<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB A-1
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Quarter Ended December 31, 1996 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 Number 0-22432
DIPLOMAT CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3727399)
- -------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Kay Fries Drive, Stony Point, New York 10980
- ----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914 786-5552
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.0001 per value and Common Stock Purchase Warrants
----------------------------------------------------------------
(Title of Class)
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
--- ---
<PAGE>
DIPLOMAT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheet - December 31, 1996 3
Consolidated Statements of Operations - For the three months ended
December 31, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows - For the three months ended
December 31, 1996 and December 31, 1995 5
Notes to Financial Statements 6-8
Item 2 - Managements' Discussion and Analysis of Financial
Conditions and Results of Operations 9-13
PART II - OTHER INFORMATION
Item 3 - Default Upon Senior Securities 14
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURE 14
</TABLE>
2
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
DECEMBER 31,1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $52,431
Accounts receivable, trade,net 1,612,060
Inventories 4,013,838
Prepaid expenses 866,132
Other current assets 246,215
-------
TOTAL CURRENT ASSETS 6,790,676
PROPERTY AND EQUIPMENT
less accumulated depreciation 2,164,857
GOODWILL 3,580,444
OTHER ASSETS 746,418
-------
$13,282,395
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $4,301,682
Loans payable-bank 2,101,901
Accrued expenses 1,593,508
Current maturities of long term debt 709,940
Subordinated term notes 1,500,000
---------
TOTAL CURRENT LIABILITIES 10,207,031
LONG TERM DEBT,less current maturities 1,032,357
STOCKHOLDERS' EQUITY:
Preferred stock 4,100,000
Common stock 535
Paid-in capital 6,321,364
Accumulated deficit (8,378,892)
-----------
TOTAL SHAREHOLDERS' EQUITY 2,043,007
$13,282,395
See notes to financial statements.
3
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
Dec 31, Dec 31,
1996 1995
---- ----
NET SALES $7,047,522 $1,353,896
COST OF SALES 3,206,950 1,244,755
--------- ---------
GROSS PROFIT 3,840,572 109,141
OPERATING EXPENSES:
Selling expenses 1,092,037 488,381
General and administrative expenses 1,769,572 547,884
Warehouse and distribution expenses 137,852 179,126
------- -------
TOTAL OPERATING EXPENSES 2,999,461 1,215,391
--------- ---------
OPERATING INCOME (LOSS) 841,111 (1,106,250)
OTHER INCOME 1,910 3,955
INTEREST EXPENSE (149,757) (124,061)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 693,264 (1,226,356)
INCOME TAXES (BENEFIT) 171,863 (47,000)
-------- --------
NET INCOME (LOSS) $521,401 ($1,179,356)
NET INCOME (LOSS) PER SHARE $0.10 ($0.30)
NUMBER OF SHARES USED IN
COMPUTATION 5,256,025 3,985,755
See notes to financial statements.
4
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31, December 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) $521,400 ($1,179,356)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 76,515 20,239
Issuance of common shares 245,000 628,000
-------- -------
842,915 (531,117)
CHANGES IN ASSETS AND LIABILITIES
(Increase) in accounts receivable 51,451 440,950
(Increase) decrease in inventories (266,098) (78,720)
(Increase)decrease in prepaid expenses 140,846 (7,120)
(Increase)decrease in other current assets 486,763 (33,476)
(Increase)decrease in other assets (96,758) (223,035)
Increase(decrease) in accounts payable (602,037) 222,398
Increase(decrease) in accrued expenses (475,615) 80,937
--------- ------
81,467 (129,183)
------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment,net (19,024) 0
-------- -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 0 250,000
Repayments of loans payable (10,519) (49,638)
Revolving credit agreement (68,751) 10,497
-------- ------
(79,270) 210,859
-------- -------
NET INCREASE(DECREASE) IN CASH (16,827) 81,676
CASH AND CASH EQUIVALENTS-beginning of period 69,258 49,695
------- ------
CASH AND CASH EQUIVALENTS-end of period $52,431 $131,371
</TABLE>
See notes to financial statements.
