<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1997
Registration Statement No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DIPLOMAT CORPORATION
(Name of small business issuer as specified in its charter)
Delaware
(State of Incorporation)
13-3727399
(IRS Employer I.D. No.)
5137
(Primary Standard Industrial
Classification Code No.)
25 Kay Fries Drive
Stony Point, New York 10980
(914) 786-5552
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Jonathan Rosenberg, President
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
(914) 786-5552
(Name, address and telephone number of agent for service)
---------------
Copies to:
Jay M. Kaplowitz, Esq.
GERSTEN SAVAGE KAPLOWITZ
& FREDERICKS, LLP
101 East 52nd Street
New York, New York 10022
(212) 752-9700
Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Proposed
Class of Maximum Proposed Maximum
Securities Being Amount Being Offering Price Aggregate Amount of
Registered Registered Per Security(1) Offering Price Registration Fee
- ---------------- ------------ --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Common Stock(2) 1,250,000 $3.825 $4,781,250 $1,448.86
Total Registration Fee $1,448.86
</TABLE>
- ----------
(1) Pursuant to Rule 457, estimated solely for the purpose of calculating
the registration fee.
(2) To be offered and sold by selling stockholders; registration fee based
on the average of the bid and ask price for the common stock of the
registrant on November 10, 1997 pursuant to 457(c).
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
(ii)
<PAGE>
SUBJECT TO COMPLETION
DATED NOVEMBER 17, 1997
PROSPECTUS
1,250,000 Shares of Common Stock
DIPLOMAT CORPORATION
This Prospectus relates to 1,250,000 shares of common stock of Diplomat
Corporation, par value $.0001 per share (the "Common Stock"), which are being
offered for sale by certain selling securityholders (the "Selling
Securityholders"). See "SELLING SECURITYHOLDERS" and "CERTAIN TRANSACTIONS."
The Company will not receive any of the proceeds from the sales of the
Common Stock by the Selling Securityholders. The Common Stock may be offered
from time to time by the Selling Securityholders through ordinary brokerage
transactions in the over-the-counter market, in negotiated transactions or
otherwise, at market prices prevailing at the time of sale or at negotiated
prices.
The Selling Securityholders each may be deemed to be "an underwriter,"
as defined in the Securities Act of 1933 (the "Securities Act"). If any
broker-dealers are used by the Selling Securityholders, any commissions paid to
broker-dealers and, if broker-dealers purchase any shares of Common stock as
principals, any profits received by such broker-dealers on the resales of the
shares of Common Stock may be deemed to be underwriting discounts or commissions
under the Securities Act. In addition, any profits realized by the Selling
Securityholders may be deemed to be underwriting commissions.
All costs, expenses and fees in connection with the registration of
the securities offered by the Selling Securityholders will be borne by the
Company. All brokerage commissions, if any, attributable to the sale of the
securities offered by the Selling Securityholders will be borne by the Selling
Securityholders. See "SELLING SECURITYHOLDERS."
The Company's Common Stock is traded on the over-the-counter market on
the National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ"). On November 10, 1997, the closing bid and asked quotations for the
Common Stock as reported by NASDAQ were $3.8125 and $3.96875, respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO
LOSE THEIR ENTIRE INVESTMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE>
Prospectus Summary
The following summary is qualified in its entirety by, and must be read
in conjunction with, the more detailed information and the consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. References in this Prospectus to the "Company" refers to the
Diplomat Corporation and its wholly-owned subsidiary Biobottoms, Inc., a
California corporation, unless otherwise indicated. References to Diplomat refer
to the Company's operations less Biobottoms, Inc.
The Company
On February 9, 1996, Diplomat acquired Biobottoms, a California
corporation, located in Petaluma, California. As a result of the acquisition,
Biobottoms is a wholly-owned subsidiary of the Company. Management of the
Company believes that this business combination will strengthen the Company's
existing business by joining the manufacturing strength and expertise of
Diplomat with the retailing expertise of Biobottoms. In October 1997, Diplomat
acquired out of bankruptcy all of the assets of Jean Grayson's Brownstone
Studios, Inc. ("Brownstone"). As a result of this acquisition, the scope of the
Company's business has expanded into the mature women's apparel and accessories
markets.
The Company designs, develops, markets and distributes infantwear and
care products, nursery accessories and products for infant and toddler comfort
and care. The Company also sells apparel and accessories to the mature women's
market since its acquisition of the assets of Brownstone via catalogs. Through
its wholly-owned subsidiary, Biobottoms, Inc. ("Biobottoms"), the Company also
sells apparel and accessories for newborns through preteens via direct mail
catalog. The Company sells primarily cloth diapers, diaper covers,furniture
covers, layette, infant and child travel products, such as infant car seat
covers, and other accessories marketed principally under the trademarks Ecology
Kids, Fresh Air Wear and Biobottoms, and mature women's apparel and accessories
under the Brownstone trademark. These products are marketed in the United States
and internationally. While international sales of Diplomat's products have not
been material, its products are sold in several Pacific Rim countries (Japan,
Singapore, Taiwan and Malaysia). Biobottoms' products are also sold domestically
and internationally. Biobottoms distributes a catalogue in Japan and has a 1-800
number which is answered in Japanese at its offices in Petaluma, California.
Sales in Japan have accounted for 20% of Biobottoms' sales since its acquisition
by the Company.
The primary customers of Diplomat are major mass merchandisers,
including Toys R Us, Inc. ("Toys R Us") and Wal-Mart Stores, Inc. ("Wal-Mart").
Toy R Us and Wal-Mart represented a total of approximately 58%, 51% and 36% of
the Diplomat division's total revenues during the fiscal years ended December
31, 1995 and September 30, 1996, and the period ended June 30, 1997,
respectively. Diplomat's products are presently carried by Wal-Mart, Toys R Us,
Target Stores and Baby Super Stores, all nationally known merchants. Diplomat's
products are also sold to drug store chains, catalogue showrooms, mail order
catalogues and food and drug store chains including Publix, Wynn Dixie and
Walgreens.
(2)
<PAGE>
In November 1996, Diplomat Corporation's Board of Directors approved a
plan to restructure Diplomat's Stony Point, New York operations by eliminating
several of its unprofitable retail lines and down sizing its distribution
facility. The Company intends to focus its Stony Point facility on its
traditional core business under its Ecology Kids brand, which has historically
generated the largest portion of Diplomat's revenues.
The Company is currently negotiating an acquisition agreement pursuant
to which it intends to acquire Lew Magram, Ltd., a woman's fashion catalog
retailer. Although the terms have not been finalized, it is currently
contemplated that the acquisition will be for shares of the Company's
convertible preferred stock. There can be no assurance that this acquisition
will be consummated on terms favorable to the Company, if at all.
Diplomat Corporation was incorporated in Delaware on June 23, 1993, as
a wholly--owned subsidiary of Diplomat Juvenile Corporation, a corporation
formed on April 6, 1982 under the laws of the State of New York. Diplomat
Juvenile Corporation was merged into the Company on September 2, 1993. Its
executive, warehouse, distribution and production facilities are located at 25
Kay Fries Drive, Stony Point, New York 10980. Its telephone number is (914)
786-5552.
INITIAL PUBLIC OFFERING
In November 1993, the Company completed its initial public offering of
575,000 Units at a sales price of $10.00 per unit, each Unit consisting of three
shares of common stock and one common stock purchase warrant (the "Class A
Warrant"), entitling the holder to purchase one share of common stock for $3.50
during the five year period expiring November 4, 1998. Purchasers of Units
acquired in the offering were also entitled to receive without additional
payment one Loyalty Unit for every ten Units continuously held until six months
from the date of the offering, and another Loyalty Unit for every ten Units
continuously held for an additional six months thereafter. The Company issued,
from August 1994 to March 1995, an aggregate of 6,175 Loyalty Units, identical
to the Units sold in the initial public offering, each consisting of three
shares of Common Stock and one common stock purchase warrant. Net proceeds to
the Company, after deduction of underwriting commissions and expenses, were
$4,454,000. Proceeds were used for inventory purchases, advertising and
promotion of new products being developed under the Lamaze name, repayment of
loans from principal shareholders and working capital.
(3)
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered............... 1,250,000 shares of Common Stock, which are
being offered for sale by the Selling Stockholders.
See "MANAGEMENT - "DESCRIPTION OF CAPITAL STOCK" and
"SELLING SECURITY HOLDERS."
The Company will not receive any proceeds from
the sale of the Common Stock by the Selling
Selling Security Holders.
Common Stock Outstanding(1)... 8,019,433
Common Stock Symbols......... NASDAQ: DIPL
Use of Proceeds..................... The Company will not receive any proceeds from
the sale of the Common Stock by the Selling
Security Holders.
Risk Factors...................... An investment in the Company's Common Stock
involves a high degree of risk and should be made
only after a careful consideration of the significant
risk factors that may affect the Company. Such
risks include special risks concerning the Company
and its business, including among other risks,
Operating Losses to Date, Possible Need for
Additional Financing and Dilution. See "RISK
FACTORS."
</TABLE>
- ----------
(4)
<PAGE>
(1) Does not include (i) 2,010,000 shares issuable upon exercise of
options under the Company's stock option plans, (ii) 52,217
shares of common stock approved for issuance but not yet
issued, (iii) 2,508,750 to be issued in connection with the Company's
October 1997 private placement, and (iv) 2,204,400 shares issuable
upon conversion of the outstanding preferred stock (representing
1,000,000 shares underlying the Series A Preferred Stock, and, based
on the closing bid price of the common stock on November 10, 1997, an
aggregate of 1,204,400 shares underlying the Series B and C Preferred
Stock). See " Management - Stock Option Plans" and "Description of
Securities."
(5)
<PAGE>
Summary Financial Data
(In thousands, except per share data)
The summary financial information set forth below is qualified by and
should be read in conjunction with the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus. The financial data for the
nine month period ended June 30, 1997 is derived from the Company's interim
financial statements, which are unaudited, but in the opinion of management
include all adjustments, consisting of only normal recurring adjustments,
necessary for fair presentation of the interim period. The results of operations
for the interim period are not necessarily indicative of the results to be
expected for the full fiscal year.
<TABLE>
<CAPTION>
Year ended
--------------------------------
Nine Month Period
December 31, September 30, ended June 30, 1997
1995 1996 (Unaudited)
---- ---- ------------------
<S> <C> <C> <C>
Statement of Operations Data:
Net Sales.......................... $11,301,314 $19,222,801 $19,866,711
Gross profit....................... 4,388,303 5,888,213 10,687,845
Restructuring Expenses............. - 1,738,975 -
Income (loss) from operations...... (241,389) (6,440,323) 1,871,856
Net income (loss).................. (720,878) (7,224,900) 1,059,279
Earnings (loss) per share.......... $ (.16) $ (1.59) $ .16
Weighted average number
of shares outstanding.............. 4,493,525 4,549,525 5,458,525
At June 30, 1997
(Unaudited)
--------------------
Balance Sheet Data:
Working capital (deficiency).............................................. $ (2,458,494)
Total assets.............................................................. 14,910,486
Long-term debt............................................................ 1,013,265
Total liabilities......................................................... 12,046,891
Stockholders' equity...................................................... 2,863,595
</TABLE>
(6)
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors,
in addition to the other information contained in this Prospectus, in connection
with investments in the shares of Common Stock offered hereby. This Prospectus
contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus. An investment
in the securities offered hereby involves a high degree of risk.
1. Recent Losses. During the fiscal years ended September
30, 1996 and December 31, 1995, the Company reported net losses of
approximately $7,225,000 (including non-recurring costs of approximately
$1,739,000 related to the restructuring of the Company's business) and
approximately $721,000, respectively. In November 1996, the Company changed its
fiscal year end to September 30. There can be no assurance that the Company will
operate profitably in the future. As of June 30, 1997, the Company had an
accumulated deficit of approximately $8,027,000.
2. Possible Need For Additional Financing. Diplomat's
principal secured commercial credit facility and that of Biobottoms, together
with funds from operations, do not provide the Company with sufficient capital
resources to fund adequately its working capital obligations. As of September
30, 1997, the aggregate borrowings by Diplomat and Biobottoms from its
institutional lender was $2,042,981. As of the date hereof, Diplomat and
Biobottoms have borrowed the maximum amounts available under the terms of the
credit facilities. As such, the Company may be required to seek financing or
curtail its business operations. There can be no assurance that such financing
will be available or that it will be available on terms acceptable to the
Company.
3. Litigation. The Company has three pending claims
against it which represent potential liability, based on damages alleged and
sought by the plaintiffs, in the aggregate amount of approximately $11,420,000.
The Company disputes each of the three claims and intends to defend them
vigorously. A negative ruling in any or all of these may have a material
adverse effect on the operations of the Company. See "The Company - Legal
Proceeding."
(7)
<PAGE>
4. New and Planned Products. The Company's success
depends, in part, upon the development of strong brand identification for its
current and proposed products. The primary direction of the Company's marketing
plan is to promote certain of its existing products and develop new products
marketed under its trademarks. Achieving and maintaining market acceptance for
its products will require significant efforts and expenditures. There can be no
assurance that the Company will be successful in effecting this plan.
5. Trademarks, Patents and Proprietary Technology.
Although Diplomat has trademark protection for the name Ecology Kids, it has
historically relied heavily on its rights to utilize the Lamaze name pursuant
to a distribution agreement with AMI. The agreement expired in July 1996 and
has not been extended. There can be no assurance that the inability to use the
Lamaze name will not have an adverse effect on the Company. In addition, the
Company currently has trademark protection to utilize the name "Fresh Air Wear"
in connection with the sale of Biobottoms' products and may apply for other
trademarks as it deems appropriate. There can be no assurance that any future
trademark registrations will be issued to the Company, that others will not
infringe upon the Company's trademarks, or that the Company can successfully
challenge any infringement. In the event that it becomes necessary to establish
recognition of alternative trademarks, the cost of such development could be
substantial, and as a result, have a material adverse effect on the Company's
business and prospects.
6. Possible Adverse Effects of Security Interests in the
Company's Assets. All of the Company's assets (with the exception of its real
estate which is also subject to mortgages), are pledged as collateral to secure
(i) the Company's term loan indebtedness, (ii) obligations to a principal
stockholder, and (iii) indebtedness incurred in connection with the acquisition
of Biobottoms. Unless these security interests are released, such assets will
not be available to secure future indebtedness, and as such may adversely
affect the Company's ability to borrow money in the future. Moreover, in the
event of a default by the Company on any of its obligations (which default is
not waived), including with respect to the financial covenants contained in the
credit agreement between the Company and Congress Financial (as such term is
hereinafter defined), such lender could foreclose on the Company's assets. In
addition, the Company's real estate is subject to two mortgage liens; default
by the Company of either mortgage lien could result in the loss of the
Company's real estate and its principal place of business.
7. Possible Conflicts of Interest. As of October 27, 1997,
Mr. Robert M. Rubin, a director and principal shareholder of the Company,
beneficially owns approximately 50% of the voting power of the Company's
voting stock. See "Principal Stockholders" and "Description of Securities." Mr.
Rubin has also provided (i) Congress Financial with a limited guaranty related
to the Company's indebtedness to Congress Financial, and (ii) a $200,000 loan
to the Company to help fund inventory. In addition, the Company has reached an
agreement in principle to acquire Lew Magram, Ltd., a woman's fashion catalogue
retailer. Mr. Rubin is a principal stockholder of Lew Magram, Ltd. There can
be no assurance that Mr. Rubin's relationships with the Company, as a creditor,
principal stockholder and a director, or Mr. Rubin's relationship as a principal
stockholder of Lew Magram, will not give rise to conflicts with respect to
future transactions by the Company. If such conflicts arise, there can be no
assurance that they will be resolved in favor of the Company.
8. Dependence Upon Primary Customers. For the fiscal year
ended December 31, 1995 and nine months ended September 30, 1996, two of
Diplomat's customers, Toys R Us and Wal-Mart, accounted for 23% and 36% and 11%
and 40%, respectively, of the Diplomat division's net sales. The Company has no
written contracts with either Toys R Us or Wal-Mart and there can be no
(8)
<PAGE>
assurance that such customers will continue to purchase products from Diplomat.
The loss of either of these customers could have a materially adverse effect on
the Company's business.
9. Substantial Competition. The infant and toddler
products and children's apparel industry segments in which the Company competes
are extremely competitive. The Company faces substantial competition in each of
its product categories. Diplomat competes in a variety of segments within these
categories, including disposable diapers, cloth diapers, infant's and juvenile
furnishings, infantwear and accessories. Diplomat's primary competition in the
cloth diaper market is Gerber Products Company ("Gerber") and Dundee Mills
("Dundee"). Diplomat faces additional competition from foreign manufacturers
with respect to cloth diapers. The United States infant disposable diaper
market is led by nationally recognized branded product leaders Proctor & Gamble
and Kimberly-Clark. In addition, Gerber produces layette and infantwear
products competitive with Diplomat's layette and infantwear products and
produces a diaper cover product which also competes generally with the diaper
covers sold by Diplomat.
The mature women's apparel and accessories markets are
extremely competitive. Diplomat competes in three size categories, petite, missy
and large sizes. Diplomat competes with several catalogs serving these markets
including Talbott's, Nicole Somers, Damon's & Draper's Papillon, as well as, to
various degrees, specialty store catalogs such as Nordstrom's, Sak's and Nieman
Marcus.
There are numerous infant and children's apparel catalogs
in competition with Biobottoms, ranging from general catalog merchandisers,
such as J.C. Penney, to smaller specialty children's apparel catalogs.
Biobottoms believes that it competes primarily with the smaller specialty
catalogs, including Hanna Anderson, Playclothes, Children's Wear Digest,
Storybook Heirlooms, Wooden Soldier, and Land's End Kids. Biobottoms also
competes with non-mail order children's clothing retailers, including specialty
stores, department stores, major chains and discount retailers. Gap Kids,
Gymboree and other national retailers are also competitors outside the direct
mail industry.
Many of the Company's competitors have substantially
greater financial, distribution, marketing and other resources and have
achieved significant name recognition and goodwill for their brand names. There
can he no assurance that either Diplomat or Biobottoms will be able to compete
successfully with its competitors.
10. Product Liability. The Company currently has an
aggregate of $2,000,000 of product liability insurance for its current products
with an umbrella policy up to an aggregate of $3,000,000. There can be no
assurance that the Company's existing coverage will be sufficient to cover any
liability resulting from any product liability claims or that the Company would
have funds available to pay any claims over the limit of its insurance. Either
an under insured or an uninsured claim could have a material adverse effect on
the Company.
