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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A1
(Mark One)
[ X ] Annual Report to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended September 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-22432
DIPLOMAT CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3727399
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 Kay Fries Drive, Stony Point,New York
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(Address of principal executive offices) (Zipcode)
Registrant's telephone number, including area code-. (914) 786-5552
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of exchange on which
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Applicable registered Nasdaq Stock Market
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock,$.0001 par value and Common Stock Purchase Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter prior 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
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Regulation S-K (s.229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB (X)
The issuer's net sales for the most recent fiscal year were $24,484,508.
The aggregate market value of the voting stock held by non-affiliates
based upon the closing bid price on December 15, 1997 was approximately
$25,390,000.
As of January 12, 1998 there were 10,685,683 shares of Common Stock, par
value $.00001 per share, outstanding.
Certain exhibits listed in Part IV have been incorporated by reference.
The index to exhibits appears on Page
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PART I
Item 1. Business
Except for historical information contained herein, the
statements in this Item are forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the Company's actual results in future periods to
differ materially from forecasted results. Those risks include, among others,
risks associated with the completion of the Lew Magram Ltd acquisition, the
receipt and timing of future customer orders, price pressures and other
competitive factors leading to a decrease in anticipated revenues and gross
profit margins.
General
The term "the Company" shall include Diplomat Corporation and its
wholly-owned subsidiaries, Biobcttoms, Inc. ("Biobottoms") and Brownstone
Holdings, Inc. ("Brownstone") unless otherwise indicated. The term "Diplomat"
shall refer to the operations of the Diplomat Corporation exclusive of its
subsidiaries.
On February 9, 1996, Diplomat Corporation completed the
acquisition of Biobottoms, a California corporation located in Petaluma,
California. Biobottoms is a children's, 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.
On October 30, 1997, the Company acquired out of bankruptcy all
of the assets of Jean Grayson's Brownstone Studios, Inc., a mail order catalog
company. As a result of this acquisition, the scope of the Company's business
has expanded into the mature women's apparel and accessories markets primarily
through direct mail catalog.
On December 23, 1997, the Company entered into an Agreement and
Plan of Merger with Lew Magram Ltd., ("Lew Magram"), a New York Corporation,
which upon completion of the merger will result in Lew Magram being a wholly
owned subsidiary of the Company. The completion of the merger is subject to
certain conditions, specifically obtaining certain lender and environmental
approvals. The Company believes that the merger will close by February 1998.
However, there can be no assurance that the merger will be completed by such
time if at all.
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The Company designs, develops, markets and distributes infantwear
and care products, nursery accessories and products for infant and toddler
comfort and care, women's apparel and accessories, and apparel and accessories
for newborns through preteens. Diplomat 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 BiobottomsTM. Brownstone, through direct mail
catalogs, sells mature women's apparel and accessories under the various
trademarks of Brownstone. Lew Magram, through direct mail catalogs, sells
apparel and accessories for the professional women's market. The Company's
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. International sales of
women's apparel have not been significant.
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.
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
42% of the Diplomat division's total revenues during the fiscal year ended
September 30, 1997. Diplomat's products are presently carried by Wal-Mart, Toys
`R' Us, Target Stores and Kids `R' Us, 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.
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Biobottoms is a direct mail catalog company 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 operated a retail store selling overstocks and out-of-season
items. The store was closed in December 1997.
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 mail
order business, 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
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manufacture, advertisement, promotion, distribution and sale of various products
for infants. The Lamaze Agreement expired in July 1996. Accordingly, the
Company no longer uses the Lamaze registered trademark.
Although the Company has traditionally focused on direct
marketing of infant- related care and comfort products and accessories and
apparel accessories for newborns through preteens, management believes that
economic conditions in the direct marketing apparel industry are favorable. The
Company has expanded its strategy to become an industry leader in the direct
mail catalog apparel industry through its recent acquisition of the assets of
Jean Grayson's Brownstone Studio, Inc. and the planned acquisition of Lew
Magram.
Lew Magram is engaged in the direct mail catalog upscale women's
apparel and accessories business. Lew Magram mails its catalogs to prospective
target customers based on customer files and rented prospect lists.
Brownstone is engaged in the business of selling mature women's
apparel and accessories through a mail order catalog and through a single outlet
store located in Secaucus, New Jersey.
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 various trademarks that it owns.
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, 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.
Manufacturing and Sourcing
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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.
Biobottoms provides for manufacturing and sourcing of products
in a number of ways. Private label vendors supply some high volume basics,
such as shirts, play pants and knit shorts, where price
competitiveness is critical.
Lew Magram and Brownstone private label products are produced by
many third party manufacturers based on design and material specifications
provided by Lew Magram and Brownstone. Branded merchandise is purchased by Lew
Magram and Brownstone merchants from third party vendors.
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.
Manufacturing groups provide control of the manufacturing process by closely
supervising all phases of production with local consultants and contractors.
Manufacturing groups are 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 September 30, 1996, two of the
Company's customers, Toys `R' Us and Wal-Mart individually accounted for
approximately 17% and 36% respectively, of the Diplomat net sales. For the
fiscal year ended September 30, 1997, such customers individually accounted for
31% and 11%, 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, Eckerd Drugs, Walgreens, Caldor, Target
Stores and Publix Supermarkets. A reduction in the number of retail accounts
from prior periods reflects
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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.
Neither Lew Magram and Brownstone have a single customer which
accounts for a significant portion of their sales.
Seasonality of product is generally not a factor affecting
Diplomat's sales. Sales fluctuations are, however, affected by special seasonal
promotional activities of the merchandise retailer. The sales of the mail
order companies are affected by seasonality with the winter holiday season being
the strongest.
Quality Assurance
The Company's products are chosen based upon the following criteria:
.o Quality
.o Price/Value
.o Fabric
o Fit
o Testing
o Exclusivity
o Color/Print
o Styling
o. Manufacturing Responsibility
o Merchandising
At least two additional features must be present that add
appropriate performance or styling benefits, including:
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
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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 other trademarks, 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.
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 becomes 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
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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 were 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 children's
apparel in competition with Biobottoms. These vary from general catalog
merchandisers, such as JC Penney, to smaller specialty children's, apparel
catalogs. Biobottoms believes it competes primarily with the latter, which group
includes: Hanna Anderson, Playclothes, Childrens Wear Digest, Storybook
Heirlooms and Wooden Soldier. 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 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. 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.
Lew Magram competes in the highly competitive retail women's
apparel market specifically the retail direct market catalog women's apparel
market. Direct competitors include Spiegel, Chadwick's of Boston and J. Crew,
each of which have substantially greater resources and market share than Lew
Magram.
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.
The mature women's apparel and accessories markets are extremely
competitive. Brownstone competes in three size categories, petite, missy and
large sizes. Brownstone 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.
Employees
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As of October 27, 1997, Diplomat 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. 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 63 of which are full time. None of the Biobottoms employees are
represented by any labor union.
Diplomat, through a management arrangement with Lew Magram, has
been managing the business of Brownstone.
Lew Magram has approximately 325 employees, including 225 full time
and 100 part time employees.
Item 2. Properties
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 1,000 square feet of the Facilities are utilized
by the Company's contract manufacturers located at the premises. Sheldon R.
Rose, the Ccmpany'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 6.375%) 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.
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Biobottoms leases approximately 17,60O 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.
Brownstone has moved from its Secaucus facility and is operating
from the facilities of Lew Magram in Teaneck, New Jersey. Lew Magram leases
approximately 73,000 square feet of warehouse and office space in Teaneck, New
Jersey. Total fixed monthly charges are approximately $49,000 subject to annual
escalation clauses. The lease expires in August 1999, subject to two five-year
renewal options. Lew Magram also leases approximately 13,000 square feet in New
York City at $19,000 per month. .