5
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES
A. The financial statements include the accounts of the Company and its
wholly-owned subsidiary. All significant intercompany balances and transactions
have been eliminated.
B. Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
C. Property and equipment are stated at cost. Depreciation is provided
using primarily the straight-line method and accelerated methods (for machinery
and equipment) over the expected useful lives of the assets, which range from
31.5 years for the building and real property, to between five and 10 years for
machinery, furniture and equipment.
D. The Company follows SFAS 109 for income taxes.
E. For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
G. In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 121. "Accounting
For the Impairment of Long Lived Assets and For Long Lived Assets to be Disposed
Of" SFAS No. 121 requires the Company to review long-lived assets and certain
identifiable assets and any goodwill related to those assets for impairment
whenever circumstances and situations change such that there is an indication
that the carrying amounts may not be recoverable. The adoption of SFAS No. 121
did not result in any material adjustments in the financial statements for the
period ended December 31, 1996.
H. Effective December 30, 1995, the Company adopted SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments", which requires
disclosure of fair value information about financial instruments whether or not
recognized in the balance sheet. The carrying amounts reported in the balance
sheet for cash, trade receivables, accounts payable and accrued expenses
approximate fair value based on the short term maturity of these instruments.
6
<PAGE>
I. The Company accounts for stock transactions in accordance with APB
No. 25 "Accounting for Stock to Employees". In accordance with SFAS No. 123,
"Accounting for Stock based Compensation", the Company has adopted the pro-forma
disclosure requirements contained therein.
J. Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period
during which the benefits are expected. Advertising costs, principally the
amortization of such prepaid catalog costs.
2. ACQUISITION OF BIOBOTTOMS, INC. AND RELATED FINANCING
A. Acquisition of Biobottoms, Inc. On February 9, 1996, the Company
completed the acquisition of Biobottoms, Inc. ("Biobottoms"), a California-based
mail-order catalog company, specializing in apparel and accessories for newborn
through preteen children, pursuant to an Agreement and Plan of Merger made as of
December 22, 1995 by and among Diplomat Corporation, Diplomat Acquisition
Corporation, a wholly-owned subsidiary of the Company, organized under the laws
of the State of Delaware ("DAC"), Biobottoms and Joan Cooper and Anita
Dimondstein, individuals and principal stockholders of Biobottoms (the "Merger
Agreement"). Biobottoms has become a wholly-owned subsidiary of the Company and
will continue its principal place of business in Petaluma, California.
The Company paid $2,500,000 for Biobottoms, $1,000,000 in cash
and $1,500,000 in the form of two promissory notes to Biobottoms' shareholders,
each in the amount of $750,000 ("Acquisition Notes"). The notes bear interest at
1% over the prime rate as defined in the agreements. One such note is due six
months from the acquisition date and the second note is due in two equal
installments of $375,000, nine months and eighteen months after the date of
acquisition, respectively. Additionally, the Company incurred costs related to
the acquisition in the amount of approximately $720,000. Of this amount,
$600,000 represents the estimated fair value of 100,000 shares of the Company's
convertible Series A Preferred Stock issued to a significant stockholder (who is
also a member of the Board of Directors), as a fee for his assistance in
consummating the acquisition. The Series A Preferred shares are convertible to
1,000,000 common shares of the Company. The Series A Preferred Stock is not
entitled to any specific dividends or liquidation rights.
The acquisition of Biobottoms has been accounted for as a
purchase and accordingly its results of operations are included with the
Company's beginning February 9, 1996.
7
<PAGE>
The following unaudited pro-forma summary combines the
consolidated results of operations of the Company and Biobottoms as if the
acquisition had occurred at the beginning of 1995, after giving effect to
certain adjustments, including amortization of goodwill, increased interest
expense on the acquisition debt, and the adjustments required as a result of
changes to certain employment agreements as a direct result of the acquisition.
