<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Quarter Ended June 30, 1997 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Transition Period from _______to_______
Commission File Number 0-22432
DIPLOMAT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3727399)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Kay Fries Drive, Stony Point, New York 10980
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914 786-5552
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: August 10, 1997 5,843,525
Common Shares outstanding
Transitional Small Business Disclosure (check One):
Yes / / No /X/
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DIPLOMAT CORPORATION
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheet - June 30, 1997 3
Consolidated Statements of Operations - For the three months
and nine months ended June 30, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows - For the nine
months ended June 30, 1997 and June 30, 1996 5
Notes to Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9-15
PART II - OTHER INFORMATION
Item 3 - Defaults Upon Senior Securities 16
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURE 16
2
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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.
3
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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.
4
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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)
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(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>
5
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DIPLOMAT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997 AND 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.
6
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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.
7
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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.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
9
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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 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.
10
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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 (1569,280)
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.
Liquidity and Capital Resources
11
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The Company completed an initial public offering on November 13, 1993
and received net proceeds of approximately $4,454,000. Proceeds of the offering
were used for purchases of inventory, marketing and promotion, product
development, reduction of accounts payable and repayment of loans from a
principal stockholder and executive officer. The Company has relied upon the
proceeds of its initial public offering, borrowings from an institutional
lender, a principal stockholder and director of the Company, and proceeds from
the exercise of warrants in 1995, 1996 and 1997 in order to fund its operations.
The Company's principal working capital credit facility is provided by
Congress Financial Corporation.
In April 1994, the Company entered into an agreement with Congress
providing the Company with a maximum $3 million secured line of credit to be
used for loans and trade letters of credit. The loans are secured by
substantially all of the Company's personal property, including without
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) percent above the prime rate announced by Core States Bank.
The credit agreement contains restrictions relating to the payment of dividends.
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 shall be 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 the debt was converted into Preferred Stock
in September, 1996.
In connection with the Biobottoms acquisition, the Company incurred
debt of $4,303,100 consisting of Deferred Payment Notes, payable to (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. Under the
Deferred Payment Note, $750,000 was due August 9, 1996, $375,000 was due
November 9, 1996 and $375,000
12
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had been due August 9, 1997 together with interest. The August and November
payments have not been made which accelerated the entire amount to be due. On
December 9, 1996, the holders of these notes gave notice of default in
accordance with the acquisition agreement. Under the Intercreditor Agreement (as
such term is defined below) the holders of the notes must wait 270 days after
giving notice before taking any further action in the collection of these notes.
On February 25, 1997, the holders of these notes agreed not to initiate an
enforcement action prior to December 31, 1997. In connection with the obtaining
of this agreement, Diplomat agreed to pay the holders of the Deferred Payment
Notes ten installments of $5,000 to be applied against the Deferred Payment
Notes commencing on February 21, 1997 and to undertake to conduct a private
placement of its securities to raise funds for repayment of the remaining
balance due on the Deferred Payment 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. Mr. Rubin furnished the former
Biobottoms shareholders with a limited guarantee up to a maximum liability of
$100,000 pertaining to the payments due July 1, 1997 and December 15, 1997.
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 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 million and on the date of Closing, $848,531 was available and
borrowed.
The Biobottoms/Congress Loan Facility is guaranteed by the Company and
a default thereunder constitutes a default under the Company's Loan and Security
Agreement with Congress. The interest rate charged on the loan is the prime rate
as announced by Core States Bank, N.A. (the "Prime Rate") plus 2%. 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 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".
The Deferred Payment notes and the Rubin Obligations are, and the
American United loans were subject to an Intercreditor Agreement with Congress
Financial Corporation (the "Intercreditor Agreement") which has the effect of
restricting or limiting enforcement remedies under the promissory notes
evidencing the Deferred Payment and the Rubin Obligations prior to repayment of
the senior debt
13
<PAGE>
payable to Congress Financial Corporation and restricting the repayment of
principal payable thereon based upon certain minimum excess loan availability
requirements.