11. State and Federal Regulation. As a seller of infant
and juvenile products, the Company is subject to laws and regulations
administered by various states and the Federal Trade Commission ("FTC"). As a
seller of bedding products, Diplomat is also required to maintain licenses in
the various states where it conducts business. These licenses subject the
Company to compliance with a variety of laws and regulations regarding the
labeling and cleanliness of its products. In addition, federal and state
regulations designed to protect consumers govern the promotion and advertising
activities of the Company and other sellers of the Company's products. Although
the Company believes it is currently in compliance with all laws and
regulations where the failure thereof might materially adversely affect its
business or financial condition, changes in laws and regulations could have a
material adverse affect on the Company and require substantial costs in order
to be in compliance with such new laws and regulations.
12. Dependence Upon Key Personnel. The Company is
currently managed by a small number of key management and operating personnel,
whose efforts will largely determine
(9)
<PAGE>
the Company's success. The loss of key management, particularly Jonathan
Rosenberg, the President and a director of the Company, and Stuart A.
Leiderman, Executive Vice President and a director of the Company, could delay
or prevent the efforts of the Company to achieve its goals and have a material
adverse effect on the Company. The Company does not currently have employment
agreements with either Mr. Rosenberg or Mr. Leiderman.
13. Control by Principal Shareholders, Officers and
Directors. As of October 27, 1997, the Company's principal shareholders,
directors and officers beneficially own in excess of 50% of the Company's voting
stock. See "Principal Stockholders." As such, the Company's principal
stockholders, officers and directors are able to exercise control over the
outcome of all matters submitted to the shareholders for approval, including
the election of directors of the Company, and as a result will be able to
control the Company's affairs and management. The Company's articles of
incorporation do not provide shareholders with cumulative voting rights.
14. Outstanding Warrants, Options and Other Convertible
Securities; Registration Rights. As of October 27, 1997, the Company has
outstanding the following warrants, options and other convertible securities:
(i) 581,175 Class A Warrants and an underwriter's unit purchase option
entitling the holder thereof to acquire 50,000 units, each unit consisting of
three shares of common stock and one common stock purchase warrant, (ii)
options entitling the holders thereof to acquire in the aggregate 130,000
shares of common stock issued pursuant to the Company's 1992 stock option plan,
(iii) options entitling the holders thereof to purchase 150,000 shares of
common stock issued pursuant to the Company's August 1996 stock option plan,
(iv) options entitling the holders thereof to purchase an aggregate of
1,210,000 shares of common stock issued pursuant to the Company's November
1996 stock option plan, (v) options exercisable to purchase up to 300,000 shares
of common stock issued to three consultants and a financial advisor, (vi) a
placement agent's warrant exercisable to purchase 200,000 shares of common
stock, (vii) 100,000 shares of Series A Preferred Stock, convertible by its
terms into 1,000,000 shares of the Company's Common Stock, (viii) 290,000
Shares of Series B Preferred Stock (with a liquidation value of approximately
$2,900,000), and 60,000 shares of Series C Preferred Stock (with a liquidation
value of $600,000), all of which is convertible into Common Stock at 75% of the
market price for the Common Stock at the time of conversion and (ix) an option
to purchase 200,000 shares issued for the benefit of the creditors of
Brownstone. There is no provision granting the Company the right to redeem any
of the above-mentioned convertible securities. To the extent that such
securities are exercised, dilution to the interest of the Company's
shareholders will occur. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of such securities can be expected to exercise them, to the extent
they are able to, at a time when the Company would, in all likelihood, be able
to obtain any needed capital on terms more favorable to the Company than those
provided in the warrants, options or preferred stock. In addition, certain of
the above mentioned securities are subject to certain demand and/or piggyback
registration rights. Such registration rights could result in substantial
expense to the Company and adversely affect any future equity or debt
financing. The sale of Common Stock or other securities held by or issuable to
the holders of registration rights or merely the potential of such sales, could
have an adverse effect on the market price of the Company's securities.
15. No Dividend. Since terminating its election to be
taxed as an S Corporation in June 1992, the Company has not paid dividends on
its Common Stock. The Company intends to retain any future earnings to finance
its growth. Accordingly, any potential investor who anticipates the need for
current dividends from his or her investment should not purchase any of the
securities offered hereby.
16. Possible Volatility of Stock Price; Stock Market
Volatility. There have been
(10)
<PAGE>
periods of extreme volatility in the stock market that, in many cases, were
unrelated to the operating performance of, or announcements concerning, the
issuers of affected securities. General market price declines or volatility in
the future could adversely affect the price of the Common Stock. There can be
no assurance that the Common Stock will maintain its current market price.
Short-term trading strategies of certain investors can have a significant
effect on the price of specific securities. The price of the Company's Common
Stock, in particular, has been volatile. Due to the sporadic trading and
volatility, the Company does not believe that an established trading market
exists for its Common Stock.
17. Shares Eligible for Future Sale. No assurance can be
given as to the effect, if any, that future sales of Common Stock will have on
the market price of Common Stock. Of the Company's 8,019,433 shares of Common
Stock currently outstanding, 3,495,458 are "restricted securities" as that term
is defined in Rule 144 under the Securities Act of 1933, as amended ("Act"), and
under certain circumstances may be sold without registration pursuant to that
rule. The Company expects to issue very shortly approximately 2,608,750 shares
of common stock pursuant to its October 1997 private placement. All of these
shares will be restricted securities. Subject to compliance with the notice and
manner of sale requirements of Rule 144 and provided that Diplomat is current in
its reporting obligations under the Securities Exchange Act of 1934, as amended,
a person who beneficially owns restricted shares for a period of at least one
year is entitled to sell, within any three month period, shares equal to the
greater of 1% of the then outstanding shares of Common Stock, or if the Common
Stock is quoted on the NASDAQ System, the average weekly trading volume of the
Common Stock during the
four calendar weeks preceding the filing of the required notice of sale with the
Securities and Exchange Commission. The Company is unable to predict the effect
that sales made under Rule 144 or otherwise may have on the market price of the
Common Stock prevailing at the time of any sales. Nevertheless, sales of
substantial amounts of the restricted shares of Common Stock in the public
market could adversely affect the then prevailing market for the Common stock
and could impair the Company's ability to raise capital through the sale of its
equity securities.
18. NASDAQ Eligibility and Maintenance Requirements;
Possible Delisting of Common Stock from NASDAQ SmallCap; Risks of Low-Priced
Stocks. The Common Stock is traded in the over-the-counter market and are quoted
on the NASDAQ SmallCap Stock Market ("NASDAQ"). For continued listing, an
issuer, among other things, must have $2,000,000 in net tangible assets,
$1,000,000 in market value of securities in the public float and a minimum bid
price of $1.00 per share. If the Company is unable to satisfy NASDAQ SmallCap's
maintenance criteria in the future, its Common Stock may be delisted from
NASDAQ, if any, in the Company's Common Stock, would thereafter be conducted in
the over the counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." As a consequence of such delisting, an investor
would likely find it more difficult to dispose of, or to obtain quotations as
to, the price of the Company's Common Stock.
19. Penny Stock Regulation. In the event that the Company
is unable to satisfy the maintenance requirements for the NASDAQ and its Common
Stock falls below the minimum bid price of $5.00 per share for the initial
quotation, trading would be conducted on the "pink
(11)
<PAGE>
sheets" or the NASD's Electronic Bulletin Board. In the absence of the Common
Stock being quoted on NASDAQ, or the Company's having a minimum of $2,000,000
in stockholders' equity, trading in the Common Stock would be covered by Rule
15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), for non-NASDAQ and non-exchange listed securities. Under such
rule, broker-dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale.
The Commission adopted regulations that generally define a penny
stock to be any equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. Such exceptions include an equity
security listed on NASDAQ, and an equity security issued by an issuer that has
(i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
If the Company's Common Stock were to become subject to the
regulations applicable to penny stocks, the market liquidity for the Common
Stock would be severely affected, limiting the ability of broker-dealers to
sell the Common Stock and the ability of purchasers in this Offering to sell
their Common Stock in the secondary market. There is no assurance that trading
in the Common Stock will not be subject to these or other regulations that
would adversely affect the market for such securities.
(12)
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds of the sale of the
Common Stock by the Selling Securityholders.
(13)
<PAGE>
CERTAIN MARKET INFORMATION
The Company's Common Stock is traded on the Automated Quotation System
of the National Association of Securities Dealers, Inc. ("NASDAQ") under the
symbol "DIPL." The following table sets forth the high and low sale prices for
Common Stock as reported by NASDAQ.
Common Stock
------------
Fiscal 1994 High Low
- ----------- ---- ---
First 7 1/4 6
Second 7 3/4 6 7/8
Third 8 1/4 7 1/2
Fourth 8 3/8 5 3/8
Fiscal 1995 High Low
- ----------- ---- ---
First 5 5/8 2 3/8
Second 3 1/4 1 1/4
Third 3 3/4 1 3/16
Fourth 3 11/16 1 3/8
Fiscal 1996 High Low
- ----------- ---- ---
First 2 1/16 1 1/8
Second 1 7/8 1 1/8
Third 2 29/32
Fiscal 1997 High Low
- ----------- ---- ---
First 1 3/4 27/32
Second 2 3/8 14/16
Third 3 1/2 1 5/8
Fourth 3 5/8 2 5/8
November 10, 1997, there were approximately 110 holders of record of
the Company's 8,019,433 outstanding shares of Common Stock.
On November 10, 1997, the closing bid and asked prices of the Common
Stock as reported by NASDAQ were $3.8125 and $3.96875, respectively.
(14)
<PAGE>
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock.
The payment of cash dividends, if any, in the future is within the discretion of
the Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
(15)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
Nine Months Ended June, 1997 Compared to Nine Months Ended June 30, 1996
NET SALES
Consolidated net sales for the Nine Month Period ended June 30, 1997
("1997 Period") increased approximately $4,120,000 or 26% from the Nine Month
Period ended June 30, 1996 ("1996 Period"), primarily as a result of the
Biobottoms sales of $5,566,000 not included in the 1996 period. Biobottoms was
acquired February 9, 1996. The sales of Diplomat for the 1997 Period were
$5,846,000 as compared to $7,554,000 for the 1996 Period and the sales of
Biobottoms were $14,020,000 in the 1997 Period as compared to $13,864,000 in the
1996 Period.
Consolidated cost of sales were 46% of net sales in the 1997 Period and
59% in the 1996 Period. The cost of sales of $9,179,000 in the 1997 Period
included $6,236,000 from Biobottoms. Cost of sales of Diplomat for the 1997
Period were $2,943,000 as compared to $5,462,000 in the 1996 Period. The
reduction of 46% was a result of the restructuring of the Company during the
1997 Period and from lower sales. Cost of sales of Biobottoms decreased 7% even
though sales increased 1% from the 1996 Period to the 1997 Period.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses increased approximately
$1,252,000 from the 1996 Period to the 1997 Period primarily as a result of
$3,257,000 of Biobottoms operating expenses not in the 1996 Period. Operating
expenses of Diplomat for the 1997 Period were $1,346,000 as compared to
$3,304,000 in the 1996 Period. The reduction of 59% resulted from decreased
expenses from restructuring, in addition to elimination of licensing fees and
lower professional, advertising and consulting fees in the 1997 Period together
with the settlement of lawsuits and adjustment of accrued expenses which reduced
operating expenses by $320,000. Operating expenses of Biobottoms remained
constant from the 1996 Period. Consolidated operating expenses were 45% of net
sales in the 1997 Period and 48% in the 1996 Period.
Interest expense decreased 22% from 1996 to 1997 as a result of the
conversion of debt to preferred stock by a principal stockholder.
The net income for the 1997 Period was $1,059,000 as compared of a net
loss of $1,551,000 for the 1996 Period.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
NET SALES
Consolidated net sales for the Three Month Period ended June 30, 1997
("1997 Period") decreased approximately $3,203,000 or 35% from the Three Month
Period ended June 30, 1996 ("1996
(16)
<PAGE>
Period"), primarily as a result of the decreases in Biobottoms sales of
$1,099,000 and Diplomat of $2,155,000 from 1996 to 1997. The sales of Diplomat
for the 1997 Period were $2,227,000 as compared to $4,382,000 for the 1996
Period because of lower sales to Wal Mart in 1997. The sales of Biobottoms were
$3,810,000 in the 1997 Period as compared to $4,909,000 in the 1996 Period.
Consolidated cost of sales were 49% of net sales in the 1997
Period and 58% in the 1996 Period. The decrease in cost of sales of $2,450,000
in the 1997 Period included $745,000 from Biobottoms. Cost of sales of Diplomat
for the 1997 Period were $1,306,000 as compared to $3,062,000 in the 1996
Period. The reduction of 57% was a result of the restructuring of the Company
during the 1997 Period and from lower sales. Cost of sales of Biobottoms
decreased 14% on decreased sales of 22% from the 1996 Period to the 1997 Period.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses decreased approximately
$662,000 or 19% from the 1996 Period to the 1997 Period, primarily as a result
of a decrease of $513,000 of Diplomat operating expenses in the 1997 Period.
Operating expenses of Diplomat for the 1997 Period were $532,000 as compared to
$1,005,000 in the 1996 Period. The reduction of 48% resulted from decreased
expenses from restructuring, in addition to elimination of licensing fees, lower
professional, advertising and consulting fees in the 1997 Period. Operating
expenses of Biobottoms remained relatively constant from the 1996 Period to the
1997 Period. Consolidated operating expenses were 48% of net sales in the 1997
Period and 38% in the 1996 Period.
Interest expense decreased 46% from 1996 to 1997 as a result of the
conversion of debt to preferred stock by a principal stockholder.
The net income for the 1997 Period was $93,000 as compared to net
income of $14,000 for the 1996 Period.
The following summary combines the consolidated results of operations
of the Company and Biobottoms on an unaudited proforma basis as if the
acquisition had occurred at the beginning of fiscal 1996, after giving effect
to the amortization of goodwill and increased interest expense on the
acquisition debt.
(17)
<PAGE>
Nine Months Pro-Forma
Ended Nine Months Ended
June 30, 1997 June 30,1996
------------- -----------------
Net Sales $19,866,711 $21,418,469
Cost of Goods Sold 9,178,866 12,168,261
---------- -----------
Gross Profit 10,687,845 9,250,208
Selling, General & Administrative Expenses 8,813,509 10,819,488
---------- -----------
Operating Income (Loss) 1,874,336 (1,569,280)
Interest Expense 491,057 989,296
---------- -------
Income (Loss) Before Income Taxes 1,383,279 (2,558,576)
Income Taxes (Benefit) 324,000 (357,525)
-------- ---------
Net Income (Loss) $ 1,059,279 $(2,201,051)
Nine Months Ended June 30, 1997 Compared to Pro-Forma Nine Months Ended
June 30, 1996
NET SALES
Consolidated net sales for the Nine Month Period ended June 30, 1997
("1997 Period") decreased approximately $1,551,000 or 7% from the Nine Month
Period ended June 30, 1996 ("1996 Period"), as a result of the increase of
Biobottoms sales of $157,000 and a decrease in the sales of Diplomat for the
1997 Period of $1,708,000.
Consolidated cost of sales were 46% of net sales in the 1997 Period
and 57% in the 1996 Period. Cost of sales decreased $2,989,000 in the 1997
Period. Cost of sales of Diplomat for the 1997 Period decreased $2,519,000 as
compared to the 1996 Period. The reduction of 46% was a result of the
restructuring of the Company during the 1997 Period and from lower sales. Cost
of sales of Biobottoms decreased 7% even though sales increased 11% from the
1996 Period to the 1997 Period.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses decreased approximately
$2,006,000 from the 1996 Period to the 1997 Period. Operating expenses of
Diplomat for the 1997 Period were $1,252,000 as compared to $3,304,000 in the
1996 Period. The reduction of 59% resulted from decreased expenses from
restructuring, in addition to elimination of licensing fees and lower
professional, advertising and consulting fees in the 1997 Period together with
the settlement of lawsuits and adjustment of accrued expenses which reduced
operating expenses by $320,000. Operating expenses of Biobottoms remained
constant from the 1996 Period. Consolidated operating expenses were 45% of net
sales in the 1997 Period and 51% in the 1996 Period.
The net income for the 1997 Period was $1,059,000 as compared to a net
loss of $2,201,000 for the 1996 Period.
(18)
<PAGE>
Fiscal Year (Nine Months) Ended September 30, 1996 Compared to Fiscal Year Ended
December 30, 1995 (The Company has changed its fiscal year end to September 30,
1996)
Net Sales
Consolidated net sales for the Nine Month Period ended September 30,
1996 ("Fiscal 1996") increased approximately $7,921,000 or 70% from the year
ended December 30, 1995 ("Fiscal 1995") primarily as a result of the Biobottoms
sales of $11,774,000 from the date of acquisition, February 9, 1996. Sales of
Diplomat decreased 33% for the period. The lower sales in Fiscal 1996 were
impacted significantly by an adverse retailing environment that has continued
from the last quarter of Fiscal 1995.
Consolidated cost of sales were 69% of net sales in Fiscal 1996 and 61%
in 1995. The increase in cost of sales of $6,422,000 in Fiscal 1996 included
$5,942,000 from Biobottoms. Cost of sales of Diplomat increased 7% in Fiscal
1996 although sales decreased 33% primarily from a writedown of inventory from
its restructuring.
For the Fiscal 1996, Toys 'R Us and Wal-Mart represented 11% and 40%
respectively, of the Diplomat sales as compared to 23% and 36% in Fiscal 1995.
Operating Expenses
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increased approximately
$5,977,000 from Fiscal 1995 to Fiscal 1996 primarily from $6,917,000 of
Biobottoms operating expenses. Consolidated operating expenses were 55% of net
sales in Fiscal 1996 and 41% in Fiscal 1995. There was a reduction of licensing
fees in Fiscal 1996 because of lower sales.
(19)
<PAGE>
Interest expense increased $302,000 in Fiscal 1996 compared to Fiscal
1995 as a result of Diplomat's increased borrowing at higher interest rates
which include $245,000 of interest in connection with the acquisition of
Biobottoms.
The Company restructured its Stony Point, New York operations by
eliminating several of its unprofitable retail lines and downsizing its
distribution facility. The restructuring expenses total approximately $1,739,000
for Fiscal 1996.
The net loss for Fiscal 1996 was $7,225,000 as compared to a net loss
of $721,000 for Fiscal 1995. Significantly lower sales of Diplomat during Fiscal
1996, without corresponding reductions in operating expenses and additional
interest expenses from the acquisition were the principal components for the
loss in Fiscal 1996, in addition to the restructuring expenses. Biobottoms had a
net loss of $1,150,000 from the date of acquisition.