Year Ended
December 30, 1995
---------
(unaudited)
Net Sales $ 27,137,857
Net Loss (1,719,030)
Net Loss Per Common Share (0.38)
The pro-forma results do not necessarily represent results
which would have occurred if the acquisition had taken place on the basis
assumed above, nor are they indicative of the results of future combined
operations.
B. Financing: Simultaneously with the closing of the Biobottoms
acquisition, the Company and Biobottoms entered into a loan and subordinated
security agreement with a director and principal stockholder of the Company and
an affiliate of such individual pursuant to which the Company borrowed from
such director and principal stockholder and affiliate $2,353,100 and $450,000.,
respectively. The loan from the director and principal stockholder was utilized
to fund the acquisition of Biobottoms in part. The loan from the affiliate has
been utilized for working capital purposes. Subject to an intercreditor
agreement between the Company's asset based lender and other lenders, the
$450,000 loan is payable in full on May 4, 1996. If the repayment is not made
on such date, the Company will be required to pay a default fee of $50,000.
In connection with such aforementioned loan by a director and
principal stockholder of the Company in the amount of $2,353,100, the Company
issued 100,000 shares of its Series A Preferred Stock, which are convertible
into 100,000 shares of common stock at the option of the director and principal
stockholder. The holder of such shares of preferred stock will have the right,
subject to subordination and intercreditor agreement by and among Congress
Financial Corporation and others, during any period during which there shall be
an Event of Default under such loans, as such term is defined therein, to
designate a majority of the members of the Board of Directors of the Company.
Such right of designation will continue during the duration of any such Event
of Default. The Company has agreed at its sole cost and expense to include the
common shares issuable upon conversion of the shares in any registration
statement filed with the Securities and Exchange Commission by the Company
within six months of the date hereof.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31,
1995
NET SALES
Consolidated net sales for the Three Month Period ended December 31,
1996 ("1996 Period") increased approximately $5,694,000 or 42% from the Three
Month Period ended December 31, 1995 ("1995 Period"), primarily as a result of
the Biobottoms sales of $5,658,000 in the 1996 period. Biobottoms was acquired
February 9, 1996. The sales of Diplomat for the 1996 period were $1,389,000 as
compared to $1,354,000 for the 1995 period and the sales of Biobottoms were
$5,658,000 in the 1996 period as compared to $4,502,000 in 1995.
Consolidated cost of sales were 46% of net sales in 1996 and 92% in
1995. The increase in cost of sales of $1,962,000 in 1996 included $2,392,000
from Biobottoms. Cost of sales of Diplomat for the 1996 period were $815,000 as
compared to $1,245,000 in 1995. The reduction of 35% was a result of the
restructuring of the Company during the 1996 period. Cost of sales of
Biobottoms increased 11% even though sales increased 26% from 1995 to 1996.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses increased approximately
$1,784,000 or 15% from 1995 to 1996, primarily as a result of $2,455,000 of
Biobottoms operating expenses in 1996. Operating expenses of Diplomat for the
1996 were $508,000 as compared to $1,215,000 in 1995. The reduction of 58%
resulted from decreased expenses from restructuring, in addition to elimination
of licensing fees and lower professional and consulting fees in 1996. Operating
expenses of Biobottoms remained constant from 1995 to 1996. Consolidated
operating expenses were 43% of net sales in 1996 and 89% in 1995.
Interest expense increased from $124,000 in 1995 to $150,000 in 1996
because of the borrowing of Biobottoms.
The net income for the 1996 period was $521,000 as compared to a net
loss of $1,179,000 for 1995.
9
<PAGE>
The following summary combines the consolidated results of operations
of the Company and Biobottoms as if the acquisition had occurred at the
beginning of fiscal 1995, after giving effect to the amortization of goodwill
and increased interest expense on the acquisition debt.