The Intercreditor Agreement also provides that irrespective of the
relative priority status between the holders of the Deferred Payment obligations
and the Rubin 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 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 follows:
Payment at Closing of Biobottoms'
Institutional Secured Lender $1,448,025
Cash portion of Biobottoms Purchase
Price 1,000,000
Loan Costs and Legal Fees 96,690
Available Working Capital 1,103,816
At the time that the Biobottoms acquisition was completed, additional
equity financing was contemplated to fund the scheduled payments of the
acquisition debt and working capital requirements for the Diplomat and
Biobottoms businesses. Such financing was not secured within the time
constraints contemplated by the management of the Company. As a result, the
acquisition debt was not paid when due. In addition, the Company is experiencing
severe working capital shortages and requires additional capital resources to
fund its existing operations. Under Diplomat's and Biobottoms' lending
facilities with Congress Financial, the Company has borrowed the maximum amounts
available as of the date hereof and there is no unused loan availability. The
Company is pursuing a number of financing alternatives, although there can be no
assurance that such efforts will result in necessary financing or that the terms
of such financing will be on terms favorable to existing stockholders. The
failure to secure additional
14
<PAGE>
working capital will materially adversely affect the business and financial
condition of the Company. Insufficient working capital may require the Company
to reduce operations significantly.
In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C and Class D
Warrants, each exercisable for 500,000 shares of common stock, at $1.37, $2.50
and $3.00 per share, respectively.
All of the Class B Warrants were exercised during 1995 providing the
Company with net proceeds of $628, 000. The Class D Warrants expired in July,
1996. 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.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31,1996, the Company was not in compliance with its
credit agreement with Congress Financial Corporation ("Congress"). Under the
agreement, the Company must maintain $4,500,000 in working capital (excluding
the Congress loan and certain subordinated debt), and stockholder's equity of
$3,500,000. At December 31,1996, the balance due to Congress was approximately
$2,101,900. On February 25, 1997, the violations were waived by Congress and the
Company and Congress agreed on revised financial covenants. The Company expects
to be in compliance with the revised financial covenants at each measurement
date.
In August, 1996 and November, 1996 the Company failed to pay Deferred
Payment Notes, totaling $1,125,000 which it owed in connection with the
acquisition of Biobottoms, Inc. ("Biobottoms"). On December 9, 1996, the holders
of the notes gave notice of default in accordance with the acquisition
agreement. Under this agreement, the holders of the notes must wait 270 days
after giving notice before taking further action in the collection of these
notes. On February 25, 1997, the holders of these notes agreed not to initiate
an enforcement action prior to December 31, 1997. In July 1997, these notes were
paid in full.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIPLOMAT CORPORATION
August 15, 1997 By: /s/ Jonathan Rosenberg
----------------------
Jonathan Rosenberg
Chief Executive Officer
August 15 , 1997 By: /s/ Irwin Oringer
--------------------------------
Irwin Oringer
Principal Accounting Officer and
Controller
16
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 10,987
<SECURITIES> 0
<RECEIVABLES> 1,751,015
<ALLOWANCES> 147,694
<INVENTORY> 5,558,875
<CURRENT-ASSETS> 8,575,132
<PP&E> 4,101,582
<DEPRECIATION> 1,882,379
<TOTAL-ASSETS> 14,910,486
<CURRENT-LIABILITIES> 11,033,626
<BONDS> 0
0
4,191,380
<COMMON> 585
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,910,486
<SALES> 19,866,711
<TOTAL-REVENUES> 19,869,191
<CGS> 9,178,866
<TOTAL-COSTS> 17,994,855
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 491,057
<INCOME-PRETAX> 1,383,279
<INCOME-TAX> 324,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,059,279
<EPS-PRIMARY> .19
<EPS-DILUTED> .16
</TABLE>