Item 3. Legal Proceedings
In September 1996, the Company was named as a defendant in an
action brought in the 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 an 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 disputes 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
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bases, 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.
In November 1997, Lew Magram was served with a proposed assessment
from the State of New York related to a sales tax audit aggregating
approximately $2.4 million, including penalties and interest. Lew Magram
disputes the assessment and intends to vigorously defend against it. Although
the Company is entitled to indemnification by certain selling Lew Magram Ltd
shareholders, an unfavorable result could have a material adverse effect on the
Company.
Other than the above claims, the Company has no notice of any
pending or threatened material litigation.
Item 4. Submission of Matters To A Vote Of Security Holders
During the fiscal year covered by this report, the Company did not
submit any matters to a vote of security holders.
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PART II
Item 5. Market for the Company's Common Stock and Warrants
As of the date hereof, the Company has outstanding its Common Stock $.0001
par value ("Common Stock") and Warrants to purchase its Common Stock
("Warrants"). The principal market for the Common Stock and Warrants is the
NASDAQ Small Cap Market ("NASDAQ") under the symbols of DIPL and DIPLW,
respectively. The following table sets forth the closing high and low bid prices
for the Common Stock and Warrants for each calendar quarter.The prices represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions and may not represent actual transactions. NASDAQ quotations do not
assume that the market for the Company's securities will be sustained,
Common Stock Warrants
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Bid
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For Fiscal Year Ending
September 30, 1996 High Low High Low
- ------------------ ----- ---- ----- ---
First Quarter 3 3/8 1 5/8 1/16 1/4
Second Quarter 2 1/2 1 1/8 1/2 1/4
Third Quarter 2 1/8 1 1/16 - 3/16
Fourth Quarter 2 1 5/16 1/4 1/16
September 30, 1997
- ------------------
First Quarter 2 7/8 3/16 3/16
Second Quarter 2 3/8 7/8 7/16 1/4
Third Quarter 3 1/2 1 5/8 15/16 1/4
Fourth Quarter 3 5/8 2 5/8 1 7/16
The Common Stock and Warrants commenced trading on NASDAQ on November
4,1993.
The Company believes that there are approximately 2,200 beneficial
owners of each of its securities.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future, The Company
intends to retain any earnings to finance the growth of the Company. There can
be no
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assurance that the Company will ever pay cash dividends pursuant to the
Company's credit agreement with its commercial lender and the terms of
indebtedness incurred in connection with the acquisition of Biobottoms.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Twelve Months Ended September 30, 1997 Compared to Twelve Months Ended September
30, 1996
NET SALES
Consolidated net sales for the Twelve Month Period ended September 30,
1997 ("1997 Period") increased approximately $3,908,000 or 19% from the Twelve
Month Period ended September 30, 1996 ("1996 Period"). The sales of Diplomat
for the 1997 Period were $6,893,000 as compared to $8,904,000 for the 1996
Period and the sales of Biobottoms were $17,592,000 in the 1997 Period as
compared to $17,378,000 in the 1996 Period.
Consolidated cost of sales were 48% of net sales in the 1997 Period
and 71% in the 1996 Period. The cost of sales were $11,659,000 in the 1997
Period. Cost of sales of Diplomat for the 1997 Period were $3,585,000 as
compared to $8,738,000 in the 1996 Period. The reduction of 59% was the result
of the restructuring of the Company during the 1997 Period and from lower sales.
Cost of sales of Biobottoms decreased 1% even
though sales increased less than 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
$1,868,000 from the 1996 Period to the 1997 Period. Operating expenses of
Diplomat for the 1997 Period were $1,872,000 as compared to $4,809,000 in the
1996 Period. The reduction of 61% 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. Operating
expenses of Biobottoms decreased 4% from the 1996 Period. Consolidated operating
expenses were 48% of net sales in the 1997 Period and 66% in the 1996 Period.
Interest expense decreased 52% 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 $756,047 as compared to a net
loss of $8,404,000 for the 1996 Period.
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At September 30, 1997, the Company has recorded deferred tax assets of
$1,362,000. The full utilization of such deferred tax assets is dependent upon
the Company realizing taxable income in future years. The total amount of future
taxable income for utilizing such deferred tax assets will be approximately
$3,400,000. Based on the current year's operations, such realization would take
approximately three years.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
NET SALES
Consolidated Net Sales for the None 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 1996 were impacted significantly by
an adverse retail environment that continued fro the last quarter of 1995. The
sales of Diplomat decreased 24% and the sales of Biobottoms increased 16% from
1995 to 1996.
Consolidated cost of sales were 69% of net sales in 1996 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 1995.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increase $1,400,000 from
1995 to 1996. The increase resulted primarily from increased catalog expenses of
Biobottoms. The operating expenses of Diplomat increased by a minor amount from
1995 to 1996. Consolidated operating expenses were 55% of net sales in 1996 and
45% in 1995.
The Company restructured its Stony Point, New York operations by
eliminating several of its 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.
17
<PAGE>
The net loss for the 1996 Period was $7,225,000 as compared to a net
loss of $721,000 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. 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 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.
Nine Months Pro-Forma
Ended Nine Months Ended
September 30, 1996 September 30, 1995
Net Sales $19,222,801 $20,180,355
Cost of Sales 13,334,588 10,569,150
---------- ----------
Gross Profit 5,888,213 9,611,205
----------- ----------
Selling, General & Administrative 10,589,561 9,179,201
Restructuring Expense 1,738,975 0
--------- -
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)
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.
The Company's principal working capital credit facility is provided by
Congress Financial Corporation ("Congress Financial").
18
<PAGE>
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 has been 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 $2,353,000,and (iii) American United Global in the amount of
$450,000. The American
19
<PAGE>
United Global loan was paid in May, 1996. The note to the former Biobottoms
Stockholders was paid in July 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 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 $648,531 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, Biobcttoms 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."
In September, 1997, Mr. Rubin made an additional loan to the Company in
the amount of $1,200,000.
20
<PAGE>
The Deferred Payment Notes and the Rubin obligations are, and the
American United loans were, subject to an Intercreditor Agreement with Congress
Financial (the "Intercreditcr 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 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:
21
<PAGE>
Payment at Closing of Biobottoms'
Institutional Secured Lender $1,448,025
Cash portion of Biobottoms Purchase
Price 1,000,000
Loan Costs and Legal Fees 96,690
Available Working Capital 1,103,816
At the time that the Biobottoms acquisition was completed, additional
equity financing was contemplated to fund the scheduled payments of the
acquisition debt and working capital requirements for the Diplomat and
Biobottoms businesses. Such financing was not secured within the time
constraints contemplated by the management of the Company. As a result, the
acquisition debt was not paid when due. In addition, the Company is experiencing
severe working capital shortages and requires additional capital resources to
fund its existing operations. Under Diplomat's and Biobottoms' lending
facilities with Congress Financial, the Company has borrowed the maximum amounts
available as of the date hereof and there is no unused loan availability. The
company is pursuing a number of financing alternatives, although there can be no
assurance that such efforts will result in necessary financing or that the terms
of such financing will be on terms favorable to existing stockholders. The
failure to secure additional working capital and funds to pay the Biobottoms
acquisition debt will materially adversely affect the business and financial
condition of the Company. Insufficient working capital may require the Company
to reduce operations significantly.
In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C and Class D
Warrants, each exercisable for 500,000 shares of common stock, at $1.37, $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.
