and
parents of a majority stockholder,
payable in monthly installments of
$5,494, principal and interest,
maturing September, 2002 161,959 142,004
10% note due to an investor, due on
December 31, 1997, collateralized
by a mortgage on real estate owned
by a majority stockholder 40,000 40,000
F-15
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 6: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
2001 2000
-------- --------
Loans from stockholders, no written terms,
interest imputed at 0% to 7% annually 172,037 116,701
Various loans from individuals, no
written terms, interest imputed at 0% to
7% annually 24,724 21,500
Capitalized lease on equipment, monthly
payments of $292, principal and
interest, in default, entire balance due 8,641 8,744
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 with
these notes, the Company issued warrants to
purchase 112,500 shares of the Company's
common stock at a price of $2.00 per share
The warrants expired on September 30, 2000
These notes, including accrued interest, are
convertible at the option of the holder, into
common stock at $3.85 per share 75,000 75,000
15% convertible note payable to investor,
matured June 1, 2000. The note is
convertible at $0.70 per share. In
conjunction with this note, the Company
issued 3,500 warrants for purchase of
common stock at $2.00 per share. The
warrants expire March 1, 2002 7,000
15% convertible note payable to investor,
matured August 10, 2000. The note is
convertible at $0.70 per share. In
conjunction with this note, the Company
issued 3,500 warrants for purchase of
common stock at $2.00 per share. The
warrants expire May 10, 2002 7,000
Note payable to investor, matured
September 7, 2000. Interest payable
in 2,000 shares of stock until the
maturity date and at 20% thereafter 4,000
F-16
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 6: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
2001 2000
-------- --------
7% note payable to accounting firm,
maturing June 1, 2001 30,000
10% note payable, pursuant to a Chapter 11
reorganization plan attached to the assets
purchased belonging to International Machine
and Welding, Inc., secured by a mortgage on
Florida property, monthly payments of $10,252,
principal and interest, maturing May 22, 2005 1,163,906
Note payable, pursuant to a Chapter 11
reorganization plan, secured by a mortgage on
Florida property, no interest, monthly payments
of $2,034, maturing January 22, 2010 219,629
9% loan payable to Internal Revenue Service, pursuant
to a Chapter 11 Reorganization plan, monthly
payments of $25, principal and interest, maturing
May 24, 2005 1,352
Loan payable to Internal Revenue Service, pursuant
to a Chapter 11 reorganization plan, no interest,
monthly payments of $10, maturing May 24, 2005 448
9% loan payable to Internal Revenue Service
pursuant to a Chapter 11 reorganization
plan, secured by tax lien, monthly payments
of $7,661, principal and interest, maturing
May 24, 2006 416,043
9% loan payable to Florida Department of Revenue,
pursuant to a Chapter 11 reorganization plan,
monthly payments totaling $173, principal and
interest, maturing May 24, 2005 8,328
Loan payable to Florida Department of Revenue,
pursuant to a Chapter 11 reorganization plan, no
interest, monthly payments of $36, principal and
interest, maturing May 24, 2004 1,706
F-17
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 6: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
2001 2000
-------- --------
9% loan payable to Polk County, pursuant
to a Chapter 11 reorganization plan, secured
by tax lien, monthly payments of $1,455,
principal and interest, maturing January
24, 2006 76,967
9% loan payable, pursuant to a Chapter 11
reorganization plan, monthly payments of $262,
principal and interest, maturing May 24, 2005 12,620
Various loans payable, pursuant to a Chapter 11
reorganization plan, no interest, monthly
payments totaling $411, maturing May 24, 2004 15,690
1% note payable, secured by a motor vehicle,
monthly payments of $449, principal and
interest, maturing December 27, 2001 4,670
12% note payable, secured by a motor vehicle,
monthly payments of $903, principal and interest,
maturing September 10, 2001 5,863
---------- --------
Total 2,563,906 516,167
Less, Current Portion 807,957 380,168
---------- --------
NET LONG-TERM DEBT $1,755,949 $135,999
========== ========
The aggregate principal maturing in subsequent years are:
Year Ending February 28, Amount
------------------------ ------
2002 $ 119,151
2003 127,708
2004 133,762
2005 1,257,163
Subsequent 118,165
-----------
$ 1,755,949
===========
F-18
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 7: COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has employment agreements with four key employees. The terms of
which expire at various times for each in fiscal year 2004. Such agreements,
which have been revised from time to time, provide for minimum salary levels,
adjusted annually for cost of living increases, normal employment benefits, auto
allowances, stock options, as well as bonuses, which may contain minimum and
incentive components. The annual commitment for future salaries at February 28,
2001, including minimum bonuses, is approximately $300,000.