The following summary combines the consolidated results of operations
of the Company and Biobottoms on an unaudited pro-forma basis 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>
Nine Months Pro-Forma
Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net Sales $ 19,222,801 $ 20,180,355
Cost of Goods Sold 13,334,588 10,569,150
------------ ----------
Gross Profit 5,888,213 9,611,205
---------- ---------
Selling, General & Administrative Expenses 10,589,561 9,179,201
Restructuring Expense 1,738,975
----------- ---------
Operating Income(Loss) (6,440,323) 432,004
Interest Expense 784,577 933,895
------------
Loss before Income Taxes (7,224,900) (501,891)
Income Taxes (benefit) -0- (173,072)
------------- ----------
Net Loss $ (7,224,900) $ (328,819)
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Sales
Consolidated Net Sales for the Nine Month Period ended September 30,
1996 ("1996 Period") decreased approximately $958,000 from the Nine Month Period
ended September 30, 1995 ("1995 Period") primarily as a result of lower sales of
Diplomat for the period. The lower sales in the 1996 Period were impacted
significantly by an adverse retailing environment that
(20)
<PAGE>
continued from the last quarter of the 1995 Period . The sales of Diplomat
decreased 24% and the sales of Biobottoms increased 16% from the 1995 Period to
the 1996 Period.
Consolidated cost of sales were 69% of net sales in the 1996 Period and
52% in 1995. Cost of sales of Diplomat increased 32% primarily from a writedown
of inventory from its restructuring. Cost of sales of Biobottoms increased 16%
as a result of an increase in sales.
For the 1996 Period, Toys "R" Us and Wal-Mart represented 11% and 40%
respectively of the Diplomat sales as compared to 32% and 22% in the 1995
Period.
Operating Expenses
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increased $1,410,000 from
the 1995 Period to the 1996 Period. The increase resulted primarily from
increased catalog expenses of Biobottoms. The operating expenses of Diplomat
increased by a minor amount from the 1995 Period to the 1996 Period.
Consolidated operating expenses were 55% of net sales in the 1996 Period and 45%
in the 1995 Period.
The Company restructured its Stony Point, New York operations by
eliminating several of Diplomat's unprofitable retail lines and downsizing its
distribution facility. The Company intends to focus its Stony Point operations
on its traditional core business. The restructuring expenses total approximately
$1,739,000 for the period ended September 30, 1996.
Interest expenses decreased $141,000 in 1996 as a result of Biobottoms
decreased borrowing at lower rates.
The net loss for the 1996 period was $7,225,000 as compared to a net
loss of $329,000 for the 1995 period. Significantly lower sales of Diplomat
during 1996, without corresponding reductions in operating expenses and
additional interest expenses from the acquisition were the principal components
for the loss in 1996, in addition to the restructuring expenses.
Results of Operations
Fiscal Year Ended December 30, 1995 Compared to Fiscal Year Ended December 31,
1994
Net Sales
Net Sales for the year ended December 30, 1995 ("Fiscal 1995" or
"1995") increased approximately $1,023,000 or 10% from year ended December 31,
1994 ("Fiscal 1994" or "1994").
The 1995 period was favorably impacted by the market acceptance and
resulting sales of the Lamaze Layette Program.
(21)
<PAGE>
Cost of sales were 61% of net sales in 1995 and 57% in 1994. During the
fourth quarter of 1995, the Company reserved $160,000 for slow moving inventory
of layette products.
Form the year 1995, Toys 'R Us and Wal-Mart represented 23% and 36%,
respectively, of the Company's sales compared to 28% and 34% in 1994.
Operating Expenses
Operating expenses as a percentage of sales decreased from 45% in
1994 to 41% in 1995.
Operating expenses, which include selling, general, administrative
warehouse and distribution expenses, increased by approximately 1% from 1994 to
1995. With the introduction of the new product line in 1994, there was an
increase of approximately $322,000 for license fees associated with these
products. Payroll and consulting fees increased approximately $178,000 from 1994
to 1995. There was a reduction of travel and entertainment of approximately
$39,000, advertising and promotion of approximately $331,000, and commissions of
$36,000. A reserve of $100,000 was established in the fourth quarter in
connection with a barter transaction entered into in 1993.
Interest expenses increased $79,000 as a result of increased borrowing
at higher interest rates in 1995 compared to 1994.
The Company has net operating loss carry forwards which are available
to offset future taxable income.
Net loss for Fiscal 1995 was $720,878 as compared to $439,459 for the
comparable period in 1994. Significantly lower sales during the fourth quarter
of the fiscal years 1995 and 1994, with lower reductions in operating expenses
were the principal components for the loss reported for such periods. Sales
during the fourth quarter have historically been lower than other periods. The
lower sales in the fourth quarter of Fiscal 1995 (approximately $1,353,000) as
compared to Fiscal 1994 (approximately $1,766,000) were also impacted
significantly by an adverse retailing environment that has continued in 1996.
The resulting net loss for the fourth quarter of 1995 increased approximately
$496,000, from $730,000 in 1994 to $1,226,000 in 1995, an increase of
approximately 68%.
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 convertible securities in 1995, 1996 and 1997 in order to fund
its operation.
(22)
<PAGE>
The Company's principal working capital credit facility is provided by
Congress Financial Corporation ("Congress Financial").
In April 1994, the Company entered into an agreement with Congress
Financial providing the Company with a maximum $3,000,000 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 without
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) above the prime rate announced by Core States Bank. The credit
agreement contains restrictions relating to the payment of dividends.
Additionally, prior to amendment, the Company was required to maintain a minimum
of $3,500,000 in stockholders' equity and a minimum of $4,500,000 of working
capital (excluding the Congress loan and certain subordinated debt). At
September 30, 1996, the Company was not in compliance with these financial
covenants, however Congress continued to extend the Company credit under the
terms of the original agreement. On February 25, 1997, the violations were
waived by Congress, and the Company and Congress agreed on revised financial
covenants. Under the revised agreement, the stockholders' equity and working
capital minimums (excluding the Congress loan and certain subordinated debt)
were reduced to (750,000) and 500,000, respectively, and was increased
during the fiscal year ending September 30, 1997 to (250,000) and 1,500,000,
respectively. The Company expects to be in compliance with the revised financial
covenants at each measurement date.
Under the terms of the credit agreement, the Company could borrow up to
85% (reduced to 80% in the third quarter of 1997) 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.
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 would have
been required to make payments of $174,800 in 1997. The balance of this 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 (i) the
former Biobottoms stockholders in the amount of $1,500,000, (ii) Mr. Rubin in
the amount of $2,353,100, and (iii) American United Global in the amount of
$450,000. The American United Global loan was paid in May, 1996. The note to the
former Biobottoms Stockholders was paid in July 1997.
(23)
<PAGE>
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, which pay an annual dividend of 9% based on per share liquidation value.
The Company issued to 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.
As of September 30, 1996, the $600,000 loan was converted into 60,000 shares of
Series C Preferred Stock, which pay an annual dividend of 9% based on per share
liquidation value.
In connection with the February 9, 1996 closing on the Biobottoms
acquisition (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
$2,000,000 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%. At September
30, 1996, Biobottoms was not in compliance with certain covenants of the
loan agreement, however Congress continued to extend Biobottoms credit under the
terms of the original agreement. On February 25, 1997 the violations were
waived by Congress, and Congress and the Company agreed on revised financial
covenants for the remainder of the Company's fiscal year ending September 30,
1997. The Company expects to be in compliance with the revised financial
covenants at each measurement date.
In February 1997, Mr. Rubin made an additional loan to the Company in
the amount of $200,000. This loan, and the Series B and C Preferred Stock are
referred to hereafter as the "Rubin Obligations."
(24)
<PAGE>
The Deferred Payment Notes and the Rubin Obligations are, and the
American Unted loans were, subject to an Intercreditor Agreement with Congress
Financial (the "Intercreditor Agreement") which has the effect of restricting or
limiting enforcement remedies under the promissory notes evidencing the Deferred
Payment and the Rubin Obligations prior to repayment of the senior debt payable
to Congress Financial 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 Notes
and the Rubin Obligations, 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 Obligations were
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 Obligations, 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. These provisions were amended on February 25,
1997, such that the proceeds of a private placement of the Company's Common
Stock shall be applied first to repay in full the principal of, and all accrued
interest on, the Deferred Payment Notes. The Company does not presently have
any commitment for any such financing.
The Intercreditor Agreement contains provisions to the effect that
prior to March 1, 1998, no principal amount of the Rubin Obligations 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 Obligations are 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 Obligations and unpaid interest accrued thereon
payable in full on February 9, 1999.
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 of that date as
follows:
Payment at Closing of Biobottoms'
Institutional Secured Lender........................ $1,448,025
Cash portion of Biobottoms Purchase
Price............................................... 1,000,000
(25)
<PAGE>
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, $1.00
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. The Class C Warrants were exercised in April
1997 providing the Company with proceeds of $500,000.
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.
In November 1996, the Company, in connection with an Incentive Stock
Option Plan, issued 1,060,000 options at an exercise price of $1.00 per share.
In May 1997, the Company, in connection with a Private Placement,
offered 1,250,000 shares of Common Stock at a price of $2.00 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.
During the nine months ended June 30, 1997, there was a decrease in
cash flow from operating activities of approximately $1,032,000 primarily from
an increase in inventory required for the sale of seasonal products. This
increase was funded by the revolving line of credit from Congress, a $200,000
loan from Robert Rubin and the proceeds from warrant exercise.
(26)
<PAGE>
BUSINESS
General
The term "the Company" shall include Diplomat Corporation and its
wholly-owned subsidiary, Biobottoms, Inc. ("Biobottoms") unless otherwise
indicated. The term "Diplomat" shall refer to the operations of the Diplomat
Corporation exclusive of the Biobottoms subsidiary.
On February 9, 1996, Diplomat Corporation completed the
acquisition of Biobottoms, a California corporation located in Petaluma,
California. Biobottoms is a childrens' mail order catalog company selling
apparel and accessories in the United States for newborns through preteens.
Management of the Company believes that this business combination will
strengthen the Company's existing business by joining the manufacturing
strength and expertise of the Company with the retailing expertise of
Biobottoms. In October 1997, Diplomat acquired out of bankruptcy all of the
assets of Jean Grayson's Brownstone Studios, Inc. As a result of this
acquisition, the scope of the Company's business has expanded into the mature
women's apparel and accessories markets.
The Company designs, develops, markets and distributes infantwear
and care products, nursery accessories and the products for infant and toddler
comfort and care, and mature women's apparel and accessories. Through its
wholly-owned subsidiary, Biobottoms, the Company also sells apparel and
accessories for newborns through preteens via direct mail catalog. The Company
sells primarily cloth diapers, diaper covers, furniture covers, layette, infant
and child travel products, such as infant car seat covers, and other accessories
marketed principally under the trademarks Ecology KidsTM and BiobottomsTN, and
mature women's apparel and accessories under the trademark Brownstone. These
products are marketed in the United States and internationally. While
international sales of Diplomat's products have not been material, its products
are sold in several Pacific Rim countries, (Japan, Singapore, Taiwan and
Malaysia). Biobottoms' products are sold domestically and internationally.
Biobottoms distributes a catalog in Japan and has an 800 number which is
answered in Japanese at the Petaluma office. Sales in Japan have accounted for
20% of Biobottoms' sales since the Company acquired it.
In November 1996, the Company restructured Diplomat's Stony Point,
New York operations by eliminating several of its unprofitable retail lines and
downsizing its distribution facility. The Company intends to focus Diplomat's
operations on its traditional core business under its Ecology KidsTM brand
name, which has historically generated the largest part of the Company's
revenue.
In June 1997, the Company reached an agreement in principle to
acquire Lew Magram, Ltd., a woman's fashion catalog retailer. Although the terms
have not been finalized, it is currently contemplated that the acquisition will
be for shares of the Company's convertible preferred stock. There can be no
assurance that the acquisition will be consummated on terms favorable to the
Company, if at all.
Marketing and Sales
The primary customers of Diplomat are major mass merchandisers,
including Toys 'R Us, Inc. ("Toys 'R Us") and Wal-Mart Stores, Inc.
(Wal-Mart"). The foregoing two customers represented a total of approximately
51% of the Diplomat division's total revenues during the fiscal year ended
September 30, 1996. Diplomat's products are presently carried by Wal-Mart, Toys
'R Us, Target Stores and Baby Superstores, all nationally known merchants.
Diplomat's products are also sold to drug store chains, catalog showrooms, mail
order catalogs and food and drug chains which include Publix, Winn-Dixie and
Walgreens.
Diplomat's new line of products for the mature women's apparel and
accessories markets is sold through mail order catalogs.
Historically, Diplomat obtained substantially all of its raw
materials required for the manufacture of its products and shipped such
materials to contract manufacturers, who assembled the products in accordance
with the Company's specifications and under its supervision, either from
facilities at the Company's Rockland County, New York warehouse and
distribution facilities, or other locations in New York State.
(27)
<PAGE>
Biobottoms is a childrens' catalog company in the United States
selling apparel and accessories primarily for newborns through preteens. The
majority of the products offered for sale by Biobottoms are made of natural
fibers and are designed by Biobottoms with an emphasis on comfort and ease of
care. Biobottoms mailed over 9 million catalogs to its existing and prospective
customers and delivered over $18 million of merchandise in 1996. The catalog is
redesigned four times a year and is mailed as many as 13 times a year to a
combination of customers and prospective customers. The catalog is divided into
product categories, generally by the age of the child and the size of the
products being offered. Biobottoms also operates a retail store selling
overstocks and out-of-season items.
Nearly 70% of Biobottoms' products are designed to its
specifications and marketed under Biobottoms' brand name. Established national
brands, such as CONVERSE and SARA'S PRINTS round out the product offering.
Unlike other segments of the apparel industry, the demand for children's
clothing is driven by the physical growth of the child, rather than changing
fashions. As a result, staples and basics account for much of the merchandise
mix, with low return rates and low markdowns.
Biobottoms' brand products allow the Company to distinguish itself
from other catalogs and retailers. The lower cost of these goods also gives
management more pricing flexibility. Biobottoms has increased its average order
size in each of the past few years by increasing the number of items per order
while decreasing the average item price. Biobottoms has also significantly
expanded the age range of its merchandise, testifying to the appeal of the
Biobottoms brand.
The increase in the number of working women has provided a very
receptive environment for catalogers over the past two decades. The Company
understands that more than 70% of women aged 25 to 54 were working full time in
1993, versus 43% in 1965. The increasing number of dual income families and
single women in the workforce is expected to continue to fuel the growth of
direct marketing through the 1990's.
Even though the Company has shifted its emphasis to the
Biobottoms' division, it continues to market Diplomat's products. The Company's
plan is to evaluate Diplomat's business and determine which areas should be
continued. Diplomat was a party to an exclusive distribution agreement ("the
Lamaze Agreement") with Ambrose & Montgomery, doing business as "Lamaze from
AMI". Pursuant to the Lamaze Agreement, Diplomat was granted the right to
utilize the Lamaze registered trademark in conjunction with the manufacture,
advertisement, promotion, distribution and sale of various products for
infants. The Lamaze Agreement expired in July 1996 and the Company currently
has no plans to extend it. Accordingly, the Company no longer uses the Lamaze
registered trademark.
New and Planned Products
The Company's success depends in part upon the development of
strong brand identification for its current and proposed products. The primary
direction of the Company's marketing plan is to promote certain of its existing
products and develop new products under the Fresh Air Wear trademark. Achieving
and maintaining market acceptance for its products will require significant
efforts and expenditures. There can be no assurance that the Company will be
successful in effecting this plan.
Product development and selection are based upon reliability of
vendors, visual appeal,
(28)
<PAGE>
perceived customer value, and uniqueness of design. Biobottoms utilizes
customers feedback on products' performance and their reported preferences for
new product designs, fabrications and category expansion. Biobottoms' sales are
generated from both house file customers (persons who have either previously
purchased from Biobottoms or requested a catalog) and rented mailing lists
(names of current customers from other catalog companies). Analysis of this
segmentation allows Biobottoms to mail frequently and selectively to its most
responsive customers.
Sourcing
Biobottoms provides for manufacturing and sourcing of products in
a number of ways. Private label vendors supply some high volume basics, such as
t-shirts, play pants and knit shorts, where price competitiveness is critical.
Other manufacturers, that may be more costly, compared to private label
vendors, may be used for products requiring shorter lead times or testing
fashion trends. This provides greater flexibility for inventory management.
Biobottoms' manufacturing group provides control of the manufacturing process
by closely supervising all phases of production with local consultants and
contractors. Biobottoms' manufacturing group is a convenient source for testing
new private label product concepts. Branded merchandise from a variety of
manufacturers is the further source of products for Biobottoms.
Major Customers
For the fiscal year ended December 31, 1995, two of the Company's
customers, Toys 'R Us and Wal-Mart individually accounted for approximately 23%
and 36% respectively, of the Diplomat net sales. For the nine month period
ended September 30, 1996, such customers individually accounted for 11% and
40%, respectively, of the Diplomat division's sales. Sales to such customers
accounted for approximately 22% of the Company's sales for the nine month
period ended September 30, 1996. The Company has no written contracts with such
customers and there can be no assurance that such customers will continue to
purchase products from the Company. The loss of either of these customers would
have a materially adverse effect on the Company's business.
In addition, the Company sold its products to approximately 500
retail accounts consisting primarily of mass merchandisers and toy retailers,
and, to a lesser extent, drug store chains, catalog showrooms, mail order
operations and food store chains. In addition to Toys'R Us and Wal-Mart, the
Company's customers include Burlington Coat Factory, Kids 'R Us, Winn- Dixie
Supermarkets, American Drug Stores, Baby Superstores, Eckerd Drugs, Walgreens,
Caldor, Target Stores and Publix Supermarkets. A reduction in the number of
retail accounts from prior periods reflects a change in customer mix, with an
increased emphasis on mass merchandisers and chain stores. The decrease also
reflects general economic conditions which include a decrease generally in the
number of retailers.
Seasonality of product is generally not a factor affecting the
Company's sales. Sales fluctuations are, however, affected by special seasonal
promotional activities of the merchandise retailer.
Quality Assurance
Products developed for either Biobottoms or Fresh Air Wear and
Ecology Kids brands are chosen based upon the following criteria:
(29)
<PAGE>
o Quality
o Price/Value
o Fabric
o Fit
o Testing
o Exclusivity
o Color/Print
o Styling
o Manufacturing Responsibility
o Merchandising
Additionally, a minimum of two additional features beyond the must
have requirements that add appropriate performance or styling benefits, and are
comparable to the benchmarks, must be added. These include, but are not limited
to:
Specialized fabrications
Premium construction details
Appropriate decorative items, such as buttons
Logos, Patches and Graphics to enhance brand identification
Governmental Regulation
As a seller of infant products, the Company is subject to laws and
regulations administered by various states and the Federal Trade Commission. As
a seller of bedding products, the Company is also required to maintain licenses
in the various states where it conducts business. These licenses subject the
Company to compliance with a variety of laws and regulations regarding the
labeling and cleanliness of its products. In addition, the Company has all of
its bedding products produced to the upholstered product specifications
required by the flammability laws of the State of California, which the Company
believes to be the most stringent in the United States. The Company believes
that it complies with the laws and regulations in all material respects.