22
<PAGE>
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 twelve months ended September 30, 1997, there was a decrease
in cash flow from operating activities of approximately $2,342,000 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, loans from
Robert Rubin and the proceeds from the issuance of stock.
23
<PAGE>
PART III
Item 9. Directors and Executive Officers, Promotors and Control Persons
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers and Key Employees
The Directors, Executive Officers and Key Employees of the Company are as
follows:
Name Age Position
---- --- --------
Robert M. Rubin 57 Chairman of the Board and Director
Jonathan Rosenberg 37 President, Chief Executive officer
and Director
Stuart A. Leiderman 53 Executive Vice President - Sales
and Marketing and Director
Warren H. Golden* 55 Chief Operating Officer and
Director
Irwin Oringer 61 Chief Accounting officer and
Controller
Howard Katz 56 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 1965 to 1969, Mr. Leiderman was a Divisional Vice President for
Hasbro, Inc.,
24
<PAGE>
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.
Mr. Rubin has served as the Chairman of the Board of Directors of
Western Power 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.("ERD"),a public
company specializing in the management and disposal of municipal solid waste,
industrial and commercial nonhazardous solid waste and hazardous waste. ERD and
its subsidiaries filed a petition under Chapter 11 of the federal bankruptcy
laws, which is pending.
Warren H. Golden has been with Lew Magram Ltd. since 1991, From 1989 to
1991, he was with S.C. Corporation with S.C. Corporation , most recently as
President. From 1983 to 1989, he was Vice President of Operations, CFO and
Treasurer of Honeybee, Inc. In 1986, he
25
<PAGE>
became a Director of Honeybee. Prior to Honeybee, Mr. Golden was Senior Vice
President, Operations and Control, for Plymouth Shops, a New York apparel
retailer. Mr. Golden is a graduate of Long Island University.
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 1968 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.
On December 23, 1997, the Board approved an increase in the size of the
Board from five to seven directors. 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.
* In accordance with the Agreement and Plan of Merger to acquire Lew Magram, Mr.
Golden is to be appointed as a director and as Chief Operating Officer of the
Company upon completion of the acquisition of Lew Magram.
Item 10. Executive Compensation
The following table sets forth a summary of the compensation paid to or accrued
by the Company during the fiscal period ended September 30, 1997 to the
Company's Chief Executive Officer and to each of the other most highly
compensated executive officers of the Company determined as of the end of the
last fiscal year.
Name Annual
and Compensation (1) Restricted
Principal Position Year Salary Stock Award
- ------------------ ---- ------ -----------
Sheldon R. Rose 9/30/96 $159,375 0
CEO 1995 $191,047
26
<PAGE>
(Resigned 11/96)
Jonathan Rosenberg 9/30/97 $190,769 0
CE0 9/30/96 $130,804
(Elected 11/96)
Stuart Leiderman 9/30/97 $150,000 0
Executive Vice 9/30/96 $112,500
President 1995 $139,334
(1) The Company did not issue any bonuses, other annual compensation, stock
appreciation rights or long term incentive plan payouts to any of the named
individuals in the Summary Compensation Table.
In January 1996, Jonathan Rosenberg, a director of the Company, became
a full time employee of the Company, serving with the title of chief operating
officer. His compensation on an annualized basis for 1996 was $175,000. In
addition to benefits generally available to senior level employees of the
Company, he receives an automobile allowance of $750 per month. In connection
with his employment, he was granted 75,000 incentive stock options, having an
exercise price of $1.50 per share, exercisable over a five (5) year period,
15,000 shares per year.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Realizable
Value at
Assumed
Individual Grants Annual Rates
of
Stock Price Alternative (f)
Appreciation for and (g): Grant
Option Term Date Value
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Name Number of Percent of Exercise Expiration 5% 10%($) Grant Date
(a) Securities Total of Date (f) (g) Present
Underlying Options/SARs Base Price (e) Value $
option/SARs Granted to ($/Sh) (h)
Granted (#) Employees in (d)
(b) Fiscal Year
(c)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jonathan 250,000 100% $1.00 2007
Rosenberg
- --------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stuart 100,000 100% $1.00 2007
Leiderman
- --------------------------------------------------------------------------------------------------
</TABLE>
In September 1996, the Company entered into an arrangement with Gersten,
Savage, Kaplowitz & Fredericks, LLP ("GSK&F") which provided that GSK&F 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
the firm 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.
Employment and Related Agreements
Sheldon R. Rose was employed under a three-year employment agreement
commencing on or about November 4, 1993, pursuant to which he was paid a base
salary of $175,000 per annum and was entitled to an annual cash bonus, based
upon the Company's reported pre-tax income from operations. In April 1994 the
Board of Directors approved a $37,500 increase to Mr. Rose's employment
agreement. No bonuses have been paid to Mr.Rose in the preceding three years. In
November 1996, the Company entered into a termination agreement with Mr. Rose.
The termination agreement provided for the cancellation of Mr. Rose's agreement
with the Company and his resignation as a Director of the Company.
The agreement provided that the Company will pay Mr. Rose an aggregate of
$70,833 over a four month period as severance pay. As part of the agreement, the
Company and certain of its affiliates would either purchase or cause to be
purchased an aggregate of 1,019,000 shares of the Company's Common Stock for an
aggregate of $475,000.
Stuart A Leiderman was employed under a three-year employment agreement
commencing on or about November 4, 1993, pursuant to which he is paid a base
salary of S150,000 per annum and is entitled to an annual bonus as determined by
the Board of Directors. No bonuses have been paid to Mr. Leiderman in the three
preceding fiscal years. The Company also provides and maintains an automobile
for Mr. Leiderman. Although the employment agreement has expired, Mr. Leiderman
is currently employed under the same terms.
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, pursuant to which he is paid $125,000 per annum. In September
1996, this agreement was extended until December 31, 1998.
In March 1994, the Company entered into a consulting agreement with
Francine H. Nichols to render consulting services pertaining to the development
and promotion
28
<PAGE>
of new products to be manufactured, marketed or distributed by the Company,
which included the development of educational and developmental toy products not
presently developed by the Company. In order to assist the Company in the
implementation of its marketing and product promotion strategies, she prepared
written educational editorial material relating to infant and child care to be
included with or printed on packaging of Company products, and for pamphlets and
similar materials to be distributed by the Company with its products. The
agreement expired December 31, 1996 and was not extended. It provided that the
Company will pay Ms. Nichols a consulting fee in the amount of I% of net sales
(as defined in the agreement) of products sold, marketed or distributed by the
Company with the trademark "Lamaze From AMI" or any variation thereof, The
maximum consulting fee in any year may not exceed $200,000.
In September 1996, the Company entered into an arrangement with Gersten,
Savage, Kaplowitz & Fredericks, LLP ("GSK&F") which provided that GSK&F 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 GSK&F
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.
In June, 1997, the Company entered into an arrangement with Shanna L.
Wolf and Marc E. Lehmann which provided for financial and investor relations
services to the Company. As compensation for the services, the consultants will
receive a total of $2,500 per month and options to purchase 25,000 shares each
of Common Stock at $1.75 per share.
In August, 1997, the Company entered into an agreement with Robert
Selame which provided for consulting services with regard to new product ideas.
As compensation for the services, the consultant will receive a 3% royalty on
sales of the new products and options to purchase 150,000 shares of Common Stock
at $1 7/8 per share.
In accordance with the Agreement and Plan of Merger to acquire Lew Magram, upon
completion of the acquistion each of Irving Magram, Warren Golden and Stephanie
Sobel will enter into employment agreements with the Company or Lew Magram. The
employment agreement between the Company and Warren Golden provides that Mr.