CASH IN BANK
The Company maintains bank accounts, which at times contain balances, which
exceed the amounts insured by the FDIC.
NOTE 8: EXTINGUISHMENT OF 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,
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 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 year ended February 28, 2001, the Company was able to negotiate a
troubled debt restructure agreement with the Series B investor. The investor
agreed to waive its rights to the mandatory redemption required under the
original stock purchase agreement, in exchange for an equity only interest. As a
result, the Company has recognized a gain on the extinguishment of mandatory
redeemable preferred stock in the amount of $1,994,768.
F-19
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 8: EXTINGUISHMENT OF MANDATORY REDEEMABLE PREFERRED STOCK (CONTINUED)
Under the terms of the amended agreement, the annual dividend rate was reduced
from 12% to 6%, effective June 1, 2000. Dividends may be paid in stock through
May 31, 2004 at a conversion rate of $1.00 per share, except that cash dividends
must be paid in lieu of stock as required by provisions related to the Series C
Preferred stock outstanding. Under these provisions, the entire 6% dividend must
be paid in cash in the event more than 50% of the original amount issued is
outstanding at the dividend date. If less than 50% is outstanding, the cash
dividend required is determined on a pro rata basis.
The Series B Preferred Stock has rights 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 $146,074 and $341,160 at
February 28, 2001 and February 29, 2000, respectively. Dividends paid in
additional shares and warrants were $364,000 for the year ended February 28,
2001 and $150,000 for the year ended February 29, 2000. A total of 1,032,500
warrants to purchase common stock, including dividends warrants, were held by
the Series B stockholder at February 28, 2001. These warrants have expiration
dates ten years from the dates of issue, ranging from April, 2008 to June, 2010.
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.
F-20
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 9: CAPITALIZATION
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 28, 2001, preferred dividends in arrears amounted to approximately
$100,690 or $915 per share.
SERIES C 6% CONVERTIBLE PREFERRED STOCK
The Company issued 9800 shares of Series C 6% Convertible Preferred Stock for
the acquisition of Patina, Corporation. Dividends are payable at 6% annually and
may be paid in Common shares at the option of the Company. Holders of Series C
Preferred Stock vote on an as converted basis at a ratio of 36.8% with the
common stockholders on all matters brought to a shareholder vote. As of February
28, 2001 dividends in arrears on the Series C shares amounted to $366,000.
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, 2001. The Company also has a
stock receivable on a placement of $105,000 and $2,000 due on the exercise of
stock options.
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.
F-21
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 9: CAPITALIZATION (CONTINUED)
COMMON STOCK OPTIONS (CONTINUED)
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, 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
Granted 200,000 .15
Exercised (189,350) .19
Expired (80,650) 3.28
--------
Options Outstanding, February 28, 2001 62,500 $1.57
========
At February 28, 2001, 62,500 options, with a weighted-average contractual life
of 3.8 years, were outstanding at exercise prices ranging from $1.50 to $1.59.
All outstanding options were fully vested and exercisable.
During the years ended February 28, 2001 and February 29, 2000, the Company
granted 200,000 (2001) and 76,000 (2002) stock options to consultants with a
fair value of $193,883 and $165,160, respectively. 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 28, 2001 and February 29, 2000:
F-22
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 9: CAPITALIZATION (CONTINUED)
COMMON STOCK OPTIONS (CONTINUED)
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 2001
whose exercise price:
is Below Market Price 200,000 $ .15 $1.17
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 $0 and $24,000 for the years ended
February 28, 2001 and February 29, 2000, respectively. The pro forma disclosures
required under FAS 123 are as follows:
2001 2000
-------- -------------
Gain (Loss) Attributable to
Common Stockholders:
As Reported $ 38,375 $ (2,467,929)
Pro forma $ 38,375 $ (2,491,929)
Loss per Common Share:
As Reported $ 0.01 $ (1.00)
Pro forma $ 0.01 $ (1.01)
F-23
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 9: CAPITALIZATION (CONTINUED)
COMMON STOCK OPTIONS (CONTINUED)
The following assumptions were used to estimate the fair value of stock options
using the Black-Scholes method:
2001 2000
---- ----
Dividend Yield 0% 0%
Expected Volatility 230% 105%
Average Expected Option Life 1 Year 2 Years
Risk-Free Interest Rate 6.50% 6.54%
WARRANTS
During the year ended February 28, 2001, the Company issued 10,500 in connection
with short term loans. The Company also 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, 2001, warrants to
purchase 392,816 shares of common stocks at a weighted-average exercise price of
$2.21 were outstanding and exercisable. The weighted average remaining
contractual life of these warrants is 1.7 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 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 28, 2001 and February 29, 2000. The Company has recorded a 100%
valuation allowance against net deferred tax assets due to uncertainty of their
ultimate realization.