Product Liability
The Company currently has an aggregate of $2,000,000 of product
liability insurance for its current products with an umbrella policy of up to
an aggregate of $3,000,000. The Company does not intend to increase such
coverage upon commercialization of any other product under development. There
can be no assurance that the Company's existing coverage will be sufficient to
cover any liability resulting from any product liability claims or that the
Company would have funds available to pay any claims over the limit of its
insurance. Either an under insured or an uninsured claim could have a
materially adverse effect on the Company.
Trademarks, Patents and Proprietary Rights
The Company's success depends, in part, upon the development of
strong brand identification for its current and proposed products. Diplomat has
trademark protection for the name Ecology Kids(TM) and, since the recent asset
acquisition, Brownstone(TM), and has historically relied heavily on its right to
utilize the Lamaze name in accordance with its now expired distribution
agreement with AMI. Although there can be no assurance thereof, the Company does
not believe that the inability to use the Lamaze name will have an adverse
effect on the Company.
(30)
<PAGE>
The Company has trademark protection to utilize the name "Fresh
Air Wear" in connection with the sale of Biobottoms' products and may apply for
other trademarks as it deems appropriate. There can be no assurance that future
trademark protection will be obtained, or that if obtained, will not be
infringed upon by others. In addition, if any of the Company's trademarks are
infringed upon, there can be no assurance that the Company can successfully
challenge any alleged infringement. In the event that it became necessary to
establish recognition of alternative trademarks, the cost of such development
could be substantial, and, as a result, materially adversely affect the
Company's business and prospects.
In November 1992 the Company acquired the four-year exclusive
License to a United States patented thermochromatic process that can be
utilized with a diaper cover to indicate wetness and soiling through heat
generated color changes. This License was entered into for the purpose of
promoting an extension of the Company's diaper cover business and for use in
developing a disposable diaper pad product combination, providing the
convenience of disposable diapers, while generating significantly less solid
waste. Plans to develop the disposable diaper pad product are not being
actively pursued at this time. The License required that the Company pay fixed
annual minimum royalty payments of $50,000 in 1993, $87,500 in 1994, and
$100,000 in 1995 and 1996. All minimum royalty payments required to be paid
have been paid through 1995 and the balance of the 1996 payments are to be paid
in 1997. The Company did not exercise its right to extend the License.
Competition
There are a wide range of catalogs selling infant and childrens'
apparel in competition with Biobottoms. These vary from general catalog
merchandisers, such as JC Penney, to smaller specialty childrens' apparel
catalogs. Biobottoms believes it competes primarily with the latter, which
group includes: Hanna Anderson, Playclothes, Childrens Wear Digest, Storybook
Heirlooms, Wooden Soldier, and Lands End Kids. Companies in the catalog
business compete on price, product quality, features, benefits, brand name and
customer service. Biobottoms seeks to market a product line that is distinctive
from its competitors. Biobottoms also competes with non-mail order childrens'
clothing retailers, including specialty stores, department stores, major chains
and discount retailers. Gap Kids, Gymboree and other national retailers are
also competitors outside the direct mail industry. Although certain of these
direct competitors have greater financial and marketing resources, Biobottoms
believes that it has been able to be competitive because of its ability to
offer quality products, reasonable prices and outstanding customer service.
The infant and toddler products industries, as well as the women's
apparel and accessory markets, are extremely competitive in the United States
and Diplomat faces substantial competition in each of its product lines. The
Company competes in a variety of segments within these product categories,
including disposable diapers, infant and juvenile furnishings, and mature
women's apparel and accessories. Competitive factors include quality, price,
style, name recognition and service. Although the Company believes that it can
compete favorably in these areas, there can be no assurance thereof.
Employees
As of October 27, 1997, the Company had 33 full time employees in
its Stony Point facility. Of such employees, three act in executive capacities,
three are full time sales and marketing personnel, one is a customer service
representative and 26 are administrative and warehouse personnel. None of the
employees are covered by a collective bargaining agreement.
(31)
<PAGE>
The Company considers its relations with the employees to be good.
Biobottoms employs permanent, full time and part time employees,
part time casual (not eligible for benefits), and temporary workers due to
seasonal increases in its sales volume. This allows for optimal employment
levels during peak and slack times. Also, it allows a portion of the work force
the option of flexible working hours. At October 27, 1997, Biobottoms employed
148 employees 83 of which are full time. None of the Biobottoms employees are
represented by any labor union.
Properties and Facilities
In December 1992, Loshell Realty Corporation ("Loshell"), owner of
the real estate and buildings housing the Company's warehouse and distribution
facilities located at 25 Kay Fries Drive, Stony Point, New York (the
"Facilities"), transferred to the Company a fee interest in the Facilities,
subject to purchase money mortgage indebtedness. The Facilities consist of five
buildings aggregating approximately 40,000 square feet, located on
approximately seven acres. The Facilities had an adjusted basis of $1,984,857
when transferred to the Company. Approximately 6,000 square feet of the
Facilities are utilized by the Company's contract manufacturers located at the
premises. Sheldon R. Rose, the Company's former President and Chief Executive
Officer and his wife are the sole shareholders of Loshell. In connection
therewith, the Company assumed purchase money mortgage indebtedness of Loshell
aggregating approximately $1,799,000 ($1,101,000 with respect to a first
mortgage note due August 2010, bearing interest at an initial rate of $11.75%
adjusted every three years, commencing July 1993 (currently 8.375%) and
$698,000 with respect to a subordinated mortgage note originally due July 1995,
but extended to January 1998, bearing interest at an initial rate of 11.5% per
annum. Mr. Rose and his wife have personally guaranteed payment of the first
mortgage, and Mr. Rose and Loshell are co-makers of the subordinated mortgage
note. The Company pays approximately $26,000 per month for both mortgage
payments and real estate taxes.
Biobottoms leases approximately 17,600 square feet of office space
and 18,700 square feet of warehouse space in Petaluma, California. In addition,
Biobottoms leases 1,700 square feet of retail space in Petaluma, California.
Total fixed monthly payments (exclusive of any applicable common area
maintenance charges) currently under these leases is $28,632 and the lease
agreements provide for fixed annual increases. The office lease and warehouse
leases expire on July 1, 1998. No determination has been made as to whether
either or both of these leases will be renewed. These properties are adequate
for current planned operations. Other suitable facilities are available at
competitive prices and terms. The retail lease for Petaluma renews bi-
annually.
Legal Proceedings
In September 1996, the Company was named as a defendant in an
action brought in the
(32)
<PAGE>
Supreme Court of the State of New York, County of Rockland (Richard Tracy and
Anne Tracy v. Insulx Product Corporation, Consolidated Rail Corporation,
Diplomat Corporation and Bruce M. Smith Contracting Corporation). Mr. Tracy
alleges that the defendants negligent maintenance of a railroad crossing
adjacent to the Company's property caused him to collide with a train. Mr.
Tracy is seeking $10,000,000 in damages for his injuries, and Mrs. Tracy is
seeking an additional $1,000,000 in damages for loss of Mr. Tracy's services.
The Company and its insurance carrier intend to vigorously defend against these
claims. The ultimate outcome of this litigation cannot presently be determined.
Accordingly, no provision for the liability has been made in the accompanying
financial statements. Additionally, the Company maintains $1,000,000 of
insurance coverage which could be applied to any liability posed by this
matter.
In February 1997, Francine Nichols, a former consultant to the
Company, commenced and action against the Company in the Supreme Court of the
State of New York, New York County, to recover approximately $240,000 allegedly
due under a consulting agreement between Ms. Nichols and the Company. The
Company disputed each claim and intends to vigorously defend against them.
However, should the claimant prevail, the result may have a material adverse
affect on the Company.
In July 1997, Federal Express commenced an action against
Biobottoms claiming approximately $180,000 in unpaid delivery invoices.
Biobottoms has disputed this claim and has filed a counter claim on several
basis, one of which is nonperformance. Although Biobottoms intends to
vigorously defend against the claim, should the claimant prevail, the result
may have a material adverse affect an Biobottoms and the Company.
Other than the above claims, the Company has no notice of any
pending or threatened material litigation.
(33)
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about the directors
and executive officers and key employees of the Company:
Name Age Position
---- ---
Robert M. Rubin 56 Chairman of the Board and Director
Jonathan Rosenberg 36 President, Chief Executive Officer
and Director
Stuart A. Leiderman 52 Executive Vice President - Sales
and Marketing and Director
Irwin Oringer 60 Chief Accounting Officer and
Controller
Howard Katz 55 Director
Wesley C. Fredericks, Jr. 49 Director
JONATHAN ROSENBERG was appointed to the Board of Directors in July 1995
and has been President and Chief Executive Officer since November 1996. Since
1993, Mr. Rosenberg served as an independent consultant to the Company,
providing advice in the operations and finance areas and in long-term strategic
planning. From 1987 until 1993, he was President and Chief Operating Officer of
Servtex International, Inc., a New York based company engaged in international
sourcing of imports and manufacturing activities on an agency basis for textile
related products.
STUART A. LEIDERMAN has served as Executive Vice President of Sales and
Marketing since July 1989, and has been a Director of the Company since June
1992. From 1985 to 1989, Mr. Leiderman was a Divisional Vice President for
Hasbro, Inc., Playskool Baby Division, a company engaged primarily in the
development, sales and marketing of toys.
ROBERT M. RUBIN has served as a Director of the Company since June 1992
and has been Chairman since November 1996. Since December 5, 1995, Mr. Rubin
has been a Director of Help at Home, Inc., a public company engaged in the
business of providing homemaker and general housekeeping services to elderly
and disabled persons at home. Since June 1994, Mr. Rubin has been a Director
of Kaye Kotts Associates, Inc., a public company that provides representation
for delinquent tax payers before tax authorities. In October 1996, Mr. Rubin
became a director of Med-Emerg International Inc., an operator of nursing
homes and related healthcare services. Currently, Mr. Rubin is also a
director of Arzan International, an Israeli food distributor.
(34)
<PAGE>
Mr. Rubin has served as the Chairman of the Board of Directors of
Western Power and Equipment Corporation ("WPEC"), a construction equipment
distributor, since November 20, 1992. Between November 20, 1992 and March 7
1993, Mr. Rubin served as Chief Executive Officer of WPEC. Between October 1990
and January 1, 1994 Mr. Rubin served as the Chairman of the Board and Chief
Executive Officer of American United Global Inc., a telecommunications and
software company ("AUGI") and since January 1, 1994, solely as Chairman of the
Board of AUGI. Mr. Rubin was the founder, President, Chief Executive Officer and
a Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May
1986 and continued as a Director of SCI (now known as Olsten Corporation
("Olsten") until the latter part of 1987. Olsten, a New York Stock Exchange
listed company is engaged in providing home care and institutional staffing
services and health care management services. Mr. Rubin was formerly a Director
and Vice Chairman, and is a minority stockholder of American Complex Care,
Incorporated ("ACCI"), a public company which provided on-site health care
services, including intradermal infusion therapies. In April 1995, the principal
operating subsidiaries of ACCI petitioned in the Circuit Court of Broward
County, Florida for an assignment for the benefit of creditors. Mr. Rubin is
also a Director, Chairman and minority stockholder of Universal Self Care, Inc.,
a public company engaged in the sale of products used by diabetics, and Response
USA, Inc., a public company engaged in the sale and distribution of personal
emergency response systems. Mr. Rubin is also Chairman, Chief Executive Officer
and a Director and a principal stockholder of ERD Waste Corp., a public company
specializing in the management and disposal of municipal solid waste, industrial
and commercial nonhazardous solid waste and hazardous waste.
IRWIN ORINGER, a Certified Public Accountant, has been Chief Accounting Officer
and Controller of the Company since September 1992. From October 1991, until he
joined the Company in September 1992, Mr. Oringer was Corporate Controller of
Trans-National Trade Development Corporation, a company engaged in the business
of importing diversified consumer products. From 1988 to 1991 he held a variety
of financial management positions with subsidiaries of Kenrich, Inc., a holding
company for businesses engaged in the wire and cable business. In February 1991,
Kenrich and its subsidiaries filed a petition under Chapter 11 of the Federal
bankruptcy laws and was subsequently liquidated.
HOWARD KATZ has been a Director of the Company since October 1996. Mr. Katz has
been Executive Vice President of American United Global, Incorporated since
April 15, 1996. From December 1995 through April 15, 1996 Mr. Katz was a
consultant for, and from January, 1994 through December, 1995 he held various
executive positions, including Chief Financial Officer with, National Fiber
Network (a fiber optics telecommunications company). From January 1991 through
December 1993 Mr. Katz was the President of Katlaw Construction Corporation, a
company that provides general contractor services to foreign embassies and
foreign missions located in the United States.
WESLEY C. FREDERICKS, JR. has been a director of the Company since July 1997.
Since 1994, he has been a member of the law firm of Gersten, Savage, Kaplowitz &
Fredericks, LLP. From 1990-1994, Mr. Fredericks was a principal in and president
of Manufacturers Products Co., an automotive supply company.
Directors of the Company are elected for one year terms or until their
successors are elected, and officers serve at the pleasure of the Board of
Directors.
(35)
<PAGE>
Compensation of Directors
The Company has not paid and does not presently propose to pay
compensation to any director for acting in such capacity, except for nominal
sums for attending Board of Directors meetings and reimbursement for reasonable
expenses in attending those meetings.
Executive Compensation
The following table sets forth certain information regarding
compensation paid by the Company during each of the last three fiscal years to
the Company's Chief Executive Officer and to each of the Company's executive
officers who earned in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- ------------------------------------
Other Restricted Securities
annual stock Underlying LTIP
Name and Bonus compen- award(s) Options/ Payouts
principal position Year Salary ($) ($) sation ($) SARs (#) ($)
- ------------------ ---- ---------- ----- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sheldon R. Rose 9/30/96 $159,375 0 0 0 0 0
CEO 1995 $191,047 0 0 0 0 0
(Resigned 11/96)
Jonathan Rosenberg 9/30/97 $190,769 0 0 0 250,000 0
CEO 9/30/96 $130,804 0 0 0 75,000 0
(Elected 11/96)
Stuart Leiderman 9/30/97 $150,000 0 0 0 100,000 0
Executive Vice 9/30/96 $112,500 0 0 0 0 0
President 1995 $139,334 0 0 0 0 0
</TABLE>
(36)
<PAGE>
Stock Option Plans
1992 Stock Option Plan
The Company's 1992 Stock Option Plan ("1992 Stock Option Plan")
provides for the issuance of up to 200,000 shares of Common Stock upon exercise
of incentive stock options and is intended to qualify under Section 422 of the
Internal Revenue Service Code of 1986, a amended ("Code").
The Stock Option Plan may be administered by the Board of Directors or
by a stock option committee of the Board of Directors (the "Committee").
incentive stock options are granted under the Stock Option Plan to employees
generally on the basis of the recipient's responsibilities and the achievement
of performance objectives. Subject to the limitations set forth in the Stock
Option Plan, the Board or the Committee has the authority to determine when the
options may be exercised and vest. Under the Plan, the per share exercise price
may not be less than the greater of 100% of the fair market value of the shares
on the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting rights of the Company's outstanding capital stock,
the per share exercise price must be at least 110% of the fair market value on
the date of grant and the term may not be longer than five years. As of this
date, the Company has outstanding an aggregate of 130,000 Stock Options,
exercisable at $1.50 per share, all of which are held by affiliates
or employees of the Company at the time of grant.
August 1996 Stock Option Plan
The Company also established a non-qualified stock option plan
providing for the issuance of up to 1,500,000 shares of Common Stock to its
directors, officers, key employees and consultants (the "August 1996 Plan"). To
date, the Company has granted directors, officers and key employees an aggregate
of 150,000 incentive and non-qualified stock options, at an exercise price of
$2.00 per share. Future grants could have an adverse affect on the market price
of the Company's securities.
November 1996 Stock Option Plan
Under the Company's November 1996 Incentive Stock Option Plan (the
"November 1996 Plan"), options to purchase a maximum of 1,500,000 shares of
Common Stock of the Company (subject to adjustments in the event of stock
splits, stock dividends, recapitalizations and other capital adjustments) may be
granted to employees, officers and directors of the Company and other persons
who provide services to the Company. As of the date of this Prospectus,
1,060,000 of such options have been granted at an exercise price of $1.00, and
150,000 have been granted at an exercise price of $2.375. The options to be
granted under the Plan are designated as incentive stock options or
non-incentive stock options by the Board of Directors which also has discretion
as to the persons to be granted options, the number of shares subject to the
options and the terms of the option agreements. Only employees, including
officers and part time employees of the Company, and non-employee directors,
consultants and advisors and other persons who perform significant service for
or on behalf of
(37)
<PAGE>
the Company, may be granted incentive stock options. Officers and directors who
currently own more than 5% of the issued and outstanding stock are not eligible
to participate in the Plan.
The Plan provides that options granted thereunder shall be exercisable
during a period of no more than ten years from the date of grant, depending upon
the specific option agreement, and that, with respect to incentive stock
options, the option exercise price shall be at least equal to 100% of the fair
market value of the Common Stock at the time of the grant.
Employee Pension Plan
In 1985, the Company instituted a pension plan (the "Pension Plan"),
which is a defined benefit pension plan maintained for all employees. Benefits
are payable based on 60% of average compensation for the three highest paid
consecutive years of service, reduced for less than 29 years of service
retirement. The Pension Plan is funded as required by the Employee Retirement
Income Security Act of 1974 ("ERISA") and does not require employee
contributions. Full vesting occurs immediately upon joining the Plan. As of this
date, Sheldon R. Rose and Stuart A. Leiderman have accrued 22 and 5 years,
respectively, of service under the Pension Plan. As of February 1993, the plan
was curtailed and no additional pension benefits will accrue.
(38)
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of March 6,
1997, and as adjusted to give effect to the Offering, regarding the beneficial
ownership of the Common Stock by (i) each beneficial owner of more than 5% of
the outstanding shares of Common Stock, (ii) each director and executive officer
of the Company, and (iii) by all executive officers and directors of the
Company as a group.
Percentage Percentage
Name and Number of Shares(2) Before After
Address(1) Beneficially Owned Offering Offering
- ---------- ------------------- ---------- ----------
Stuart A. Leiderman(3) 308,000 3.82% 3.82%
Robert M. Rubin(4) 6,235,217 49.52% 49.52%
Jonathan Rosenberg(5) 165,000 2.02% 2.02%
Wesley C. Fredericks, Jr.(6) 258,333 3.18% 3.18%
Howard Katz(7) 66,500 * *
All officers and
directors as a group
(5 persons) 7,033,000 54.25% 54.25%
* less than one percent.