Golden will be employed as the Company's Chief Operating Officer and Lew
Magram's Executive Vice President for three years, subject to annual renewals,
at an annual salary of $200,000. The employment agreement between Irving Magram
and Lew Magram
29
<PAGE>
provides that Mr. Magram will be employed as President of Magram for three
years, subject to annual renewals, at an annual salary of $200,000. The
employment agreement between Stephanie Sobel and Lew Magram provides that Ms.
Sobel will be employed as Senior Vice President of Marketing for three years,
subject to annual renewal, at an annual salary of $172,500.
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, 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 and 500,000 non-qualified stock options issued and exercised by
a consultant. 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
30
<PAGE>
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 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.
31
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Percentage
Name and Number of Shares(2)(3) Beneficially
Address(l) Beneficially Owned Owned
---------- --------------------- -------
Stuart A. Leiderman(4) 308,000 2.87%
Robert M. Rubin(5) 7,588,967 49.74%
Jonathan Rosenberg(6) 165,000 1.52%
Wesley C. Fredericks, Jr.(7) 258,333 2.39%
Howard Katz(8) 66,500 *
All officers and
directors as a group
(5 persons) 8,386,800 53.66%
* less than one percent.
(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 January 12, 1998 by (ii) the sum of
(A) the number of shares of Common Stock outstanding as of January I2, 1998
plus (B) the number of shares issuable upon exercise of options or warrants held
by such stockholder which were exercisable as of January 12, 1998 or which will
become exercisable within 60 days after January 12, 1998.
32
<PAGE>
(3) The table does not include the beneficial ownership of the Company's Common
Stock to be issued upon the closing of the acquisition of Lew Magram Ltd. In
December 1997, the Company entered into an Agreement and Plan of Merger with Lew
Magram Ltd., Robert Rubin, Jay Kaplowitz, Irving Magram, Warren Golden and
Stephanie Sobel, all of the shareholders of Lew Magram Ltd. (the "Merger"). The
closing of the Merger is conditioned upon obtaining a lender's approval to
release Mr. Magram from a personal guaranty of Lew Magram's loans and
environmental approvals from the State of New Jersey. Prior to the closing,
Messrs. Magram and Golden and Ms. Sobel own all of the outstanding common stock
of Lew Magram Ltd. and Messrs. Rubin and Kaplowitz own all of the outstanding
Senior Convertible Preferred Stock of Lew Magram Ltd., which Messrs. Rubin and
Kaplowitz acquired in May 1997, which is convertible into one-half of the
outstanding common stock of Lew Magram Ltd. after giving effect to the
conversion. Upon the closing of the Merger, the Company will issue 95,000 shares
of Series D Preferred Stock to each of the Lew Magram Ltd. shareholders of which
Mr. Rubin will receive 42,750 shares. Mr. Magram will receive 40,375 shares,
Messrs. Golden and Kaplowitz will receive 4,750 shares each and Ms. Sobel will
receive 2,375 shares, subject to the right of Mr. Magram to put Lew Magram Ltd
common stock to Messrs. Rubin and Kaplowitz equivalent to approximately 7,017
shares of Series D Preferred Stock. In addition, Mr. Magram, Mr. Golden and Ms.
Sobel will receive 125,000 shares, 83,333 and 41,667 shares of the Company's
common stock, respectively. Each share of the Company's Series D Preferred Stock
shall be convertible into 33 1/3 shares of the Company's Common Stock which
ratio may be increased or decreased if the average closing price of the
Company's Common Stock for the ten trading days before the closing is less than
$3.00 or more than $4.50 per Share.
(4) 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.
(5) Represents (i) 3,016,750 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) 52,217 shares of Common
Stock approved for issuance but not yet issued.
(6) 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
33
<PAGE>
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.
(7) 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.
(8) 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.
Item 12. Certain Relationships and Related Transaction
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
States Bank. Under the terms of the Agreement, the Company may borrow up to 80%
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,OO0. 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
34
<PAGE>
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.
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
35
<PAGE>
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 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 , LLP ("GSK&F") which provided that
GSK&F will provide certain legal and consulting services to the Company over an
extended
36
<PAGE>
period of time. As compensation for its services, certain individual members of
GSK&F 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
on Stock at $2.00 per share.
In September, 1997, Mr. Rubin made an additional loan to the
Company in the amount of $1,200,000.
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 $3,480,000 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 3,480 shares of Series E Preferred Stock and 2,610,000 shares of
Common Stock in the next few weeks.
37
<PAGE>
In December 1997, the Company entered into an Agreement and Plan of
Merger with Lew Magram Ltd., Robert Rubin, Jay Kaplowitz, Irving Magram, Warren
Golden and Stephanie Sobel, all of the shareholders of Lew Magram Ltd.
("Merger"). Upon the closing of the Merger, Lew Magram Ltd. will merge with
Magram Acquisition Corp. resulting in Lew Magram becoming a wholly owned
subsidiary of the Company. Prior to the closing Messrs. Magram and Golden and
Ms. Sobel own all of the outstanding common stock of Lew Magram Ltd. and Messrs.
Rubin and Kaplowitz own all of the outstanding Senior Convertible Preferred
Stock of Lew Magram Ltd., which Messrs. Rubin and Kaplowitz acquired in May
1997, which is convertible into one-half of the outstanding common stock of Lew
Magram Ltd. after giving effect to the conversion. At the closing of the Merger,
the Company will issue 95,000 shares of the Series D Preferred Stock to each of
the Lew Magram Ltd. shareholders of which Mr. Rubin will receive 42,750 shares,
Mr. Magram will receive 40,375 shares, Messrs. Golden and Kaplowitz will
receive 4,750 shares each and Ms. Sobel will receive 2,375. In addition, Mr.
Magram, Mr. Golden and Ms. Sobel will receive 125,000 shares, 83,333 and
41,667 shares of the Company's common stock, respectively. Each share of the
Company's Series D Preferred Stock is convertible into 33 1/3 shares of the
Company's Common Stock which ratio may be increased or decreased if the average
closing price of the Company's common stock for the ten trading days before the
closing is less than $3.00 or more than $4.50 per share. Each of the
stockholders have agreed to indemnify the Company for any material breach of the
representations made by Lew Magram Ltd. in the Merger Agreement limited to
$9,500,000 and which claims for indemnification must be brought within one year
of the closing date of the Merger. Messrs. Rubin and Kaplowitz will assign to
the Company their rights to any claim either of them may have for breach of any
warranty made by Lew Magram Ltd. in the May 1997 Senior Convertible Preferred
Stock purchase agreement in return for a release of their indemnification
obligations under the Merger Agreement.
38
<PAGE>
Item 13. Exhibits, Lists and Reports an Form 8-K
(a). Exhibits (numbered in accordance with Item 601 of Regulation S-B).
Exhibit
No. Description
--- -----------
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 and 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**
39
<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 Biobottcms, Inc. Guarantee of $2,353,100 Secured Subordinated Term
Note.****
10q Biobottoms, Inc. Guarantee of $450,O0O 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.****
40
<PAGE>
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. I thereto.****
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, , 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 27, 1997. *******
10dd Agreement and Plan of Merger by and among Diplomat Corporation, Magram
Acquisition Corp and Lew Magram Ltd********
21 Subsidiaries of the Registrant*********
* Incorporated by reference to Diplomat Corporation Registration
Statement No. 33-66910 NY
** Incorporated by reference to Diplomat Corporation Annual Report an Form
IO- KSB for the year ended January 1, 1994.