<TABLE>
<CAPTION>
Three Months Pro-Forma
Ended Three Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Net Sales $7,047,522 $5,856,155
Cost of Goods Sold 3,206,950 3,401,128
---------- -----------
Gross Profit 3,840,572 2,455,027
Selling, General & Administrative Expenses 2,997,551 3,761,004
---------- -----------
Operating Income (Loss) 843,021 (1,306,967)
Interest Expense 149,757 276,207
----------- ------------
Income (Loss) Before Income Taxes 693,264 (1,583,174)
Income Taxes (Benefit) 171,863 (136,602)
-------- -------------
Net Income (Loss) 521,401 (1,446,572)
</TABLE>
Liquidity and Capital Resources
The Company completed an initial public offering on November 13, 1993
and received net proceeds of approximately $4,454,000. Proceeds of the offering
were used for purchases of inventory, marketing and promotion, product
development, reduction of accounts payable and repayment of loans from a
principal stockholder and executive officer. The Company has relied upon the
proceeds of its initial public offering, borrowings from an institutional
lender, a principal stockholder and director of the Company, and proceeds from
the exercise of warrants in 1995 in order to fund its operation.
The Company's principal working capital credit facility is provided by
Congress Financial Corporation.
In April 1994, the Company entered into an agreement with Congress
providing the Company with a maximum $3 million secured line of credit to be
used for loans and trade letters of credit. The loans are secured by
substantially all of the Company's personal property, including with
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) percent above the prime rate announced by Core States Bank.
The credit agreement contains restrictions relating to the payment of dividends
and the maintenance of certain levels or working capital which may not be less
than $4,500,000, excluding the Congress loan and stockholders equity of not
less than $3,500,000. The Company is currently not in compliance with all
financial covenants, pertaining to working capital and net worth. The Company
is currently negotiating a waiver of non-compliance and modification of
covenants.
Under the terms of the credit agreement, the Company could borrow up
to 85% of the amount of eligible accounts receivable (as defined in the
agreement), not to exceed the maximum credit. In February 1995 the Agreement
was amended to adjust the formula used to determine the amount available for
revolving loans by including therein an amount based upon eligible inventory
not to exceed $750,000.
10
<PAGE>
In connection with that amendment, Robert Rubin, a director and principal
stockholder of the Company, furnished the lender with a personal limited
guarantee up to a maximum liability of $375,000, pertaining to loans made based
upon eligible inventory. In connection with the initial Congress transaction,
the Company borrowed from Robert Rubin $590,000 on a secured term loan basis,
subordinated to Congress Financial, in order to repay in full its then existing
outstanding principal indebtedness to Citibank, N.A. Such Citibank facility in
the initial principal amount of $650,000, was established in June, 1993,
secured by certain assets of the Company and a shareholder guaranty from Mr.
Rubin. The loan from Mr. Rubin was repayable with interest at the prime rate
plus 1 1/2%, with required principal payment amortization identical to the
terms applicable to the Citibank loan terms.
Accordingly, the Company made principal payments of $120,000 in 1994,
$120,000 in 1995, $175,000 in 1996 and will be required to make payments of
$174,800 in 1997. The balance of the debt was converted into Preferred Stock in
September, 1996.
In connection with the Biobottoms acquisition, the Company incurred
debt of $4,303,100 consisting of Deferred Payment Notes, payable to the former
Biobottoms stockholders, Mr. Rubin and American United Global. The American
United Global loan was paid in May, 1996. The final Deferred Payment Note of
$375,000 is due August 9, 1997 together with interest. The August and November
Notes, totalling $1,125,000 have not been paid. On December 9, 1996, the holders
of the notes gave notice of default in accordance with the acquisition
agreement. Under this agreement, the holders of the notes must wait 270 days
after fiving notice before taking any further action in the collection of these
notes.
Effective September 30, 1996, Mr. Rubin, a director and principal
stockholder of the Company, agreed to convert an aggregate of $2,900,000 in
outstanding debt into an aggregate of 290,000 Shares of Series B Preferred
Stock.