(39)
<PAGE>
- ----------
(1) Unless otherwise indicated, the address of all officers and directors
listed above is in the care of the Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities and includes Shares of
Common Stock issuable upon conversion of outstanding preferred stock,
or subject to options, or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days. The
percentage of stock outstanding for each stockholder is calculated by
dividing (i) the number of shares of Common Stock deemed to be
beneficially held by such stockholder as of November 10, 1997 by (ii) the
sum of (A) the number of shares of Common Stock outstanding as of
November 10, 1997 plus (B) the number of shares issuable upon exercise of
options or warrants held by such stockholder which were exercisable as
of November 10, 1997 or which will become exercisable within 60 days after
November 10, 1997.
(3) Represents (i) 268,000 shares of Common Stock currently owned, and (ii)
40,000 shares of Common Stock issuable upon exercise of currently
exercisable options granted under the November 1996 Plan. Mr. Leiderman
also has an additional 60,000 options under the November 1996 Option Plan
which are not currently exercisable and will not become exercisable in the
next sixty days.
(4) Represents (i) 1,663,000 shares of Common Stock currently owned, (ii)
1,000,000 shares of Common Stock issuable upon conversion of 100,000 shares
of the Company's Series A Preferred Stock (iii) 290,000 shares of Series B
Preferred Stock which provide for certain conversion rights and entitle him
to 2,900,000 votes, (iv) 60,000 shares of Series C Preferred Stock which
provide for certain conversion rights and entitle him to 600,000 votes, (v)
20,000 shares of Common Stock issuable upon exercise of currently
exercisable options issued pursuant to the 1992 Stock Option Plan, and (vi)
(40)
<PAGE>
52,217 shares of Common Stock approved for issuance but not yet issued.
See "Management" and "Description of Securities - Preferred Stock."
(5) Represents (i) 65,000 shares of Common Stock issuable upon exercise of
currently exercisable options granted pursuant to the 1992 Stock Option
Plan, and (ii) 100,000 shares of Common stock issuable upon the exercise of
currently exercisable options granted pursuant to the November 1996 Plan.
Mr. Rosenberg also has an additional 30,000 options under the 1992 Stock
Option Plan and 150,000 options under the November 1996 Option Plan which
are not currently exercisable and will not become
exercisable in the next sixty days.
(6) Represents (i) 157,500 shares of Common Stock currently owned,
(ii) 67,500 shares which may be issued upon exercise of currently
exercisable options issued pursuant to the August 1996 Stock Option Plan,
and (iii) 33,333 shares of Common Stock issuable upon currently exercisable
options issued pursuant to the November 1996 Plan. Mr. Fredericks also has
an additional 66,664 options under the November 1996 Plan which are not
currently exercisable and will not become exercisable within the next sixty
days.
(7) Includes 66,500 shares of Common Stock issuable upon exercise of currently
exercisable options granted pursuant to the November 1996 Stock Option
Plan. Mr. Katz also has an additional 58,500 options which are not
currently exercisable and will not become exercisable within the next
sixty days.
(41)
<PAGE>
CERTAIN TRANSACTIONS
In April 1994, the Company entered into an agreement with Congress
Financial Corporation providing the Company with a $3.0 million secured line of
credit to be used for loans and trade letters of credit (the "Agreement"). The
loans are secured by substantially all of the Company's personal property,
including without limitation, accounts receivable, inventory and trademarks. The
interest rate on loans is two percent above the prime rate announced by Core
State Bank. Under the terms of the Agreement, the Company may 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. At the present time, the Company is fully utilizing its line of
credit. On February 9, 1996, the date of closing of the purchase of Biobottoms
by Diplomat, Congress entered into a loan and security agreement with Biobottoms
providing for a line of credit of $2.0 million limited to 45% of eligible
inventory (as defined in the Agreement).
In April 1994 and in connection with the Congress agreement, the
Company borrowed from Mr. Rubin $590,000 on a secured term loan basis,
subordinated to Congress, 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 by Mr. Rubin. The
loan from Mr. Rubin was repayable with interest at the prime rate plus 1%, with
required principal payment amortization identical to the terms applicable to the
Citibank loan terms. Accordingly, the Company was required to make principal
payments on the loan from Mr. Rubin of $120,000 in 1994, $120,000 in 1995,
$120,000 in 1996 and the balance in 1997. At September 30, 1996 the
outstanding balance of $310,000 was converted into preferred stock.
Initial borrowings from Congress in the amount of $1,065,192 were used
to repay indebtedness to the American Insured Receivables Fund, the Company's
former asset based lender. 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. In connection with this amendment, Robert Rubin, a director and
principal stockholder of the Company, furnished the lender with a personal
limited guaranty up to an aggregate maximum liability of $375,000, pertaining to
loans made based upon eligible inventory.
(42)
<PAGE>
In January 1994, the Company entered into a three year financial
consulting agreement with Robert M. Rubin, a director and principal stockholder
of the Company, providing for the payment to him of $125,000 per annum. Mr.
Rubin consults with the Company on financial management and long term planning
matters, including consideration of acquisitions. The term of the agreement was
extended to December 31, 1998 in consideration of Mr. Rubin's subordinated loan
to the Company made in connection with the credit agreement described above.
In July 1995, pursuant to the Company's 1992 Stock Option Plan,
the Company granted each of Jonathan Rosenberg and Robert M. Rubin, options to
purchase 20,000 shares of the Company's Common Stock, and Irwin Oringer options
to purchase 15,000 shares of the Company's Common Stock, all at an exercise
price of $1.50 per share, exercisable over a five year term expiring July 14,
2000. The common shares underlying such options were included in a registration
statement that became effective in March 1995. As of the date hereof, none of
these options have been exercised.
In 1996, pursuant to the Company's 1992 Stock Option Plan, the
Company granted Jonathan Rosenberg options to purchase 75,000 shares of
the Company's Common Stock at an exercise price of $1.50. To date, none
have been exercised.
In February 1996, Mr. Rubin loaned the Company $2,353,500 to be used as
part of the acquisition price of Biobottoms. In connection with such loan, the
Company issued Mr. Rubin 100,000 shares of its Series A Preferred Stock,
convertible into 1,000,000 shares of common stock at the option of Mr. Rubin.
The holder of such shares of preferred stock will have the right, subject to a
subordination and intercreditor agreement by and among Congress, Robert Rubin,
American United Global, Inc. and Joan Cooper and Anita Dimondstein as Agents,
during any period during which there shall be an Event of Default under the
Rubin/American United Loans, as such term is defined therein, to designate a
majority of the members of the Board of Directors of the Company. This right of
designation continues 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 filed with the
Securities and Exchange Commission by the Company within six months of the date
of the issue. In the absence of such filing, the Company has agreed, at its sole
cost and expense and upon the request of Mr. Rubin, to file and use its best
efforts to effect a registration of such shares within three (3) months of his
written request.
In May 1997 the Company issued to Mr. Rubin of 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 providing an additional loan to the Company in the
aggregate amount of $600,000.
As of September 30, 1996, the $600,000 loan was converted into 60,000
Shares of Series C Preferred Stock. The Series C Preferred Stock, which has a
liquidation value of $10.00 per Share is convertible into Common Stock at 75% of
the current market price based on the average closing price for the Common Stock
for the 10 days preceding the conversion. Each
(43)
<PAGE>
share of Series C Preferred Stock entitles the holder to 10 votes per share. The
Series C Preferred Stock pays an annual dividend of 9%, based on the per Share
liquidation value. In the event that the dividend, which is payable monthly, is
not paid for three consecutive months , Mr. Rubin shall be entitled to an
additional 100,000 Shares of Common Stock for each month that the dividend is
not paid.
As of September 30, 1996, Robert Rubin, a director and principal
stockholder of the Company, converted an aggregate of approximately $2,900,000
in outstanding debt into an aggregate of 290,000 Shares of Series B Preferred
Stock. The Series B Preferred Stock, which has a liquidation value of $10 per
share, is convertible into Common Stock at 75% of the current market price based
on the average closing price for the Common Stock for the 10 days preceding the
conversion. In addition, each share of Series B Preferred entitles the holder
thereof to 10 votes per share. The Series B Preferred Stock pays an annual
dividend of 9%, based on the per Share liquidation value. In the event that the
dividend, which is payable monthly, is not paid for three consecutive months,
Mr. Rubin shall be entitled to an additional 100,000 Shares of Common Stock for
each month that the dividend is not paid.
In March 1997, the Company approved the issuance of 52,217 shares of
Common Stock to Mr. Rubin in lieu of the dividend payments due under the Series
B and Series C Preferred Stock, as well as for an adjustment in salary, for the
period from January 1, 1997 through March 31, 1997.
On September 9, 1996, the Company entered into an arrangement with
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP ("GSKF&C") which provided
that GSKF&C will provide certain legal and consulting services to the Company
over an extended period of time. As compensation for its services, certain
individual members of GSKF&C received an aggregate of 350,000 shares of Common
Stock and options to purchase an aggregate of 150,000 shares of Common Stock at
$2.50 per share. Of such securities, 157,500 shares of Common Stock and 67,500
options were issued to Wesley C. Fredericks who has since then become a director
of the Company.
In November 1996, the Company issued an aggregate of 1,060,000 options
to 35 employees of the Company, including two executive officers and one outside
director, pursuant to the November 1996 Plan. The options are exercisable at
$1.00 per share, vest over a period of five years, and expire ten years from the
date of grant, if not sooner due to termination or death of the employee.
In May 1997, the Company issued an aggregate of 150,000 options
pursuant to the November 1996 Plan, 50,000 of which were issued to Howard Katz,
a director of the Company, and 100,000 of which were issued to Mr. Fredericks
in connection with his agreeing to become a member of the Company's board of
directors.
In May 1997, the Company authorized the issuance of 200,000 of Common
Stock to Mr. Rubin in consideration of Mr. Rubin extending loans to the Company
as well as extending a personal guarantee to Congress on behalf of the Company.
Between May and July 1997, the Company issued an aggregate of 158,408
shares of Common Stock and options to acquire 200,000 shares of Common Stock to
six consultants. Of the 200,000 options, 50,000 are exercisable at $1.75 per
share and 150,000 are exercisable at $1.875 per share.
From May 1997 through September 1997, the Company sold 1,250,000 shares
of its Common Stock in a private placement of its securities in which it raised
$2,500,000. In addition to these shares, the Company issued to European
Community Capital a placement agent's warrant exercisable to purchase up to
200,000 shares of Common Stock at $3.3125 per share. The Company issued an
option to a principle of the placement agent to purchase up to 100,000 shares of
Common Stock at $2.00 per share.
In October 1997, in part to raise capital for the Company's
acquisition out of bankruptcy of the assets of Brownstone, the Company
completed a private offering of its securities which raised $3,345,000 from
accredited investors. The private placement consisted of units, each unit
consisting of ten shares of Series E Preferred Stock and 7,500 shares of Common
Stock at a purchase price of $10,000 per unit. As a result the Company will be
issuing an aggregate of 3,345 shares of Series E Preferred Stock and 2,608,750
shares of Common Stock in the next few weeks.
(44)
<PAGE>
DESCRIPTION OF SECURITIES
The following description of certain matters relating to the securities
of the Company does not purport to be complete and is subject in all respects to
applicable Delaware law and to the provisions of the Company's articles of
incorporation ("Articles of Incorporation") and bylaws (the "Bylaws"), and the
Underwriting Agreement between the Company and the Underwriter, copies of all
which have been filed with the Commission as Exhibits to the Registration
Statement of with this Prospectus is a part.
General
The Company is authorized by its Articles of Incorporation to issue an
aggregate of 50,000,000 shares of Common stock, $.0001 par value per share, and
up to 1,000,000 shares of preferred stock (the "Preferred Stock"). Immediately
prior to this Offering, an aggregate of 5,343,525 shares of Common Stock were
issued and outstanding. One Hundred (100) shares of the authorized Preferred
Stock are issued and outstanding as Series A Non-Voting Preferred Stock, Two
Hundred and Ninety Thousand (290,000) as Series B Preferred Stock, and Sixty
Thousand (60,000) as Series C Preferred Stock. All outstanding shares of Common
Stock are of the same class, and have equal rights and attributes.
Capital Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.0001 par value per share. As of the date of this Private Placement Memorandum,
there are 8,019,433 shares of Common Stock outstanding. Each share of Common
Stock entitles the holder thereof to one vote on all matters submitted to a vote
of the shareholders. Since the holders of Common Stock do not have cumulative
voting rights, holders of more than 50% of the outstanding shares can elect all
of the directors of the Company and holders of the remaining shares by
themselves cannot elect any directors. The holders of Common Stock do not have
preemptive rights or rights to convert their Common Stock into other securities.
Holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
the Common Stock outstanding and to be outstanding upon completion of this
offering are and will be fully paid and nonassessable.
The Company amended its Certificate of Incorporation to authorize the
issuance of up to 1,000,000 shares of "blank check" preferred stock. The Company
issued 100,000 shares of Series A Preferred Stock, 290,000 Shares of Series B
Preferred Stock and 60,000 shares of Series C Preferred Stock. The Company is
currently contemplating issuing a new Series D Preferred Stock in connection
with the proposed acquisition of Lew Magram, Ltd, and will be issuing very
shortly 3,345 shares of Series E Non-Voting Preferred Stock in connection with
the October 1997 Private Placement. Other than with respect to the Series D
Preferred and the Series E Preferred, the Company and its Board of Directors
have no plans to issue any additional shares of Preferred Stock. Preferred Stock
may be issued in the future in connection with acquisitions, financings or such
other matters as the Board of Directors deems to be appropriate. In the event
that any such shares of Preferred Stock shall be issued, a Certificate of
Designation, setting forth the series of such Preferred Stock and the relative
rights, privileges and designations with respect thereto, shall be filed with
the Secretary of State of the State of Delaware. The effect of such Preferred
Stock is that the Company's Board of directors alone may authorize the issuance
of preferred stock which could have the effect of
(45)
<PAGE>
making more difficult or discouraging an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or other means.
Section 203 of the Delaware Corporation Law prohibits a publicly held
Delaware corporation form engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person, who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock.
Series A Preferred Stock
The Company has 100,000 shares of Series A Preferred Stock outstanding,
all of which are owned by Robert Rubin. Each share of Series A Preferred Stock
is convertible into 10 shares of Common stock at the option of the holder. In
the event that the Company defaults on certain obligations owed to Mr. Rubin, he
shall have the right to designate a majority of the members of the Board of
Directors of the Company. In addition, the holder of the Series A Preferred
Stock has piggyback and demand registration rights with respect to the Common
stock issuable upon exercise of the Series A Preferred Stock. The Series A
Preferred Stock is not entitled to any specific dividends or liquidation rights.
Series B Preferred Stock
The Company has 290,000 Shares of Series B Preferred Stock outstanding,
all of which are owned by Robert Rubin. The Series B Preferred Stock, which has
a liquidation value of $10.00 per Share, is convertible into Common Stock at 75%
of the current market price based on the average closing price for the Common
Stock for the 10 days preceding the conversion. Each share of Series B Preferred
Stock entitles the holder to 10 votes per share. The Series B Preferred Stock
pays an annual dividend of 9%, based on the per Share liquidation value. In the
event that the dividend, which is payable monthly, is not paid, Mr. Rubin shall
be entitled to an additional 100,000 Shares of Common Stock for each month that
the dividend is not paid.
Series C Preferred Stock
The Company has 60,000 Shares of Series C Preferred Stock outstanding,
all of which are owned by Robert Rubin. The Series C Preferred Stock, which has
a liquidation value of $10.00 per Share, is convertible into Common Stock at 75%
of the current market price based on the average closing price for the Common
Stock for the 10 days preceding the conversion. Each share of Series C Preferred
Stock entitles the holder to 10 votes per share. The Series C Preferred Stock
pays an annual dividend of 9%, based on the per Share liquidation value. In
(46)
<PAGE>
the event that the dividend, which is payable monthly, is not paid, Mr. Rubin
shall be entitled to an additional 100,000 Shares of Common Stock for each month
that the dividend is not paid.
Delaware Anti-Takeover Law
Section 203 of the Delaware General Corporation Law (the "Delaware
anti-takeover law") generally prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an interested stockholder for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) the corporation has elected in its
original certificate of incorporation not to be governed by the Delaware
anti-takeover law (the Company has not made such an election), (ii) prior to
such date the Board of Directors of the corporation approved either the business
combination or the transaction in which the person became an interested
stockholder, (iii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding shares
owned by directors who are also officers of the corporation and by certain
employee stock plans, (iv) on or after such date the business combination is
approved by the Board of Directors of the corporation and by the affirmative
vote of at least 66 3/4% of the outstanding voting stock of the corporation that
is not owned by the interested stockholder, or (v) the majority of the
corporation's stockholders adopt an amendment to the corporation's certificate
of incorporation electing not to be governed by the Delaware anti-takeover law,
such amendment not being effective for 12 months following its adoption and not
applicable to any business combination between the corporation and a stockholder
who became an interested stockholder after its adoption. A "business
combination" generally includes mergers, asset sales and similar transactions
between the corporation and the interested stockholder, and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns 15% or more of
the corporation's voting stock or who is an affiliate or associate of the
corporation and, together with his affiliates and associates, has owned 15% or
more of the corporation's voting stock within three years.
Personal Liability of Directors
The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the personal liability of a director to the corporation for
monetary damages arising from certain breaches of fiduciary duties as a
director. The Company's Certificate of Incorporation includes such a provision
eliminating the personal liability of directors to the Company and its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except (i) any breach of a director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for any
transaction from which the director derived an improper personal benefit; or
(iv) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law.
Directors are also not insulated from liability for claims arising under the
federal securities laws. The foregoing provisions of the Company's Certificate
of Incorporation may reduce the likelihood of derivative litigation against
directors for breaches of their fiduciary duties, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
(47)
<PAGE>
The Company's Certificate of Incorporation also provides that the
Company shall indemnify its directors, officers and agents to the fullest extent
permitted by the Delaware General Corporation Law. The Company does not have
directors' and officers' liability insurance but may secure such insurance in
the future. Furthermore, the Company may enter into indemnity agreements with
its directors and officers for the indemnification of and advancing of expenses
to such persons to the fullest extent permitted by law.
Transfer Agent
The Transfer Agent for the Common Stock of the Company is North
American Transfer Co.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 8,019,433
shares of Common Stock outstanding. In addition, the Company has reserved for
issuance 3,200,000 shares upon the exercise of options eligible for grant under
the Company's Stock Option Plan, 2,010,000 of which have been granted and are
currently outstanding. The 1,250,000 shares of Common Stock registered
hereby (plus any additional shares sold upon exercise of the Over-Allotment
Option) will be freely tradeable without restriction or further registration
under the Act, except for any shares purchased or held by an "affiliate" of the
Company (in general, a person who has a control relationship with the Company),
which will be subject to the limitations of Rule 144 adopted under the Act
("Rule 144"). Of the shares of Common Stock to be issued and outstanding after
this offering, 2,187,050 shares of Common Stock are "restricted securities" as
that term is defined under Rule 144, and may not be sold unless registered under
the Act or exempted therefrom. Certain of the foregoing shares are now eligible
to be sold in accordance with the exemptive provisions and the volume
limitations of Rule 144.