*** Incorporated by reference to Diplomat Corporation Registration
No33-95986
41
<PAGE>
**** Incorporated by reference to Diplomat Corporation Annual Report on Form
10-KSB for the year ended December 31, 1995.
***** Incorporated by reference to Diplomat Corporation Annual Report on Form
10-KSB for the year ended September 30, 1996.
****** Incorporated by reference to Diplomat Corporation report on Form 8-K
dated November 15, 1997.
******* Incorporated by reference to Diplomat Corporation Registration Form
SB-2 dated November 17, 1997.
******** Incorporated by reference to Diplomat Corporation report on Form 10-KSB
dated January 13, 1998.
*********Included in this Form 10-KSB/A1
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-KSB/A1 to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIPLOMAT CORPORATION
By:/s/ Jonathan Rosenberg
-----------------------
Jonathan Rosenberg
President, Chief Executive Officer
Dated: January 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, which include the
Chief Executive Officer, the Chief Financial Officer and a majority of the Board
of Directors, on behalf of the Registrant and in the capacities and on the dates
indicated:
Name Title Date
---- ----- ----
/s/ Jonathan Rosenberg President, Chief Executive January 15, 1998
- ---------------------- Officer and Director
Jonathan Rosenberg (Principal Exec Officer)
/s/ Robert M. Rubin Chairman of the Board and January 15, 1998
- ------------------- a Director
Robert M. Rubin
Executive Vice President of
- -------------------- Sales and Marketing and a
Stuart Leiderman Director
Director
- ----------------
Howard Katz
/s/ Wesley C. Fredericks, Jr. Director January 15, 1998
- ----------------------------
Wesley C. Fredericks, Jr.
/s/ Irwin Oringer Principal Accounting Officer January 15, 1998
- ----------------- and Controller
Irwin Oringer
43
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Number
-------------
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEET F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS F - 4
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 7
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 Subsidiaries as of September 30, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended September 30, 1997 and the nine months ended September 30,
1996.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 Subsidiaries as of September 30, 1997 and the results of its
operations and its cash flows for the year ended September 30, 1997 and the nine
months ended September 30, 1996 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 13, 1998
F - 2
<PAGE>
<TABLE>
<CAPTION>
DIPLOMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
CURRENT ASSETS:
Pro-Forma Actual
--------- ------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 59,750 $ 35,669
Accounts receivable, net of allowance of $147,001 2,212,856 1,419,720
Inventories 10,005,057 5,326,811
Prepaid catalogs 2,452,858 918,028
Prepaid expenses 1,396,881 350,783
Other current assets 938,802 938,802
------------ ----------
TOTAL CURRENT ASSETS 17,066,204 8,989,813
PROPERTY AND EQUIPMENT, net 3,465,493 2,152,520
OTHER ASSETS:
Goodwill 10,879,788 3,448,444
Customer List 4,875,000 --
Other 728,437 1,136,053
------------ -----------
$ 37,014,921 $15,726,830
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expense $11,713,554 $ 5,592,089
Loans payable - Stockholder 1,435,000 1,435,000
Loans payable - Congress Financial Corp. 4,130,136 1,866,426
Open prepaid orders 335,948 --
Outstanding merchandise credits 2,981,521 --
Current maturities of long term debt 893,936 682,863
------------ -----------
TOTAL CURRENT LIABILITIES 21,490,095 9,576,378
LONG TERM DEBT, less current maturities 1,235,754 1,076,610
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 1,000,000 shares
authorized 505,000 shares issued and outstanding 12,883,048 4,191,380
Common stock, $.0001 par value, 50,000,000 shares
authorized, 8,001,933 shares issued and outstanding 801 801
Paid-in capital 9,266,908 9,266,908
Accumulated deficit (7,861,684 (8,385,247)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 14,289,073 5,073,842
------------ -----------
$ 37,014,921 $15,726,830
============ ===========
</TABLE>
See notes to financial statements.
F - 3
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Actual
--------------------------------
Pro-Forma Nine
Year ended Year ended months ended
September 30, September 30, September 30,
1997 1997 1996
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
NET SALES $ 35,147,333 $ 24,484,508 $ 19,222,801
COST OF GOODS SOLD 16,665,203 11,659,386 13,334,588
------------- ------------ ------------
GROSS PROFIT 18,482,130 12,825,122 5,888,213
------------- ------------ -----------
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 16,720,829 11,675,754 10,589,561
RESTRUCTURING AND REORGANIZATION COSTS -- -- 1,738,975
------------- ------------ ------------
OPERATING INCOME (LOSS) 1,761,301 1,149,368 (6,440,323)
OTHER EXPENSE (644,233) (663,754) (784,577)
------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,117,068 485,614 (7,224,900)
INCOME TAXES (BENEFIT) (210,433) (270,433) --
------------- ------------ -----------
NET INCOME (LOSS) 1,327,501 756,047 (7,224,900)
PREFERRED STOCK DIVIDENDS (362,892) (317,892) --
------------ ------------ ----------
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $ 964,609 $ 438,155 $(7,224,900)
============ ============ ===========
NET INCOME (LOSS) PER COMMON SHARE $ 0.16 $ .07 $ (1.59)
============ ============ ===========
AVERAGE NUMBER OF SHARES USED IN COMPUTATION 5,892,454 5,892,454 4,549,525
============ ============ ===========
</TABLE>
See notes to financial statements.
F - 4
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1997 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
<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 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 410,000 4,100,000 4,100,000
Net loss (7,224,900) (7,224,900)
---------- ------ -------- ------------ ----------- ------------ ------------
Balance at September 30, 1996 4,993,525 508 410,000 4,100,000 6,076,391 (8,900,293) 1,276,607
Private placements 1,250,000 125 2,174,875 2,175,000
Exercise of warrants 500,000 50 499,950 500,000
Issuance of shares 1,258,408 118 515,692 515,810
Preferred stock issued for interest 91,380 91,380
Net income 756,047 756,047
Preferred stock dividends (241,000) (241,000)
---------- ------ -------- ------------ ----------- ------------ ------------
Balance at September 30, 1997 8,001,933 $ 801 410,000 $ 4,191,380 $ 9,266,908 $ (8,385,247) $ 5,073,842
========== ====== ======== ============ =========== ============ ============
</TABLE>
See notes to financial statements.
F - 5
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the nine
year ended months ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 756,047 $ (7,224,900)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization 176,333 --
Depreciation 249,732 211,237
Issuance of stock for expenses 91,380 400,000
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable 243,791 (282,507)
(Increase) decrease in inventories (1,489,071) 2,551,187
(Increase) decrease in prepaid expenses 656,195 1,041,372
(Increase) decrease in prepaid catalogs (918,028) (641,132)
(Increase) decrease in other current assets (205,824) 702,866
(Increase) decrease in other assets (522,393) 500,202
Increase (decrease) in accounts payable and accrued expenses (1,380,753) 2,054,897
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (2,342,591) (686,778)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Biobottoms, Inc. (net of cash acquired) -- (2,899,211)
Purchase of trademark (75,000) --
Purchase of property and equipment (179,904) (211,096)
------------- -------------
NET CASH FLOWS PROVIDED BY (USED) BY INVESTING ACTIVITIES (254,904) (3,110,307)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Biobottoms aquisition loan (1,500,000) --
Proceeds of loans payable, affiliate -- 450,000
Revolving credit loans (304,226) 583,650
Preferred stock dividends paid (243,892) --
Issuance preferred and common stock 3,190,809 475,000
Borrowings from stockholder 1,435,000 2,620,000
Repayment of long term debt and loan payables (13,785) (393,678)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,563,906 3,734,972
------------- -------------
NET DECREASE IN CASH (33,589) (62,113)
CASH AND CASH EQUIVALENTS, at beginning of period 69,258 131,371
------------- -------------
CASH AND CASH EQUIVALENTS, at end of period $ 35,669 $ 69,258
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 666,390 $ 706,000
============= =============
Income taxes $ -- $ --
============= =============
</TABLE>
See notes to financial statements.