The Company issued Mr. Rubin an aggregate of 550,000 shares of Common
Stock in consideration of Mr. Rubin's waiver of certain compensation owed to him
and for restructuring certain debt owed to him, waiving certain defaults and
making additional loans to the Company in the aggregate amount of $600,000. This
debt ws converted into Series C Preferred Stock in September, 1996.
The promissory notes made in connection with the merger are referred to
hereinafter as the Deferred Payment Notes.
In connection with the Closing, Biobottoms established an inventory
based credit facility with Congress Financial Corporation, the Company's
principal lender, secured by a first priority security interest in substantially
all of the assets of Biobottoms and a guaranty of such obligations by the
Company (the "Biobottoms/Congress Loan Facility"). The maximum credit available
under the facility is $2 million and on the date of Closing, $848,531 was
available and borrowed.
The Biobottoms/Congress Loan Facility is guaranteed by the Company and
a default thereunder constitutes a default under the Company's Loan and Security
Agreement with Congress. The interest rate charged on the loan is the prime rate
as announced by Core States Bank, N.A. (the "Prime Rate") plus 2%.
11
<PAGE>
Simultaneously with the Closing, the Company and Biobottoms also entered into
a loan and subordinated security agreement with Robert M. Rubin (a director and
principal stockholder of the Company) and American United Global, Inc.
("American United" a corporation of which Mr. Rubin is an officer, director and
principal stockholder) pursuant to which the Company borrowed from Mr. Rubin
(the "Rubin Loan") and the Company borrowed from American United (the "American
United Loan") (collectively the Rubin/American United Loans") $2,353,100 and
$450,000 respectively. The amounts represented by the Rubin Loan were converted
into Series B Preferred Stock in September, 1996.
The American United loan to the Company provided for additional working
capital. Repayment of these loans were secured by a first priority security
interest in the capital stock of Biobottoms owned by the Company and Biobottoms,
other than real estate, Biobottoms guaranteed the indebtedness of the Company to
American United and Biobottoms guaranteed the indebtedness of the Company to Mr.
Rubin. The interest on these loans is payable monthly at the Prime Rate plus 2%,
the same rate charged by Congress Financial Corporation, subject to the
Intercreditor Agreement (defined below).
The Deferred Payment notes and the Rubin/American United loans are
subject to an Intercreditor Agreement with Congress Financial Corporation (the
"Intercreditor Agreement") which has the effect of restricting or limiting
enforcement remedies under the promissory notes evidencing the Deferred Payment
and the Rubin/American United Loans prior to repayment of the senior debt
payable to Congress Financial Corporation and restricting the repayment of
principal payable thereon based upon certain minimum excess loan availability
requirements.
The Intercreditor Agreement also provides that irrespective of the
relative priority status between the holders of the Deferred Payment obligations
and the Rubin/American United loans, repayment of the Deferred Payment is
permitted to be paid provided that there has been no default of senior debt
payable by the Company or Biobottoms to Congress, minimum excess availability
requirements under the Company's loan facility with Congress are satisfied and
such payments are made with proceeds from a subsequent sale of its capital
stock. Subject to the Intercreditor Agreement, the Deferred Payment and the
Rubin/American United loans will be payable from the proceeds from any sale of
capital stock by the Company in the proportions of 40% on account of the
Deferred Payment and 60% on account of the Rubin/American United Loans, except
that before any such distributions are made, the Company will be required to
reduce the outstanding principal amount of the Deferred Payment by $150,000.
It was the Company's intention to provide for the repayment of the
Deferred Payment and the Rubin Loan with proceeds of a subsequent financing
consisting of equity, debt or a combination of both. The Company does not
presently have any commitment for any such financing. After April 4, 1996,
principal payments on the American United Loan may be made with funds available
to Diplomat under its credit facility with Congress.
Prior to March 1, 1998, no principal amount of the Rubin Loan may be
repaid, except from proceeds from the sale of capital stock by the Company,
subject in all respect to the Intercreditor Agreement.