In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
the Company, (or persons whose shares are aggregated), who for at least two
years has beneficially owned restricted securities acquired directly or
indirectly from the Company or an affiliate of the Company in a private
transaction is entitled to sell in brokerage transactions within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
total number of outstanding shares of the same class, or (ii) if the stock is
quoted on the Nasdaq National Market, the average weekly trading volume in the
stock during the four calendar weeks preceding the day notice is given to the
Securities and Exchange Commission with respect to such sale. A person (or
persons whose shares are aggregated) who is not an affiliate and has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned restricted securities for at least three
years is entitled to sell such shares pursuant to subparagraph (k) of Rule 144
without regard to any of the limitations described above.
Future sales of the Company's Common Stock by certain of the present
stockholders, under Rule 144, may have a depressive effect on the price of the
Company's Common Stock.
(48)
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The table below sets forth with respect to each Selling Securityholder
the number of shares of Common Stock beneficial owned by each Selling
Securityholder and the number of such securities included for sale in this
Prospectus. Although there can be no assurance that the Selling Securityholders
will sell any or all of the shares of Common Stock offered hereby, the following
table assumes that each of the Selling Securityholders will sell all shares of
Common Stock offered by this Selling Securityholder Prospectus.
Beneficial Beneficial
Ownership Shares of Ownership
of Common Stock Common Stock of Common Stock
Selling Securityholder Prior for Sale to be sold After Sale
- ---------------------- --------------- ------------ ---------------
James Favia 37,500 37,500 0
Harry G. Carson, Jr., TTEE 125,000 125,000 0
Rory Zinman 50,000 50,000 0
Harvey Bibicoff 125,000 125,000 0
Discovery Trading Corp. 175,000 175,000 0
William C. Hayde 75,000 75,000 0
Jeannette Flam 575,000 575,000 0
Steven Wallitt 37,500 37,500 0
Susan Weintraub 12,500 12,500 0
Wilde Construction, Inc. 37,500 37,500 0
The shares of Common Stock may be sold by one or more of the following
methods: (a) a block trade in which a broker or dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Securityholders may arrange for other brokers or dealers to participate.
Such brokers or dealers may receive commissioner discounts from Selling
Securityholders in amounts to be negotiated. Such brokers and dealers and any
other participating brokers or dealers may be deemed to be "underwriters" within
the meaning of the Act in connection with such sales.
(49)
<PAGE>
LEGAL MATTERS
The legality of the Common Stock offered by this Prospectus will be
passed upon for the Company by Gersten, Savage, Kaplowitz & Fredericks, LLP, New
York, New York.
EXPERTS
The consolidated financial statements of Diplomat Corporation at
September 30, 1996, and for each of the two years in the period ended December
31, 1995, appearing in this Prospectus and Registration Statement have been
audited by Feldman Radin & Co., P.C., independent auditors, as set forth in
their report thereon appearing elsewhere herein, and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement
under the Act with respect to the Common Stock offered hereby. This Prospectus
omits certain information contained in the Registration Statement and the
exhibits thereto, and references is made to the Registration Statement and the
exhibits thereto for further information with respect to the Company and the
Common Stock offered hereby. Statements contained herein concerning the
provisions of any documents are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference. The Registration Statement, including exhibits and schedules filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and its public reference facilities in New
York, New York and Chicago, Illinois upon payment of the prescribed fees. At the
date hereof, the Company was not a reporting company under the Securities
Exchange Act of 1934, as amended.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Certificate of Incorporation and By-laws of the Company provide
that the Company shall indemnify to the fullest extent permitted by Delaware law
any person whom it may indemnify thereunder, including directors, officers,
employees and agents of the Company. Such indemnification (other than as ordered
by a court) shall be made by the Company only upon a determination that
indemnification is proper in the circumstances because the individual met the
applicable standard of conduct. Advances for such indemnification may be made
(50)
<PAGE>
pending such determination. Such determination shall be made by a majority vote
of a quorum consisting of disinterested directors, or by independent legal
counsel or by the stockholders. In addition, the Certificate of Incorporation
provides for the elimination, to the extent permitted by Delaware law, of
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as directors.
The Company proposes to obtain a directors and officers insurance and
company reimbursement policy. The policy, if obtained, would insure directors
and officers against unindemnified losses arising from certain wrongful acts in
their capacities and would reimburse the Company for such loss for which the
Company has lawfully indemnified the directors and officers.
The Company has also agreed to indemnify each director and executive
officer pursuant to an Indemnification Agreement with each such director and
executive officer from and against any and all expenses, losses, claims, damages
and liability incurred by such director or executive officer for or as a result
of action taken while such director or executive officer was acting in his
capacity as a director, officer, employee or agent of the Company.
Insofar as indemnification for liabilities arising under the Act may be
provided to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(51)
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
DIPLOMAT CORPORATION Independent Auditor's Report............................................................ F-2
DIPLOMAT CORPORATION AND SUBSIDIARY Consolidated Balance Sheet - September 30, 1996.......................... F-3
Consolidated Statements of Operations
(For the nine months ended September 30, 1996 and year ended December 30, 1995).......................... F-4
Consolidated Statements of Stockholders' Equity
(Nine months ended September 30, 1996 and years ended December 30, 1995 and December 31, 1994)........... F-5
Consolidated Statements of Cash Flows
(For the nine months ended September 30, 1996 and for the year ended December 30, 1995).................. F-6
Notes to Consolidated Financial Statements
(Nine months ended September 30, 1996 and for the year ended December 30, 1995).......................... F-7
DIPLOMAT CORPORATION
Consolidated Financial Statements (Unaudited)
For the nine month period ended June 30, 1997............................................................ F-21
DIPLOMAT CORPORATION AND SUBSIDIARY
Consolidated Balance Sheet (Unaudited) - June 30, 1997....................................................... F-22
Consolidated Statements of Operations (Unaudited)
(For the nine months and three months ended June 30, 1997 and June 30, 1996)............................. F-23
Consolidated Statements of Cash Flows (Unaudited)
(For the nine months ended June 30, 1997 and June 30, 1996).............................................. F-24
Notes to Consolidated Financial Statements
(Nine months ended June 30, 1997 and 1996)............................................................... F-25
</TABLE>
(F-1)
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Diplomat Corporation
Stony Point, New York
We have audited the accompanying consolidated balance sheet
of Diplomat Corporation and Subsidiary as of September 30, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the nine months ended September, 30, 1996 and the year ended December 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Diplomat
Corporation and Subsidiary as of September 30, 1996 and the results of its
operations and its cash flows for the nine months ended September 30, 1996 and
the year ended December 30, 1995 in conformity with generally accepted
accounting principles.
/s/ Feldman Radin & Co., P.C.
-----------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
January 16, 1997 (February 25, 1997
as to (i) the third and fourth paragraphs
of Note 10, and (ii) subsection (a) of Note 11)
F-2
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 69,258
Accounts receivable - trade, less allowance
for possible losses of approximately $ 75,000 1,663,511
Inventories 3,747,740
Prepaid expenses 1,006,978
Other current assets 732,978
------------
TOTAL CURRENT ASSETS 7,220,465
------------
PROPERTY AND EQUIPMENT,
less accumulated depreciation 2,222,348
OTHER ASSETS
Goodwill 3,616,444
Other 613,660
------------
$ 13,672,917
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 4,903,719
Loans payable - bank, revolving credit agreement 2,170,652
Accrued expenses 2,069,123
Current maturities of other long term debt 705,981
Acquisition loans payable 1,500,000
------------
TOTAL CURRENT LIABILITIES 11,349,475
------------
LONG TERM DEBT, less current maturities 1,046,835
------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 1,000,000 shares authorized, 410,000
shares issued and outstanding 4,100,000
Common stock, $.0001 par value, 50,000,000 shares authorized,
4,993,525 shares issued and outstanding 500
Paid-in capital 6,076,399
Accumulated deficit (8,900,292)
------------
TOTAL STOCKHOLDERS' EQUITY 1,276,607
------------
$ 13,672,917
============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine
months ended Year ended
September 30, December 30
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $ 19,222,801 $ 11,301,314
COST OF GOODS SOLD 13,334,588 6,913,011
------------ ------------
GROSS PROFIT 5,888,213 4,388,303
------------ ------------
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 10,589,561 4,629,692
RESTRUCTURING EXPENSE 1,738,975 --
------------ ------------
OPERATING INCOME (LOSS) (6,440,323) (241,389)
OTHER INCOME 7,935 10,784
INTEREST EXPENSE (792,512) (490,273)
------------ ------------
LOSS BEFORE INCOME TAXES (7,224,900) (720,878)
INCOME TAXES (BENEFIT) -- --
------------ ------------
NET LOSS $ (7,224,900) $ (720,878)
============ ============
NET LOSS PER COMMON SHARE: $ (1.59) $ (0.16)
============ ============
AVERAGE NUMBER OF SHARES USED IN COMPUTATION 4,549,525 4,493,525
============ ============
</TABLE>
See notes to financial statements.
F - 4
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------- ------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 3,975,000 $ 398 -- $ -- $ 4,573,501 $ (515,056) $ 4,058,843
Issuance of common stock 10,755 2 (2) -- --
Net loss -- (439,459) (439,459)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 3,985,755 400 -- -- 4,573,499 (954,515) 3,619,384
Issuance of common stock,
net costs of issuance
of $59,500 500,000 50 627,950 628,000
Issuance of common stock 7,770 8 (8) --
Net loss (720,878) (720,878)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 30, 1995 4,493,525 458 -- -- 5,201,441 (1,675,393) 3,526,507
Exercise of Options, issuance
of 500,000 shares of common
stock par .0001 @ .95 500,000 50 474,950 475,000
Issuance of common stock 400,000 400,000
Issuance of preferred stock -- 4,100,000 4,100,000
Net loss (7,224,900) (7,224,900)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996 4,993,525 $ 508 -- $ 4,100,000 $ 6,076,391 $(8,900,293) $ 1,276,607
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F - 5
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine For the year
months ended ended
September 30, December 30,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,224,900) $ (720,878)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 211,237 117,533
Issuance of common shares 400,000
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable (282,507) 42,990
(Increase) decrease in inventories 2,551,187 (658,489)
(Increase) decrease in prepaid expenses 400,240 81,559
(Increase) decrease in other current assets 702,866 8,315
(Increase) decrease in other assets 500,202 (58,068)
Increase (decrease) in accounts payable 502,311 14,639
Increase (decrease) in accrued expenses 1,552,586 38,224
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (686,788) (1,134,175)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Biobottoms, Inc. (net of cash acquiredof ($1,250) (2,899,211) --
Acquisition of property and equipment (211,096) (26,979)
----------- -----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (3,110,307) (26,979)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long term advance from stockholder -- 250,000
Repayment of loans payable , stockholder -- (8,881)
Proceeds of loans payable, affiliate 450,000 --
Revolving credit agreement 583,650 589,531
Issuance of warrants -- 628,000
Issuance of common stock 475,000 --
Borrowings from stockholder 2,620,000 --
Repayment of long term debt and loan payables (393,678) (207,160)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,734,972 1,251,490
----------- -----------
NET INCREASE (DECREASE) IN CASH (62,113) 90,336
CASH AND CASH EQUIVALENTS, at beginning of period 131,371 41,035
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 69,258 $ 131,371
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 706,000 $ 418,000
=========== ===========
Income taxes $ -- $ 21,600
=========== ===========
</TABLE>
See notes to financial statements.
F - 6
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
AND THE YEAR ENDED DECEMBER 30, 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. Pursuant to
SFAS 109 deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured by applying enacted tax rates and
laws to taxable years in which such differences are expected to
reverse.
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") isuued Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting For the Impairment of Long Lived Assets and For
Long Lived Assets to be Diposed 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
F - 7
<PAGE>
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
September 30, 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.
I. The Company accounts for stock transactions in accordance
with APB No. 25, "Accounting for Stock Issued 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, of
approximately $3,033,000 are included in the accompanying statement of
operations for the eight months ended September 30, 1996. Included in
other current assets at September 30, 1996, is approximately $463,000
of prepaid catalog costs.
2. BUSINESS:
The Company is engaged in two lines of business and
accordingly its operations are classified into two business segments:
specialty catalog retail operations of natural fiber apparel and
related products utilizing environmentally "friendly" materials for
children from infancy to early adolescence, and the manufacturing
marketing and distribution of infants accessories principally to mass
merchants.
As of 1995, the Company reported its results of operations on
a fifty-two/fifty-three week year ending on the Saturday closest to
December 31. However, on November 12, 1996, the Company has changed
its reporting date to September 30.
3. 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 Corp., a wholly-owned
subsidiary
F - 8
<PAGE>
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 into 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.
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.
F - 9
<PAGE>
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 1,000,000 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 a 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.
4. MANAGEMENT PLANS:
For the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, the Company's net loss was
approximately $7,225,000, $721,000 and $439,000, respectively.
Management attributes the losses in 1995 and 1994 to lower sales
without corresponding reductions in operating expenses . In 1996,
significantly lower sales, additional interest expenses from the
acquisiton of Biobottoms, Inc., and expenses incurred as a result of
management's restructuring plan were the principal components for the
substanial loss. These losses placed a severe strain on the Company's
liquidity and working capital and diverted management attention to
financial matters, as well as substantially increased legal fees and
the cost of financing.
The Company has taken several actions to improve its ability
to meet its obligations and enhance working capital. Subsequent to
September 30, 1996, the Company commenced negotiations with lenders to
extend due dates of currently due obligations and concurrently, is in
the process of negotiating to sell equity secuities via private
placement. Management believes that the actions taken and its plans to
reduce expenses and improve operating margins will allow the Company
to meet its obligations and achieve positive cash flow. However, no
assurances can be given that the Company will be successful in
achieving those
F - 10
<PAGE>
reductions and achieving profitability or positive cash flow.
5. RESTRUCTURING OF OPERATIONS:
During the quarter ended September 30, 1996, management
instituted various actions designed to significantly cut costs in the
Company's manufacturing operation located in Stony Point, New York,
and to refocus the operation on its most profitable product lines and
channels of distribution. Towards this end, the following significant
decisions were made: (i) the former Chief Executive Officer's
contract, which expired in October 1996, was not renewed, and all ties
with this officer were severed; (ii) certain royalty agreements,
specifically those related to products which the Company is
discontinuing, were not renewed by the Company; (iii) a decision was
made to target primarily mass merchant customers; and (iv) significant
permanent cutbacks in personnel and other operating costs were made.
As a result of the actions taken, the Company incurred
restructuring charges of approximately $1,738,975. The restructuring
charges include approximately $568,000 primarily for write-offs and
other costs associated with the discontinuance of various products and
$771,000 for severance pay and professional and consulting fees
payable in connection with the restructuring plan.
6. CONVERSION OF STOCKHOLDER DEBT AND ISSUANCE OF SERIES B
PREFERRED STOCK
Effective September 30, 1996, a significant stockholder and member of
the Company's Board of Directors converted $3,500,285 of indebtedness
into 290,000 shares of Series B preferred stock of the Company and
60,000 shares of the Company's Series C preferred stock. Both the
Series Band C shares of preferred stock have a liquidation preference
of $10 per share ("Liquidation Value") and a normal dividend of 9% of
Liquidation Value, payable monthly. Should the Company not pay the
dividends on either the Series B or C preferred stock for three
consecutive months, the holder will be entitled to receive 100,000
shares of the Company's common stock for each month that the dividend
has not been paid as a penalty. The preferred stock, based on
Liquidation Value is convertible into common stock of the Company at
75% of the average market value of the common stock for the ten
trading days immediately preceding the day of conversion. The
preferred stock also has voting rights equal to 3,500,000 shares of
common stock on all matters on which common stock votes, including
election of directors. As part of the consideration for the conversion
the holder was issued 500,000 shares of the Company's common stock.
The issuance of the common stock was valued at approximately $0.80 per
share, the estimated fair value of such shares at the time of
issuance.
F - 11
<PAGE>
7. INVENTORIES:
Inventories consist of the following:
September 30,
1996
-------------
Raw materials and packaging $ 297,776
Work-in-process 409,177
Finished goods 3,040,787
=============
$ 3,747,740
=============
8. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
September 30,
1996
-------------
Land $ 420,000
Building 1,807,347
Equipment 1,680,206
-------------
3,907,553
Less accumulated depreciation 1,685,205
-------------
$ 2,222,348
=============
9. OTHER ASSETS:
September 30,
1996
-------------
Goodwill $ 3,616,444
Noncurrent deferred tax asset 581,535
Deposits 32,125
=============
$ 4,230,104
=============
F - 12
<PAGE>
10. REVOLVING CREDIT AGREEMENTS:
(a) In April 1994, the Company entered into an agreement with
Congress Financial Corporation ("Congress") providing the Company with
a $3,000,000 collateralized line of credit to be utilized for loans
and trade letters of credit. The loan is collateralized by
substantially all of the Company's personal property, including
accounts receivable, inventory, and trademarks. The interest rate on
loans is 2% above the prime rate announced by Philadelphia National
Bank. The prime rate was 8.25% and 8.75% at September 30, 1996 and
December 30, 1995, respectively.
Pursuant to the amended terms dated October 1995, the Company
may borrow up to an amount equal to the sum of:
(I) 85% of eligible accounts receivable (as defined)
(ii) 100% of cash collateral
(iii) the lesser of 35% of eligible inventory (as defined) or
$1,250,000, less
(iv) any availability reserves.
The revolving credit agreement contains restrictions relating
to the payment of dividends, and the maintenance of working capital
and stockholders' equity. As of September 30, 1996, the Company was in
violation of the financial covenants contained in the agreement. On
February 25, 1997, the violations were waived by the lender and
concurrently, the lender and the Company agreed on revised financial
covenants for the remainder of the Company's fiscal year ending
September 30, 1997. The Company expects to be in compliance with the
revised financial covenants at each measurement date. Up to $375,000
of such loan is guaranteed by a director and significant stockholder.
(b) On February 9, 1996, the Company's, a wholly owned subsidiary
(Biobottoms), entered into a new financing arrangement with Congress
which includes a $2,000,000 revolving credit line, restricted to the
lesser of 45% of the value of eligible inventory or 80% of the value
of an orderly liquidation of such inventory. Borrowings on the line of
credit bear interest at the prime rate plus 2% and it expires on
February 9, 1999. Fees are paid on the unused line of credit at the
rate of 1/2%. The line of credit is collateralized by substantially
all of the Company's assets. As of September 30, 1996, as a result of
cross defaults due to the violations described in the preceeding
paragraph, Biobottoms was in violation of certain of the financial
covenants contained in the agreement. On February 25, 1997, these
violations were waived by the lender and concurrently, the lender and
the Company agreed on revised financial covenants for the remainder of
the Company's fiscal year ending September 30, 1997. The Company
expects to be in compliance with the revised covenants at each
measurement date.