F - 6
<PAGE>
DIPLOMAT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEAR ENDED SEPTEMBER 30, 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
A. The financial statements include the accounts of the
Company and its wholly-owned subsidiaries. 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") 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
F - 7
<PAGE>
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.
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 with employees
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.
K. Revenue is recognized at the time merchandise is shipped to
customers. Proceeds received for merchandise not yet shipped are
reflected as "customers' unshipped orders," a current liability.
2. BUSINESS:
The Company is engaged in two lines of business and
accordingly its operations are classified into two business segments:
mail order catalog retail operations, 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.
F - 8
<PAGE>
3. ACQUISITION OF LEW MAGRAM, LTD.:
On December 23, 1997, the Company (through its wholly-owned
subsidiary, Magram Acquisition Corp.) entered into a definitive
agreement to acquire Lew Magram, Ltd.(Magram), a New York corporation
with a place of business in Teaneck, New Jersey, which is in the
business of mail order catalogue sales of womens' clothing. The
accompanying financial statements include unaudited pro-forma balance
sheets and income statements as if the acquisition was effected as of
July 1, 1997, the date that the Company assumed effective control of
Magram. The acquisition was accounted for as a purchase and the
consideration consisted of the issuance of the Company's $.10 par
value, Series D, convertible preferred stock. The Series D preferred
stock is convertible into 3,166,667 shares of the Company's common
stock, (which assumes a market value of $4.00 per share). An additional
250,000 shares of common stock were also given as consideration. The
fair market value of the consideration was approximately $8.7 million
and acquisition costs were approximately $646,000. The Company recorded
the carryover basis for a certain selling stockholder of Magram who is
also a principal stockholder of the Company.
The net fair market of identifiable assets acquired was
approximately $1.9 million, and included customer lists valued at $5
million. The customer lists are being amortized over a period of 10
years. Goodwill amounted to approximately $7.4 million and is being
amortized over 25 years.
The following unaudited pro-forma summary combines the
consolidated results of operations of the Company and Magram as if the
acquisition had occurred at the beginning of 1996, after giving effect
to certain adjustments, including amortization.
Nine months
Year ended ended
September 30, September 30,
--------------- ---------------
1997 1996
(unaudited) (unaudited)
Net sales $ 72,710,390 $ 56,785,858
Net loss (3,708,442) (11,897,951)
Net loss per common share (.63) (2.62)
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.
4. ACQUISITION OF BIOBOTTOMS, INC. AND RELATED FINANCING:
F - 9
<PAGE>
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 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.
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 on the notes within 270 days, or be
subject to enforcement action. On February 25, 1997, the former
Biobottoms shareholders agreed not to initiate enforcement action under
this or susequent defaults until not earlier than December 31, 1997. In
connection with obtaining this agreement, Diplomat agreed to pay the
Biobottoms shareholders ten installemnts 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 agreement 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 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
F - 10
<PAGE>
goodwill, increased interest expense on the acquisition debt, and the
adjustments required as a result of changes to certain employment
agreements as a direct result of the acquisition.
Year ended
December 30,
1995
---------------
(unaudited)
Net sales $ 27,137,857
Net loss (1,719,030)
Net loss per common share (0.38)
The pro-forma results do not necessarily represent results
which would have occurred if the acquisition had taken place on the
basis assumed above, nor are they indicative of the results of future
combined operations.
B. Financing: Simultaneously with the closing of the
Biobottoms acquisition, the Company and Biobottoms entered into a loan
and subordinated security agreement with a director and principal
stockholder of the Company and an affiliate of such individual pursuant
to which the Company borrowed from such director and principal
stockholder and affiliate $2,353,100 and $450,000, respectively. The
loan from the director and principal stockholder was utilized to fund
the acquisition of Biobottoms in part. The loan from the affiliate has
been utilized for working capital purposes. Subject to an intercreditor
agreement between the Company's asset based lender and other lenders,
the $450,000 loan was paid in full on May 4, 1997.
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.
F - 11
<PAGE>
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 B and 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.
In September 1997, this significant shareholder loaned the
Company an additional $1.2 million, with interest at 9%.
7. INVENTORIES:
F - 12
<PAGE>
Inventories consist of the following at September 30, 1997:
Raw materials and packaging $ 375,510
Work-in-process 365,333
Finished goods 4,495,968
----------------------
$ 5,236,811
======================
8. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September
30, 1997:
Land $ 420,000
Building 1,517,600
Equipment 2,808,526
----------------------
4,746,126
Less accumulated depreciation 2,593,606
----------------------
$ 2,152,520
======================
9. OTHER ASSETS:
Other assets consist of the following at September 30, 1997:
Deferred acquisition costs $ 407,616
Noncurrent deferred tax asset 581,535
Other 146,902
----------------------
$ 1,136,053
======================
F - 13
<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
8.5% and 8.25% at September 30, 1997 and 1996, respectively. The
outstanding balance was $820,186 at September 30, 1997.
Pursuant to the amended terms dated October 1995, the Company
may borrow up to an amount equal to the sum of:
(i) 80% 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. Up to $375,000 of such loan is guaranteed by a
director and significant stockholder.
(b) On February 9, 1996, the Company's 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. The balance on this loan was $1,046,240 at
September 30, 1997.
The above credit agreements with Congress Financial Corp. are
currently being re-written as part of Congress's review and approval
of the Magram acquisition.
F - 14
<PAGE>
11. LONG-TERM DEBT:
Long-term debt consists of the following at September 30, 1997:
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.
$ 952,806
Note payable - bank, payable in monthly
installments of $7,201 which includes interest at
12%. The note is collateralized by land and
buildings and is cosigned by a stockholder.(b) 564,540
Equipment Loans - payable in monthly installments 80,634
Other 161,493
Acquisition notes payable(a) -
----------------
1,759,473
Current maturities 682,863
----------------
Long - term debt $ 1,076,610
================
The maturities of long term debt is as follows:
1998 $ 893,936
1999 215,976
2000 50,233
2001 55,733
Thereafter 543,595
------------------
$1,759,473
==================
(a) 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
F - 15
<PAGE>
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
notes 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.
(b) Full payment of this mortgage was due on January 26, 1997. The
lender 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 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 during 1995 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, which
were exercised during 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.
F - 16
<PAGE>
E. 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 during 1996.
F. 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 Service C Preferred Stock, as well as for an
adjustment in salary, for the period from January 1, 1997 through March
31, 1997.
G. In September 9, 1996, the Company entered into an arrangement
with Gersten, Savage, Kaplowitz & Fredericks, LLP ("GSK&F") which
provided that GSK&F 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 GSK&F 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.
H. 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.
I. 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 agreement to become a
member of the Company's board of directors. Such options are
exercisable at $2.38 per share.
J. In May 1997, the Company authorized the issuance of 200,000
shares 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.
K. 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.
L. 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 principal of the
placement agent to purchase up to 100,000 shares of Common Stock at
$2.00 per share.
F - 17
<PAGE>
M. In September 1997, Mr. Rubin made an additional loan to the
Company in the amount of $1,200,000.