Commencing March 1, 1998 and subject to the provisions of the Intercreditor
Agreement, including without limitation the requirement that the Company have
certain minimum levels of excess loan availability at the time of the making of
any such principal payment, the Rubin Loan is subject to principal payments
monthly of the amount equal to 25% of the Company's net profit for the second
preceding month, plus depreciation and amortization expenses for said month,
with the unpaid principal amount of the Rubin Loan and unpaid interest accrued
thereon payable in full on February 9, 1999.
12
<PAGE>
In connection with the Biobottoms Congress Loan Facility, Mr. Rubin
also issued to Congress his written commitment to provide additional term loans
to the Company, not to exceed in the aggregate the principal amount of
$300,000, such loans to be made solely at the discretion of Congress. Proceeds
from any such loans may only be used by the Company to provide working capital
for Biobottoms.
Proceeds from the Congress loan and the Rubin/American United Loans
were used on February 9, 1996 or remained otherwise available as follows:
Payment at Closing of Biobottoms'
Institutional Secured Lender $1,448,025
Cash portion of Biobottoms Purchase
Price 1,000,000
Loan Costs and Legal Fees 96,690
Available Working Capital 1,103,816
At the time that the Biobottoms acquisition was completed, additional
equity financing was contemplated to fund the scheduled payments of the
acquisition debt and working capital requirements for the Diplomat and
Biobottoms businesses. Such financing was not secured within the time
constraints contemplated by the management of the Company. As a result, the
acquisition debt was not paid when due. In addition, the Company is
experiencing severe working capital shortages and requires additional capital
resources to fund its existing operations. Under Diplomat's and Biobottoms'
lending facilities with Congress Financial, the Company has borrowed the
maximum amounts available as of the date hereof and there is no unused loan
availability. The Company is pursuing a number of financing alternatives,
although there can be no assurance that such efforts will result in necessary
financing or that the terms of such financing will be on terms favorable to
existing stockholders. The failure to secure additional working capital and
funds to pay the Biobottoms acquisition debt will materially adversely affect
the business and financial condition of the Company. Insufficient working
capital may require the Company to reduce operations significantly.
In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C and Class D
Warrants, each exercisable for 500,000 shares of common stock, at $1.37, $2.50
and $3.00 per share, respectively.
All of the Class B Warrants were exercised during 1995 providing the
Company with net proceeds of $628, 000. The Class D Warrants expired in July,
1996.
In August 1996, the Company, in connection with a Non-Qualified Stock
Option Plan, issued 500,000 options which were exercised at a price of $.95 per
share.
There can be no assurance that the Company will operate profitably in
the future or that cash from operations will become the principal source of
funds for operations.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, the Company was not in compliance with its credit
agreement with Congress Financial Corporation ("Congress"). Under the agreement,
the Company must maintain $4,500,000 in working capital (excluding the Congress
loan and certain subordinated debt), and stockholder's equity of $3,500,000. At
December 31, the balance due to Congress was approximately $2,101,900. As of the
date of this filing the Company is still not in compliance, however it is
negotiating with Congress for a waiver of non-compliance, and modification of
covenants of the credit agreement.
In August and November the Company failed to pay Deferred Payment
Notes, totalling $1,125,000 which it owed in connection with the acquisition of
Biobottoms, Inc. ("Biobottoms"). On December 9, 1996, the holders of the notes
gave notice of default in accordance with the acquisition agreement. Under this
agreement, the holders of the notes must wait 270 days after giving notice
before taking further action in the collection of these notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIPLOMAT CORPORATION
February 20, 1997 By: /s/ Jonathan Rosenberg
----------------------------------
Jonathan Rosenberg
Chief Executive Officer
February 20, 1997 By: /s/ Irwin Oringer
----------------------------------
Irwin Oringer
Principal Accounting Officer and
Controller
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 52,431
<SECURITIES> 0
<RECEIVABLES> 1,612,060
<ALLOWANCES> 0
<INVENTORY> 4,013,838
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0
4,100,000
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</TABLE>