F - 13
<PAGE>
11. LONG-TERM DEBT:
Long-term debt consists of the following at September 30, 1996:
Note payable - bank, payable in monthly
installments of $10,018 which includes interest at
8.375%, due August 2010. The note is collateralized
by land and buildings and is guaranteed by a
stockholder. $ 986,581
Note payable - bank, payable in monthly
installments of $7,201 which includes interest at
12%, due January 1997. The note is collateralized
by land and buildings and is cosigned by a
stockholder. (b) 582,049
Equipment Loans - payable in monthly installments 184,186
Acquisition notes payable. (a) 1,500,000
--------------
3,252,816
--------------
Current portion - acquisition notes, former stockholders 1,500,000
Current maturities of other long term debt 705,981
--------------
Total current 2,205,981
--------------
Long - term debt $ 1,046,835
==============
The maturities of long term debt is as follows:
1997 $ 2,205,981
1998 93,759
1999 92,448
2000 52,125
Thereafter 808,503
------------
$ 3,252,816
============
(a) The Company paid $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. The Company did not make the payments which
were required in August and November 1996. On December 9,
F - 14
<PAGE>
1996 the Company received notification of the default from the former
Biobottoms shareholders, which required that the Company cure the
default under the notes within 270 days, or be subject to enforcement
action. On February 25, 1997, the Biobottoms former stockholders
agreed not to initiate enforcement action as a result of this or
subsequent defaults until not earlier than December 31, 1997. In
connection with obtaining this agreement, Diplomat agreed to pay the
Biobottoms shareholders ten installments of $5,000 to be
applied against the Acquisition Notes, commencing on February 21, 1997
and to undertake to conduct a private placement of its securities to
raise funds for the repayment of the remaining balance due on the
Acquisition Notes. Should the Company fail to raise enough funds for
repayment, it has agreed to pay the Biobottoms shareholders
additional payments of $50,000 on July 1, 1997 and $100,000 on
December 15, 1997 to be applied against the Acquisition Notes.
(b) Full payment of this mortgage was due on January 26, 1997. The
lender has agreed to extend the mortgage for an additional twelve
months in exchange for an extension fee of 15,000 and the agreement to
bring certain past due amounts current.
12. STOCKHOLDERS' EQUITY:
A. On December 31, 1992, the Board of Directors has adopted a
stock option plan which allows for the grant of option to employees
and non-employees to purchase up to 200,000 shares of the Company's
common stock. The exercise price per share cannot be less than the
fair market value of the Company's common stock on the date of grant.
During each of 1996 and 1995, the Company issued 75,000 options
exercisable at $1.50 per share. There were no options exercised or
canceled during either of the years presented.
B. There are currently 581,175 warrants outstanding to
purchase shares of the Company's common stock at $3.50 per share. The
warrants, which were issued in connection with the Company's initial
public offering of its common stock, are exercisable until November 4,
1998. To date, these warrants have not been exercised.
C. During 1995, warrants to purchase 1,500,000 shares of
common stock were granted; 500,000 of these warrants, exercisable at
$1.37 per share, were exercised resulting in net proceeds to the
Company of $628,000. The remaining 1,000,000 warrants were exercisable
as follows, (I) 500,000 at $3.00 per share expiring on July 18, 1996
and (ii) 500,000 at $1.00 per share expiring on July 18, 1997. The
warrants expiring July 18, 1996 were not exercised.
D. In September 1996, the Company issued 500,000 common
shares at $0.95 per share to previously unrelated investors from the
exercise of options. Net proceeds to the Company were $475,000.
E. In November 1996, the Company adopted an Incentive Stock
option Plan (the 1996 Plan) pursuant to which options to purchase a
maximum of 1,500,000 shares of the company's common stock (subject to
adjustment in the case of stock splits, stock dividends,
recapitalizations and other capital adjustments) may be granted to
employees, oficers and directors of the Company and other persons who
provide services to the Company. As of January 31, 1997, 1,060,000 of
such options have been granted at an exercise price of $1.00 per
share. The 1996 Plan provides that options granted thereunder shall be
exercisable during a period of no more than ten years from the date of
grant, and with respect to incentive stock options, the exercise price
shall be at least equal to 100% of the fair market valuee of the
common stock at the date of grant. No options under the plan were
exercised as of January
F - 15
<PAGE>
31, 1997.
F. In September 1996, the Company issued 150,000 options under
its August 1996 Stock Option Plan. These options are exercisable for a
period of five years at price of $2.00 per share, fair market value at
the time.
13. CONCENTRATION OF CREDIT RISKS:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. Concentrations of credit risk with respect to trade
receivables include concentrations of trade accounts in the juvenile
products industry.
To counter the credit risk associated with the Company's
trade receivables, the Company purchases credit insurance covering
substantially all major customers.
14. NET SALES:
For the nine months ended September 30, 1996 and the years
ended December 30, 1995 and December 31, 1994 two customers accounted
for 6% and 15%, 23% and 36% and 28% and 34% of net sales,
respectively.
15. COMMITMENTS AND CONTINGENCY:
A. Effective July 1, 1993, the Company entered into a license
agreement with an unaffiliated third party, pursuant to which the
Company was granted an exclusive license to the use of a registered
trademark for the manufacture, advertisement, promotion, distribution
and sales of certain products within the United States.
An amendment effective January 1995, obligates the Company to
distribute a number of Authorized Products sufficient to generate
minimum net annual sales of $4,500,000 for the twelve months ended
December 30, 1995, and each year thereafter during the term of the
agreement. In the event that such minimum net sales goals are not
achieved, the Company must pay the licensor the Distribution Fee based
upon such volumes. Additionally, the Company paid the licensor 9% of
net sales of licensed products of up to $5,000,000 and 10% of such net
sales in excess of $5,000,000. This license agreement expired on June
30, 1996 and was not renewed by the Company.
B. The Company's former Chief Executive Officer was employed
under a three-year employment agreement effective November, 1993, as
amended in April 1994 pursuant to which he was paid a base salary of
$212,500 per annum and was entitled to an annual cash bonus, based
upon the Company's reported pretax income from operations. The
employment agreement expired in November 1996 and was not renewed.
An executive vice-president of the Company is employed under
a three-year agreement, effective November 1993, pursuant to which he
earns an annual salary of $150,000 and is entitled to an annual bonus
as determined by the Company's Board of Directors. The contract
expired in November 1996. The employee continues to be employed by the
company pursuant to the terms of the original agreement.
F - 16
<PAGE>
C. In January 1994, the Company entered into a three-year
financial consulting agreement with a director and principal
stockholder of the Company, providing for the payment of $125,000 per
annum.
D. Leases:
The Company leases its office, warehouse, and retail store
facilities under operating lease agreements. The terms of the lease
agreements provide for the minimum annual rentals.
Furniture minimum annual lease payments under lease
agreements with terms in the excess of one year, at September 30,
1996, are as follows:
1997 $217,000
The operating leases provide for annual increases in lease
payments. The Company recognizes the total lease expense on a
straight-line basis over the lives of the leases in accordance with
generally accepted accounting principles.
Rent expense for operating leases in excess of one year was
approximately $226,000 and $351,802 for the fiscal years ended
September 30, 1996 and January 28, 1996, respectively.
E. Litigation
In September 1996, the Company was named as a
defendant in an action brought in the Supreme Court of New York. The
plaintiff alleges that the defendants' (including the Company)
negligent maintenance of a railroad crossing adjacent to the Company's
property caused him to collide with a train. The plaintiff is seeking
$10,000,000 in damages for his injuries, and his spouse is seeking an
additional $1,000,000 in damages for loss of the plaintiff's services.
The Company and its insurance carrier intend to vigorously defend this
action. The ultimate outcome of the litigation cannot be presently
determined. The Company does maintain $1,000,000 of insurance coverage
which could be applied to any liability posed by this matter.
16. INCOME TAXES:
The following analyzes the deferred tax assets and
liabilities required at September 30, 1996:
Deferred tax asset:
Net operating loss carry forward $ 2,579,000
Restructuring reserves 1,287,000
Inventory 176,000
F - 17
<PAGE>
Other items 174,000
------------
4,216,000
Less: Valuation allowance (3,047,000)
------------
Deferred tax asset 1,169,000
Deferred tax liability
Tax basis of assets less than basis for financial
reporting purposes and other items (103,000)
============
$ 1,066,000
============
A valuation allowance is provided to reduce the deferred tax
assets to a level which, more likely than not, will be realized. The
net deferred tax asset reflects management's estimates of the amount
which will be realized from future profitability which can be
predicted with reasonable certainty. The valuation allowance was
$3,047,000 at September 30, 1996, which represents an increase of
$2,769,000 over the amount reported at December 30, 1995.
As of December 30, 1995, the Company has net operating loss
carry forwards for Federal income tax purposes of approximately
$1,263,000 which are available to offset future Federal taxable income
through 2009.
The provision for income taxes differs from the amount
computed by applying the 34% federal statutory income tax rate to the
net loss before provision for income taxes as follows:
<TABLE>
<CAPTION>
Nine months
ended Year ended Year ended
September 30, December 30, December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit computed at statutory rate $(2,456,000) $ (112,805) $ (214,000)
State tax benefit, net of federal tax benefit (313,000)
Adjustment to valuation allowance 2,769,000 112,805 88,000
----------- ----------- -----------
Income tax (benefit) as reported $ -- $ -- $ (126,000)
=========== =========== ===========
</TABLE>
17. BUSINESS SEGMENT INFORMATION:
Summarized financial information by business segment for nine
months ending September 30, 1996 is as follows:
F - 18
<PAGE>
Nine months
ended
September 30,
1996
------------
Net sales:
Specialty catalog retail $ 11,672,908
operations
Mass merchant manufacturing
and distribution 7,549,893
------------
19,222,801
============
Operating income (loss):
Specialty catalog retail (1,085,728)
operations
Mass merchant manufacturing (2,154,973)
and distribution
------------
(3,240,701)
============
Total assets:
Specialty catalog retail
operations 5,310,725
Mass merchant manufacturing
and distribution 7,762,192
------------
13,072,917
============
Depreciation and amortization:
Specialty catalog retail
operations 125,555
Mass merchant manufacturing
and distribution 85,682
------------
211,237
============
Capital expenditures:
F - 19
<PAGE>
Specialty catalog retail 202,633
operations
Mass merchant manufacturing
and distribution 8,463
------------
$ 211,096
============
18. NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED):
The following summarizes the Company's results of operations
for nine months ended September 30, 1995:
Nine months
ended
September 30, 1995
-----------
Net sales $ 9,947,418
Cost of sales 5,668,256
-----------
Gross profit 4,279,162
Operating expenses 3,414,301
-----------
Operating income 864,861
Other income 14,739
Interest expense (374,121)
-----------
Income before income taxes 505,479
Income taxes 47,000
-----------
Net income $ 458,479
===========
Net income per share $ 0.12
===========
Number of shares used in
computation 3,985,755
F - 20
<PAGE>
DIPLOMAT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) FOR THE
PERIOD ENDED
JUNE 30, 1997
F-21
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
JUNE 30,1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,987
Accounts receivable, trade,net 1,603,321
Inventories 5,558,875
Prepaid expenses 1,058,262
Other current assets 343,687
------------
TOTAL CURRENT ASSETS 8,575,132
PROPERTY AND EQUIPMENT
less accumulated depreciation 2,219,203
INTANGIBLE ASSETS 3,484,444
OTHER ASSETS 631,707
------------
$ 14,910,486
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 4,572,521
Loans payable-stockholders 37,000
Loans payable-bank 2,975,623
Accrued expenses 1,263,217
Current maturities of long term debt 685,265
Subordinated convertible term notes 1,500,000
------------
TOTAL CURRENT LIABILITIES 11,033,626
------------
LONG TERM DEBT,less current maturities 1,013,265
------------
STOCKHOLDERS' EQUITY:
Preferred stock 4,191,380
Common stock 585
Paid-in capital 6,698,813
Accumulated deficit (8,027,183)
------------
TOTAL SHAREHOLDERS' EQUITY 2,863,595
------------
$ 14,910,486
See notes to financial statements.
F-22
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 30 June 30 June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 19,866,711 $ 15,746,746 $ 6,037,441 $ 9,239,984
COST OF SALES 9,178,866 9,271,782 2,937,212 5,386,893
------------ ------------ ------------ ------------
GROSS PROFIT 10,687,845 6,474,964 3,100,229 3,853,091
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling expenses 3,662,495 3,243,646 1,194,388 1,441,698
General and administrative expenses 4,646,468 3,673,329 1,493,044 1,811,025
Warehouse and distribution expenses 507,026 647,515 156,917 253,405
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 8,815,989 7,564,490 2,844,349 3,506,128
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 1,871,856 (1,089,526) 255,880 346,963
OTHER INCOME(EXPENSE) 2,480 1,415 375 2,685
INTEREST EXPENSE (491,057) (631,019) (160,184) (294,645)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX 1,383,279 (1,719,130) 96,071 55,003
INCOME TAXES (BENEFIT) 324,000 (168,340) 3,000 41,052
------------ ------------ ------------ ------------
NET INCOME (LOSS) 1,059,279 (1,550,790) 93,071 13,951
PREFERRED STOCK DIVIDEND 162,000 0 79,500 0
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE
FOR COMMON $ 897,279 ($ 1,550,790) $ 13,571 $ 13,951
NET INCOME (LOSS) PER
COMMON SHARE $ 0.16 ($ 0.35) $ 0.00 $ 0.00
NUMBER OF SHARES USED IN
COMPUTATION 5,458,525 4,493,525 5,843,525 4,493,525
</TABLE>
See notes to financial statements.
F-23
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30, June 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) $ 1,059,278 $(1,550,790)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 305,177 202,105
---------- ----------
1,364,455 (1,348,685)
CHANGES IN ASSETS AND LIABILITIES
(Increase)decrease in accounts receivable (132,871) (1,222,615)
(Increase) decrease in inventories (1,811,135) 153,004
(Increase)decrease in prepaid expenses (411,318) 56,641
(Increase)decrease in other current assets 749,324 606,555
(Increase)decrease in other assets (18,047) 0
Increase(decrease) in accounts payable (89,098) (671,381)
Increase(decrease) in accrued expenses (683,574) 174,493
---------- ----------
(1,032,264) (2,251,988)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment,net (194,032) (42,510)
Acquisition of Biobottoms 0 (4,567,662)
---------- ----------
(194,032) (4,610,172)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 500,000 628,000
Issuance of preferred stock 91,380 600,000
Preferred stock dividend (162,000) 0
Proceeds from loans payable 0 4,564,847
Repayments of loans payable (66,326) (1,053,907)
Revolving credit agreement 804,971 2,174,016
---------- ----------
1,168,025 6,912,956
---------- ----------
NET INCREASE(DECREASE) IN CASH (58,271) 50,796
CASH AND CASH EQUIVALENTS-beginning of period 69,258 49,695
---------- ----------
CASH AND CASH EQUIVALENTS-end of period $ 10,987 $ 100,491
Supplemental disclosure of cash flow activity:
Financing
Issue of common and preferred stock in settlement
of obligations $ 213,880 $ 600,000
Supplemental cash flow information:
Cash paid for the year for:
Interest 491,057 631,019
Taxes 4,837 0
</TABLE>
F-24
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
The financial statements for these interim periods, which are
unaudited, in the opinion of management, includes all adjustments, consisting of
normal recurring adjustments, necessary for fair presentation of the interim
period. The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full fiscal year. These
financial statements should be read in conjunction with the Company's annual
report on Form 10-KSB for the year ended September 30, 1996.
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 June 30, 1997.
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.
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.
F-25
<PAGE>
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, are included in the statements
of operations.
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 as long as no default
occurs. One such note was due six months from the acquisition date and the
second note was due in two equal installments of $375,000, nine months and
eighteen months after the date of acquisition, respectively. The Company did not
make the payments which were required in August and November 1996. On December
9, 1996 the Company received notification of the default from the former
Biobottoms shareholders, which required that the Company cure the default under
the notes within 270 days, or be subject to enforcement action. On February 25,
1997, the Biobottoms former shareholders agreed not to initiate enforcement
action as a result of this or subsequent defaults until not earlier than
December 31, 1997. In connection with obtaining this agreement, Diplomat agreed
to pay the Biobottoms shareholders ten installments of $5,000 to be applied
against the acquisition notes, commencing on February 21, 1997 and to undertake
to conduct a private placement of its securities to raise funds for the
remaining balance due on the acquisition notes. In July 1997, the Company
received proceeds from a Private Placement and pursuant to an agreement with the
Biobottoms shareholders paid $1,500,000 in full satisfaction of all amounts due
under the acquisition notes, and also amended its consulting agreements with
Joan Cooper and Anita Dimondstein to provide for additional compensation of
29,204 shares each of the Company's common stock. 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.
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 fiscal 1996, 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.
F-26
<PAGE>
Nine Months Ended
June 30, 1996
-----------------
(unaudited)
Net Sales $21,418,469
Net Loss (2,201,051)
Net Loss Per Common Share (0.49)
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 was payable in full on May 4, 1996 and was paid in full together
with a financing fee of $50,000 paid in May 1996.
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 1,000,000 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.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
During the three months and nine months period ended June 30, 1997,
certain lawsuits were settled resulting in a reduction of accounts payable and
certain accrued liabilities were adjusted aggregating $320,000 less than
originally estimated. This reduction has been included as a reduction of general
and administrative expenses during the periods. During the periods, there was
also a reduction of accounts payable and accrued liabilities of approximately
$214,000 by the issuance of preferred stock and common stock in payment of
obligations.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this Prospectus nor any offer,
solicitation or sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof or that the information herein is correct as of any time
subsequent to the date of this Prospectus.
Page
----
Prospectus Summary ..............................
Risk Factors ....................................
Use of Proceeds .................................
Dividend Policy .................................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations ..........................
Business ........................................
Management ......................................
Principal Stockholders ..........................
Certain Transactions ............................
Description of Securities .......................
Shares Eligible for Future Sale .................
Selling Securityholders and
Plan of Distribution ...........................
Legal Matters ...................................
Experts .........................................
Additional Information ..........................
Indemnification for Securities
Act Liabilities.................................
Financial Statements ............................ F-1
Until _____________, 1997 (25 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIPLOMAT CORPORATION
1,250,000 shares of Common Stock
-------------------
Prospectus
-------------------
____________, 1997
- --------------------------------------------------------------------------------
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(52)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, among other
things, and subject to certain conditions, authorizes the Company to indemnify
its officers and directors against certain liabilities and expenses incurred by
such persons in connection with claims made by reason of their being such an
officer or director. The restated Certificate of Incorporation and By-laws of
the Company provide for indemnification of its officers and directors to the
full extent authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to
indemnify the directors and certain officers of the Registrant and certain other
persons against certain civil liabilities.