N. 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 $3,480,000
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 3,480 shares of
Series E Preferred Stock and 2,610,000 shares of Common Stock.
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.
14. NET SALES:
For the year ended September 30, 1997 and the nine months ended
September 30, 1996 two customers of Diplomat accounted for 6% and 4%
and 6% and 15% of net sales, respectively.
15. COMMITMENTS AND CONTINGENCY:
F - 18
<PAGE>
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.
In February 1997, Francine Nichols, a former consultant to the
Company, commenced an 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 disputes
F - 19
<PAGE>
each claim and intends to vigorously defend against them and believes
that it will prevail.
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 bases, one of which is nonperformance. Biobottoms intends to
vigorously defend against the claim, and believes that it will prevail.
16. INCOME TAXES:
The following analyzes the deferred tax assets at September 30,
1997:
Deferred tax asset:
Net operating loss carry forward $ 3,167,000
Depreciation 102,000
Inventory 1,016,000
Other items 164,000
------------------
4,449,000
Less: Valuation allowance (3,087,000)
------------------
Deferred tax asset $ 1,362,000
==================
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 $2,835,000 at
September 30, 1997, which represents a decrease of $212,000 over the
amount reported at September 30, 1996.
As of September 30, 1997, the Company has net operating loss carry
forwards for Federal income tax purposes of approximately $7,900,000
which are available to offset future Federal taxable income through
2009.
F - 20
<PAGE>
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
Year ended months ended
September 30, September 30,
1997 1996
------------------- ------------------
<S> <C> <C>
Income tax (benefit) computed at statutory rate $ 257,000 $ (2,456,000)
Tax benefit of net operating loss carry forward (257,000)
State tax benefit, net of federal tax benefit 1,567 (313,000)
Adjustment to valuation allowance (212,000) 2,769,000
------------------- ------------------
Income tax (benefit) as reported $ (210,433) $ -
=================== ===================
</TABLE>
17. BUSINESS SEGMENT INFORMATION:
Summarized financial information by business segment for nine
months ending September 30, 1997 is as follows:
Year ended
September 30,
1997
-----------------------
Net sales:
Specialty catalog retail $ 17,591,784
operations
Mass merchant manufacturing 6,892,724
and distribution
-----------------------
24,484,508
-----------------------
Operating income:
Specialty catalog retail (287,066)
operations
Mass merchant manufacturing 1,436,434
and distribution
-----------------------
1,149,368
-----------------------
F - 21
<PAGE>
Total assets:
Specialty catalog retail 10,311,497
operations
Mass merchant manufacturing 5,415,333
and distribution
-----------------------
15,726,830
-----------------------
Depreciation and amortization:
Specialty catalog retail 320,941
operations
Mass merchant manufacturing 105,124
and distribution
-----------------------
426,065
-----------------------
Capital expenditures:
Specialty catalog retail 159,766
operations
Mass merchant manufacturing 20,138
and distribution
-----------------------
$ 179,904
-----------------------
18. YEAR ENDED SEPTEMBER 30, 1996 (UNAUDITED):
The following summarizes the Company's results of operations
for year ended September 30, 1996:
Year ended
September 30, 1996
-----------------------
Net sales $ 20,576,697
Cost of sales 14,579,343
-----------------------
Gross profit 5,997,354
F - 22
<PAGE>
Operating expenses 13,543,927
-----------------------
Operating loss (7,546,573)
Other income 3,980
Interest expense (908,664)
-----------------------
Loss before income taxes (8,451,257)
Income taxes 47,000
-----------------------
Net loss $ (8,404,257)
-----------------------
Net loss per share $ (1.97)
-----------------------
Number of shares used in 4,267,640
computation
19. STOCK OPTION PLANS
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, 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-
F - 23
<PAGE>
qualified stock options, at an exercise price of $2.00 per share and
500,000 non-qualified stock options issued and exercised by a
consultant. 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 $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 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 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.
In fiscal 1997, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". For disclosure
purposes, the fair value of options is estimated on the date of grant
using the Black-Scholes option option pricing model with the following
weighted average assumptions used for stock options granted during the
years ended September 30, 1997 and 1996: annual dividends of $0;
expected volatility of 94.99%; risk-free interest rate of 7% and
expected life of five years. The weighted average fair value of stock
options granted during the years ended September 30, 1997 and 1996 was
$1.17 and $1.48, respectively. If the Company had recognized
compensation cost for stock options in accordance with SFAS No. 123,
the Company's proforma net loss and net loss per share would have been
$328,099 and $.06 per share for the fiscal year ended September 30,
1997 and $8,298,400 and $1.82 per share for the nine months ended
September 30, 1996.
20. SUBSEQUENT EVENT
In October 1997, the Company acquired out of bankruptcy all of the
assets of Brownstone Studios, Inc., a mail-order catalog company.
F - 24
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES D PREFERRED STOCK
OF
DIPLOMAT CORPORATION
Pursuant to Section 151 of the Delaware General Corporation Law,
Diplomat Corporation (the "Corporation"), a corporation organized and existing
under and by virtue of the provisions of the Delaware General Corporation Law
that pursuant to authority conferred upon the Board of Directors of the
Corporation (the "Board") by the Certificate of Incorporation of the
Corporation, the Board, by a Unanimous Written Consent dated December 23, 1997,
adopted the following resolution authorizing the creation and issuance of a
series of 95,000 shares of Series D Preferred Stock, (the "Series D Preferred
Stock" or the "Series"), which resolution is as follows:
RESOLVED, that pursuant to authority expressly granted to and
vested in the Board of Directors by the Certificate of Incorporation, as
amended, of the Corporation, the Board hereby creates a series of 95,000 shares
of Series D Preferred Stock, of the Corporation and authorizes the issuance
thereof, and hereby fixes the designation thereof, and the voting powers,
preferences and relative, participating, optional and other special limitations
or restrictions thereon (in addition to the designations, preferences and
relative, participating and other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation, as amended, of the Corporation, which are applicable to the
preferred stock of all series, if any) as follows:
1. Designation. The shares of the Series shall be designated
"Series D Preferred Stock", and the number of shares constituting the Series
shall be 95,000.
2. Dividends. Holders of the Series D Preferred Stock
(the "Holders") shall be entitled to an annual cumulative dividend of eight and
one-half percent (8.5%) of the Liquidation Value of the Series D Preferred
Stock, from the date of issuance and payable monthly commencing January 31,
1998. Dividends will be payable in cash or accumulated and payable in kind in
Common Stock upon conversion pursuant to Section 5 herein. The Corporation may
set a record date for the payment of any dividend, on at least 10 days prior
notice to all holders, which record date shall be not more than 60 days prior to
a dividend payment date. Dividends payable for any period less than a full year,
will be computed on the basis of a 360 day year with equal months of 30 days.
3. Liquidation.
(a) Liquidation Preference. Upon any liquidation,
dissolution, or winding up of the Corporation, whether voluntary or
involuntary, and after provision for the payment of creditors, the Holders shall
be entitled to be paid an amount equal to $100.00 per share ("Liquidation
Value") of Series D Preferred Stock held, before any distribution or payment is
made upon any shares of Common Stock and any other series of stock junior to
the Series D Preferred Stock. The Series D Preferred Stock shall be in parity
with the most senior of the Corporation's preferred stock, including but not
limited to Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred
<PAGE>
Stock and Series E Preferred Stock (the "Parity Stock") with respect to
liquidation rights. The Corporation shall not authorize or issue any class or
series of preferred stock which is pari passu or senior to the Series D
Preferred Stock without the prior written consent of the Holder of the Series D
Preferred Stock (pursuant to Section 6 hereof).