2001 2000
---------- ----------
Deferred Tax Assets Resulting
from Net Operating Losses $1,376,168 $1,114,118
Less, Valuation Allowance 1,376,168 1,114,118
---------- ----------
Net Deferred Tax Assets $ 0 $ 0
========== ==========
F-24
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 10: INCOME TAXES (CONTINUED)
The Internal Revenue Code contains provisions, which may limit the net operating
loss carry-forward available for use in any given year if significant changes in
ownership interest of the Company occur.
The loss carry-forwards 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
2016 1,747,000
-----------
$ 9,174,455
===========
NOTE 11: ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS
During the fourth quarter of the year ended February 28, 2001, the Company
determined that a write down of inventory to net realizable value of $341,630
was required as discussed in Note 4. The effect of the year-end adjustment was
to increase net loss for the fourth quarter by $341,630, or $.08 per common
share.
NOTE 12: SUBSEQUENT EVENTS
In March 2001, the property at 46 Old Flat River Rd. Coventry, RI was sold to a
relative of the president of JD American Workwear for $165,000. JD American
Workwear, Inc. is leasing the property for $1,670 per month. The lease expires
on March 31, 2004.
As of June 1, 2001, the Company has discontinued the operations of JD American
Workwear, Inc. The Company is negotiating a sale of the operations to its
founder.
F-25
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 13: SEGMENT REPORTING
The Company's reportable business segments correspond with the Company's three
subsidiaries which offer distinctive products and services that are marketed
through different channels. They are managed separately because of their unique
geographical locations and operations.
The Company has three reportable segments, as named by management:
Manufacturing, Construction Management and Product Marketing. The Manufacturing
segment provides specialized machining services to the heavy equipment industry.
The Construction Management segment provides commercial and residential concrete
and paving services. The Product Marketing segment sells the industrial and
commercial safety clothing that it formerly manufactured.
The Company's accounting policies for segments are the same as those described
in the summary of significant accounting policies. Management evaluates segment
performance based on segment profit and loss before income taxes and
nonrecurring gains and losses.
A summary of the Company's segmented information for the year ended February 28,
2001 is as follows:
Segments
--------------------------------------------------------------
Construction Product Consolidated
Manufacturing Management Marketing Totals
------------- ---------- --------- ------
Net Sales to
Unaffiliated Customers $ 1,653,399 $ 267,559 $ 187,682 $ 2,108,640
Interest Expense 120,994 1,055 62,817 184,866
Depreciation and
Amortization 254,130 29,584 20,905 304,619
Segment Profit (Loss) (21,496) (53,161) (533,734) (608,391)
Segment Assets 6,599,988 277,698 747,304 7,624,990
Expenditures for Assets 5,452 5,452
F-26
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
NOTE 13: SEGMENT REPORTING (CONTINUED)
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
Information for the Company's reportable segments relates to the enterprise's
consolidated totals as follows:
REVENUES
Total Revenues for Reportable Segments $ 2,108,640
-----------
Total Consolidated Revenues $ 2,108,640
===========
PROFIT OR LOSS
Total Profit (Loss) for Reportable Segments $ (608,391)
Other Income (Expense) (529,450)
Accretion of Discount and Dividends on
Mandatory Redeemable Preferred Stock (209,333)
Gain on Extinguishment of Mandatory
Redeemable Preferred Stock 1,994,768
General Corporate Expenses (609,219)
-----------
Total Consolidated Profit (Loss) $ 38,375
===========
ASSETS
Total Assets for Reportable Segments $ 7,624,990
-----------
Total Consolidated Assets $ 7,624,990
===========
MAJOR CUSTOMERS
For the year ended February 28, 2001, no customer exceeded 10% of revenue
overall although one customer, a liquidator, accounted for 30.14% of the revenue
in the Product Marketing segment. In the year ended February 29, 2000, two
customers each representing more than 10% of gross sales accounted for $87,359,
or 32%, of the segments sales. These customers were a retailer with sales of
$38,172, or 14%, and a uniform company with sales of $49,187, or 18%.
F-27