Item 25. Other Expenses of Issuance and Distribution
The following is a statement of the estimated expenses to be paid by
the Company in connection with the issuance and distribution of the securities
being registered:
SEC Registration Fee $ 1,448.86
Printing Engraving Expenses $10,000
Legal Fees and Expenses $20,000
Accounting Fees and Expenses $ 3,000
Miscellaneous $ 3,200
Total $37,648.86
----------
* estimate
Item 26. Recent Sales of Unregistered Securities
During the past three years, the Company has sold securities to
unregistered securites as described below. Unless otherwise indicated, there was
no underwriters involved in the transactions and there was no underwriting
discounts or commissions paid in connection therewith, except as disclosed
below. The issuances of these securities were considered to be exempt from
registration under Section 4(2) of the Act, as amended, and the regulations
promulgated thereunder. The purchasers of the securities in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the certificates for the securities issued
in such transaction. The purchasers of the securities in the transactions had
adequate access to information about the Registrant.
In July 1995, in connection with a financial consulting agreement
between the Company and Boulder Enterprises, Inc., the Company issued Class B,
Class C, and Class D warrants to Boulder Enterprises, Inc., each of which is
exercisable to purchase 500,000 shares of common stock at $1.37, $1.00 and
$3.00, respectively. The Class B warrants have expired and the Class D and Class
C warrants have been exercised.
In July 1995, the Company granted each of Sheldon M. Rose, Jonathan
Rosenberg and Robert Rubin options to purchase 20,000 shares of Common Stock,
and Irwin Oringer options to purchase 15,000 shares of Common Stock, all
exercisable at $1.50 per share.
In 1995, the Company issued 500,000 shares of Common Stock to Boulder
Enterprises, Inc. upon exercise of its Class B Warrant.
In 1996, the Company granted Jonathan Rosenberg options to purchase
75,000 shares of Common Stock exercisable at $1.50 per share.
In February 1996, in consideration for making a loan to the Company in
the amount of $2,353,500, the Company issued Mr. Rubin 100,000 shares of its
Series A Convertible Preferred Stock which are convertible at Mr. Rubin's option
into 1,000,000 shares of the Company's Common Stock.
In September 1996, the Company issued (i) 350,000 shares of Common
Stock and (ii) options to purchase 150,000 shares of Common Stock at an
exercise price of $2.50, to Gersten, Savage, Kaplowitz & Fredericks, LLP
in consideration for providing certain legal and consulting services to the
Company.
In September 1996, Mr. Rubin converted an aggregate of approximately
$3,500,000 in debt into 290,000 shares of the Company's 9% Class B Convertible
Preferred Stock and 60,000 shares of the Company's 9% Class C Convertible
Preferred Stock. Each of the Series B and Series C shares is convertible at the
option of the holder into 10 shares of the Company's Common Stock.
In November 1996, the Company issued options to purchase an aggregate
of 1,060,000 shares of its Common Stock at an exercise price of $1.00 per share
to 35 employees of the Company, including two executive officers and one outside
director.
In May 1997, the Company issued options to purchase an aggregate of
150,000 shares of its common stock pursuant to the November 1996 Plan, 50,000 of
which were issued to Howard Katz, a director of the Company, and 100,000 of
which were issued to Mr. Fredericks in connection with his agreeing to become a
member of the Company's board of directors.
In May 1997, the Company issued to Mr. Rubin 550,000 shares of Common
Stock in connection with (i) Mr. Rubin's conversion of debt to equity, and (ii)
Mr. Rubin deferring his monthly consulting fee. The issuance of this stock was
approved in 1996.
In May 1997, the Company authorized the issuance of 200,000 of Common
Stock to Mr. Rubin in consideration of Mr. Rubin extending loans to the Company
as well as extending a personal guarantee to Congress on behalf of the Company.
Between May and July 1997, the Company issued an aggregate of 158,408
shares of Common Stock and options to acquire 200,000 shares of Common Stock to
six consultants. Of the 200,000 options, 50,000 are exercisable at $1.75 per
share and 150,000 are exercisable at $1.875 per share.
From May 1997 through September 1997, the Company sold 1,250,000 shares
of its Common Stock in a private placement of its securities in which it raised
$2,500,000. In addition to these shares, the Company issued to European
Community Capital a placement agent's warrant exercisable to purchase up to
200,000 shares of Common Stock at $3.3125 per share. The Company issued an
option to a principle of the placement agent to purchase up to 100,000 shares of
Common Stock at $2.00 per share.
In October 1997, in part to raise capital for the Company's
acquisition out of bankruptcy of the assets of Brownstone, the Company
completed a private offering of its securities which raised $3,345,000 from
accredited investors. The private placement consisted of units, each unit
consisting of ten shares of Series E Preferred Stock and 7,500 shares of Common
Stock at a purchase price of $10,000 per unit. As a result the Company will be
issuing an aggregate of 3,345 shares of Series E Preferred Stock and 2,608,750
shares of Common Stock in the next few weeks.
II-1
<PAGE>
Item 27. Exhibits
3a. Certificate of Incorporation, as amended*
3b By-laws, amended*
3c Amendment to Certificate of Incorporation*
4a Form of Common Stock Certificate*
4b Form of Warrant Agency Agreement between the Registrant and North
American Transfer Company*
4c Revised form of Unit Purchase Option*
4d Common Stock Purchase Warrant*
4e Certificate of Designation of Class B of Class C Preferred Stock*****
5 Opinion of Gersten, Savage, Keplowitz & Fredericks, LLP
10a Employment Agreement with Stuart A. Leiderman*
10b Stock Option Plan*
10c November 1996 Stock Option Plan*****
10d Exclusive Distributorship Agreement by and between Ambrose &
Montgomery, Inc. and Diplomat Juvenile Corporation*
10e License Agreement by and between Diplomat Juvenile Corporation,
Wesley Howell and Steve Prested*
10f Loshell Realty mortgages with Union State Bank and Stony Point
Technical Park, Inc. and related Mortgage Notes, including Sheldon
Rose guarantee of Union State Bank*
10g Agreement dated as of March 1, 1994 by and between Francine H.
Nichols and Diplomat Corporation**
II-2
<PAGE>
10h First Amendment to Exclusive Distributorship Agreement by and between
Ambrose & Montgomery, Inc. and Diplomat Corporation**
10i Collateral Assignment of Trademarks and Trademark Licenses (Security
Agreement) by and between Congress Financial Corporation and Diplomat
Corporation**
10j Second Amendment to Exclusive Distributorship Agreement between
Ambrose Montgomery, Inc. and Diplomat Corporation***
10k Amended and Restated Subordinated and Intercreditor Agreement dated
as of February 9, 1996 by and among Congress Financial Corporation,
Robert Rubin, American United Global, Inc., Joan Cooper and Anita
Dimondstein, as agents, Diplomat Corporation and Biobottoms, Inc.****
10l Amendments No. 1, No. 2 and No. 3 to Loan and Security Agreement by
and between Congress Financial Corporation and Diplomat
Corporation.****
10m Loan and Security Agreement made as of February 9, 1996 by and among
Robert M. Rubin, American United Global, Inc., Diplomat Corporation
and Biobottoms, Inc. ****
10n Secured Subordinated Term Note dated February 9, 1996 in the
principal amount of $2,353,100 of Diplomat Corporation payable to
American United Global, Inc. ****
10o Secured Subordinated Term Note dated February 9, 1996 in the
principal amount of $450,000 of Diplomat Corporation payable to
American United Global, Inc. ****
10p Biobottoms, Inc. Guarantee of $2,353,100 Secured Subordinated Term
Note.****
10q Biobottoms, Inc. Guarantee of $450,000 Secured Subordinated Term
Note.****
10r Loan and Security Agreement dated February 9, 1996 by and between
Congress Financial Corporation and Biobottoms, Inc.****
10s Diplomat Corporation Guarantee dated February 9, 1996 to Congress
Financial Corporation of Biobottoms, Inc. Indebtedness.****
10t Collateral Assignment of Trademarks and Trademark Licenses dated
February 9,1996 between Biobottoms, Inc. and Congress Financial
Corporation.****
10u Security Agreement (Rights in Agreement and Plan of Merger) dated
February 9, 1996 between Biobottoms, Inc. Diplomat Corporation and
Congress Financial Corporation.****
10v Agreement and Plan of Merger by and among Diplomat Corporation,
Diplomat Acquisition Corporation, Biobottoms, Inc. and Principal
Stockholders, together with Amendment No. 1 thereto.****
II-3
<PAGE>
10w Consulting Service Agreement dated February 9, 1996 by and among
Diplomat Corporation, Diplomat Acquisition Corporation, Biobottoms,
Inc., and Anita Dimondstein.****
10x Consulting Service Agreement dated February 9, 1996 by and among
Diplomat Corporation, Diplomat Acquisition Corporation, Biobottoms,
Inc., and Joan Cooper.****
10y Asset Purchase Agreement dated as of September 24, 1997 by and among
Diplomat Corporation and Jean Grayson's Brownstone Studio, Inc. and
Wilroy Inc.
10z Bill of Sale provided by Jean Grayson's Brownstone Studio, Inc. and
Wilroy, Inc.
10aa Assignment and Assumption Agreement dated October 30, 1997 between
Brownstone Holdings, Inc., Jean Grayson's Brownstone Studio, Inc. and
Wilroy, Inc.
10bb Loan and Security Agreement by and among Congress Financial Corporation
and Jean Grayson's Brownstone Studio, Inc. dated February 28, 1997, as
amended September 17, 1997.
10cc Junior Participation Agreement between Congress Financial Corporation,
Robert M. Rubin and Jay M. Kaplowitz dated September 17, 1997.
21 Subsidiaries of the Registrant*****
23a Consent of Feldman Radin & Co., P.C.
23b Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP
(included in Exhibit 5)
* Incorporated by reference to Diplomat Corporation Registration
Statement No. 33-66910 NY
** Incorporated by reference to Diplomat Corporation Annual Report on Form
10KSB for the year ended January 1, 1994.
*** Incorporated by reference to Diplomat Corporation Registration No.
33-95986
**** Incorporated by reference to Diplomat Corporation Annual Report on Form
10KSB for the year ended December 31, 1995.
***** Incorporated by reference to Diplomat Corporation Annual Report on Form
10KSB for the year ended September 30, 1996.
****** Incorporated by reference to Diplomat Corporation report on Form 8-K
dated November 14, 1997.
(b) Reports on Form 8-K. The Registrant filed reports on Form 8-K for
reportable events dated November 26, 1996, and November 14, 1997.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to any charter provision, by-law contract arrangements statute,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit
II-4
<PAGE>
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any Prospectus required by section 10(a)(3) of
the Act;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to suit information in the
registration statement.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the Offering
of such securities at that time shall be deemed to be the initial bona
fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the Offering.
(4) For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h), under the Act as part of this registration statement as
of the time the Commission declared it effective.
(5) For determining any liability under the Act, treat each post-effective
amendment that contains a form of Prospectus as a new registration
statement at that time as the initial bona fide Offering of those
securities.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirement for
filing on Form SB-2 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York on November 17, 1997.
DIPLOMAT CORPORATION
By: /s/ Jonathan Rosenberg By: /s/ Irwin Oringer
------------------------------ -------------------------------------
Jonathan Rosenberg, President Irwin Oringer, Chief Accounting Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and has appointed Jonathan Rosenberg, President, his
or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
and all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting said attorney-in-fact and agent,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
/s/ Jonathan Rosenberg
- ------------------------- Chief Executive Officer, November 17, 1997
Jonathan Rosenberg President and Director
/s/ Stuart A. Leiderman
- ------------------------- Executive Vice President November 17, 1997
Stuart A. Leiderman and Director
/s/ Wesley C. Fredericks, Jr.
- ------------------------- Director November 17, 1997
Wesley C. Fredericks, Jr.
/s/ Irwin Oringer
- ------------------------- Chief Accounting Officer and November 17, 1997
Irwin Oringer Controller
/s/ Robert M. Rubin
- ------------------------ Chairman of the Board November 17, 1997
Robert M. Rubin
- ------------------------ Director November 17, 1997
Howard Katz
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------- ----------- ----------
3a Certificate of Incorporation, as amended*
3b By-laws, amended*
3c Amendment to Certificate of Incorporation*
4a Form of Common Stock Certificate*
4b Form of Warrant Agency Agreement between the Registrant and North
American Transfer Company*
4c Revised form of Unit Purchase Option*
4d Common Stock Purchase Warrant*
4e Certificate of Designation of Class B of Class C Preferred Stock*****
5 Opinion of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
10a Employment Agreement with Stuart A. Leiderman*
10b Stock Option Plan*
10c November 1996 Stock Option Plan*****
10d Exclusive Distributorship Agreement by and between Ambrose &
Montgomery, Inc. and Diplomat Juvenile Corporation*
10e License Agreement by and between Diplomat Juvenile Corporation,
Wesley Howell and Steve Prested*
10f Loshell Realty mortgages with Union State Bank and Stony Point
Technical Park, Inc. and related Mortgage Notes, including Sheldon
Rose guarantee of Union State Bank*
10g Agreement dated as of March 1, 1994 by and between Francine H.
Nichols and Diplomat Corporation**
<PAGE>
10h First Amendment to Exclusive Distributorship Agreement by and between
Ambrose & Montgomery, Inc. and Diplomat Corporation**
10i Collateral Assignment of Trademarks and Trademark Licenses (Security
Agreement) by and between Congress Financial Corporation and Diplomat
Corporation**
10j Second Amendment to Exclusive Distributorship Agreement between
Ambrose Montgomery, Inc. and Diplomat Corporation***
10k Amended and Restated Subordinated and Intercreditor Agreement dated
as of February 9, 1996 by and among Congress Financial Corporation,
Robert Rubin, American United Global, Inc., Joan Cooper and Anita
Dimondstein, as agents, Diplomat Corporation and Biobottoms, Inc.****
10l Amendments No. 1, No. 2 and No. 3 to Loan and Security Agreement by
and between Congress Financial Corporation and Diplomat
Corporation.****
10m Loan and Security Agreement made as of February 9, 1996 by and among
Robert M. Rubin, American United Global, Inc., Diplomat Corporation
and Biobottoms, Inc. ****
10n Secured Subordinated Term Note dated February 9, 1996 in the
principal amount of $2,353,100 of Diplomat Corporation payable to
American United Global, Inc. ****
10o Secured Subordinated Term Note dated February 9, 1996 in the
principal amount of $450,000 of Diplomat Corporation payable to
American United Global, Inc. ****
10p Biobottoms, Inc. Guarantee of $2,353,100 Secured Subordinated Term
Note.****
10q Biobottoms, Inc. Guarantee of $450,000 Secured Subordinated Term
Note.****
10r Loan and Security Agreement dated February 9, 1996 by and between
Congress Financial Corporation and Biobottoms, Inc.****
10s Diplomat Corporation Guarantee dated February 9, 1996 to Congress
Financial Corporation of Biobottoms, Inc. Indebtedness.****
10t Collateral Assignment of Trademarks and Trademark Licenses dated
February 9,1996 between Biobottoms, Inc. and Congress Financial
Corporation.****
10u Security Agreement (Rights in Agreement and Plan of Merger) dated
February 9, 1996 between Biobottoms, Inc. Diplomat Corporation and
Congress Financial Corporation.****
10v Agreement and Plan of Merger by and among Diplomat Corporation,
Diplomat Acquisition Corporation, Biobottoms, Inc. and Principal
Stockholders, together with Amendment No. 1 thereto.****
<PAGE>
10w Consulting Service Agreement dated February 9, 1996 by and among
Diplomat Corporation, Diplomat Acquisition Corporation, Biobottoms,
Inc., and Anita Dimondstein.****
10x Consulting Service Agreement dated February 9, 1996 by and among
Diplomat Corporation, Diplomat Acquisition Corporation, Biobottoms,
Inc., and Joan Cooper.****
10y Asset Purchase Agreement dated as of September 24, 1997 by and among
Diplomat Corporation and Jean Grayson's Brownstone Studio, Inc. and
Wilroy Inc.
10z Bill of Sale provided by Jean Grayson's Brownstone Studio, Inc. and
Wilroy, Inc.
10aa Assignment and Assumption Agreement dated October 30, 1997 between
Brownstone Holdings, Inc., Jean Grayson's Brownstone Studio, Inc. and
Wilroy, Inc.
10bb Loan and Security Agreement by and among Congress Financial Corporation
and Jean Grayson's Brownstone Studio, Inc. dated February 28, 1997, as
amended September 17, 1997.
10cc Junior Participation Agreement between Congress Financial Corporation,
Robert M. Rubin and Jay M. Kaplowitz dated September 17, 1997.
21 Subsidiaries of the Registrant*****
23a Consent of Feldman Radin & Co., P.C.
23b Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP
(included in Exhibit 5)
* Incorporated by reference to Diplomat Corporation Registration
Statement No. 33-66910 NY
** Incorporated by reference to Diplomat Corporation Annual Report on Form
10KSB for the year ended January 1, 1994.
*** Incorporated by reference to Diplomat Corporation Registration No.
33-95986
**** Incorporated by reference to Diplomat Corporation Annual Report on Form
10KSB for the year ended December 31, 1995.
***** Incorporated by reference to Diplomat Corporation Annual Report on Form
10KSB for the year ended September 30, 1996.
****** Incorporated by reference to Diplomat Corporation report on Form 8-K
dated November 15, 1997.
<PAGE>
[Gersten, Savage, Kaplowitz & Fredericks, LLP Letterhead]
November 17, 1997
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York
Gentlemen:
You have requested our opinion, as counsel for Diplomat Corporation, a
Delaware corporation (the "Company"), in connection with the Company's
registration statement on Form SB-2 ("Registration Statement"), under the
Securities Act of 1933, as amended (the "Act"), being filed by the Company with
the Securities and Exchange Commission on or about November 17, 1996.
The Registration Statement relates to an offer by certain security holders
of the Company of 1,250,000 shares issued and outstanding shares of the
Company's common stock, $.0001 par value ("Common Stock").
We have examined such records and documents and made such examinations of
law as we have deemed relevant in connection with this opinion. It is our
opinion that when there has been compliance with the Act, the shares referred to
above, when issued, delivered, and paid for, will be fully paid, validly issued
and nonassessable.
No opinion is expressed herein as to any laws other than the laws of the
State of New York, of the United States and the corporate laws of the State of
Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In doing so, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
/s/ GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS, LLP
GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS, LLP
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 for
Diplomat Corporation, relating to 1,250,000 of the Company's common shares, of
our report dated January 16, 1997 (February 25, 1997 as to (i) the third and
fourth paragraphs of note 10 and (ii) subsection (a) of note 11), relating to
the financial statements of Diplomat Corporation as of September 30, 1996 and
for the nine months then ended and the year ended December 30, 1995 and to the
reference to our firm under the caption Experts in the registration statement.
/s/ Feldman Radin & Co. P.C.
----------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, N.Y.
November 14, 1997