(b) Ratable Distribution. If upon any liquidation,
dissolution or winding up of the Corporation, the net assets of the Corporation
to be distributed among the Holders shall be insufficient to permit payment in
full to the Holders of such Series D Preferred Stock, then all remaining net
assets of the Corporation after the provision for the payment of the
Corporation's debts shall be distributed ratably in proportion to the full
amounts to which they would otherwise be entitled to receive among the Holders
and the Holders of the Parity Stock.
(c) Corporate Changes. The sale, lease or exchange of
all or substantially all of the Corporation's assets or the merger or
consolidation of the Corporation which results in the holders of Common Stock of
the Corporation receiving in exchange for such Common Stock cash, notes,
debentures or other evidences of indebtedness or obligations to pay cash, or
preferred stock of the surviving entity which ranks on a parity with
or senior to the Series D Preferred Stock as to dividends or upon
liquidation, dissolution or winding-up shall be deemed to be a liquidation,
dissolution or winding up of the affairs of the Corporation within
the meaning of this Section 3(c). In the case of mergers or consolidations
of the Corporation where holders of Common Stock of the Corporation
receive, in exchange for such Common Stock, common stock or preferred stock
in the surviving entity (whether or not the surviving entity is the
Corporation) of such merger or consolidation, or common stock or preferred
stock of another entity (in either case, such preferred stock to be received in
exchange for common stock is herein referred to as "Exchanged Preferred Stock"),
which is junior as to dividends and upon liquidation, dissolution or winding up
to the Series D Preferred Stock, the merger agreement or consolidation agreement
shall expressly provide that the Series D Preferred Stock shall become preferred
stock of such surviving entity or other entity, as the case may be, with the
same annual dividend rate and equivalent rights to the rights set forth herein;
provided however that if the Exchanged Preferred Stock is to be mandatorily
redeemed in whole or in part through the operation of a sinking fund or
otherwise the merger or consolidation agreement shall expressly provide that, or
other provisions shall be made so that, all shares of the Series D Preferred
Stock shall be mandatorily redeemed prior to the first mandatory redemption of
the Exchanged Preferred Stock; and provided further, that in the event the
Corporation or an affiliate of the Corporation optionally redeems or otherwise
acquires any or all of the then outstanding shares of Exchanged Preferred Stock,
the Corporation shall redeem all shares of Series D Preferred Stock. In the
event of a merger or consolidation of the Corporation where the consideration
received by the holders of common stock consists of two or more types of the
consideration set forth above, the holders of the Series D Preferred Stock shall
be entitled to receive either cash or securities based upon the foregoing in the
same proportion as the holders of common stock of the Corporation are receiving
cash or debt securities, or equity securities in the surviving entity or other
entity.
2
<PAGE>
4. Voting Rights. The Series D Preferred Stock shall have
voting rights equal to 3,166,667 shares of the Company's common stock on all
matters on which the common stock votes.
5. Conversion Rights. The Series D Preferred Stock shall be
convertible into Common Stock immediately as follows:
(a) Optional Conversion. Subject to and upon
compliance with the provisions of this Section 5, a Holder shall have the right
at such Holder's option at any time or from time to time, to convert any of
such shares of Series D Preferred Stock into fully paid and non-assessable
shares of Common Stock at the then Conversion Rate (as hereinafter defined),
plus accrued and unpaid dividends upon the terms hereinafter set forth.
(b) Conversion Rate.Each share of Preferred Stock is
convertible into thirty-three and one-third (33 1/3) shares of common stock,
subject to adjustment as set forth in Section 5(d) hereof.
(c) Mechanics of Conversion. The Holder may exercise
the conversion right specified in Section 5(a) by giving written notice to the
Corporation, that the Holder elects to convert a stated number of shares of
Series D Preferred Stock into a stated number of shares of Common Stock, and by
surrendering the certificate or certificates representing the Series D Preferred
Stock so to be converted, duly endorsed to the Corporation or in blank, to the
Corporation at its principal office (or at such other office as the Corporation
may designate by written notice, postage prepaid, to all Holders) at any time
during its usual business hours on or before the Conversion Date (as defined
below), together with a statement of the name or names (with addresses) of the
person or persons in whose name the certificate or certificates of Common Stock
shall be issued.
(1) Conversion Deemed Effective. Conversion shall
be deemed to have been effected on the date when delivery of notice of an
election to convert and certificates for shares are made and such date is
referred to as the "Conversion Date"; provided, however, that any such surrender
on any date when the stock transfer books of the Corporation shall be closed
shall constitute the person or persons in whose name or names the certificates
for such shares are to be issued as the record holder or holders thereof for
all purposes at the close of business on the next succeeding day on which such
stock transfer books are open.
(2) Issuance of Common Stock; Effect of
Conversion. Promptly after receipt from a Holder of the written notice referred
to in Section 5(c) and surrender of the certificate or certificates representing
the share or shares of Series D Preferred Stock to be converted, the Corporation
shall cause to be issued and delivered to said holder, registered in such name
or names as such holder may direct, a certificate or certificates for the number
of shares of Common Stock issuable upon the conversion of such share or shares.
3
<PAGE>
(d) Conversion Rate Adjustments. The Conversion Rate
shall be subject to adjustment from time to time as follows:
(1) Consolidation, Merger, Sale, Lease or
Conveyance. In case of any consolidation with or merger of the corporation with
or into another corporation, or in case of any sale, lease or conveyance to
another corporation of the assets of the Corporation as an entirety or
substantially as an entirety, each share of Series D Preferred Stock shall after
the date of such consolidation, merger, sale, lease or conveyance be convertible
into the number of shares of stock or other securities or property (including
cash) to which the Common Stock issuable (at the time of such consolidation,
merger, sale, lease or conveyance) upon conversion of such share of Series D
Preferred Stock would have been entitled upon such consolidation, merger, sale,
lease or conveyance; and in any such case, if necessary, the provisions set
forth herein with respect to the rights and interests thereafter of the holder
of the shares of Series D Preferred Stock shall be appropriately adjusted so as
to be applicable, as nearly as may reasonably be, to any shares of stock or
other securities or property thereafter deliverable on the conversion of the
shares of Series D Preferred Stock.
(2) Stock Dividends, Subdivisions,
Reclassification or Combinations. If the Corporation shall (i) declare a
dividend or make a distribution on its Common Stock in shares of its Common
Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify the outstanding
Common Stock into a smaller number of shares, the Conversion Rate in effect at
the time of the record date for such dividend or distribution or the effective
date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of Series D Preferred
Stock surrendered for conversion after such date shall be entitled to receive
the number of shares of Common Stock which he would have owned or been entitled
to receive had such Series D Preferred Stock been converted immediately prior
to such date. Successive adjustments in the Conversion Rate shall be made
whenever any event specified above shall occur.
(e) Fractional Shares. No fractional shares of Common
Stock or scrip shall be issued upon conversion of shares of Series D Preferred
Stock. If more than one share of Series D Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares Series D Preferred Stock so surrendered. Instead
of any fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series D Preferred Stock, the Corporation shall pay
a cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest of the then current market price.
(f) Treasury Stock. For the purposes of this
Section 5, the sale or other disposition of any Common Stock theretofore held
in the Corporation's treasury shall be deemed to be an issuance thereof.
4
<PAGE>
(g) Costs. The Holder shall pay all documentary,
stamp, transfer or other transactional taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of any shares of Series D
Preferred Stock; provided further that the Corporation shall not be required
to pay any taxes which may be payable in respect of any transfer involved
in the issuance or delivery of any certificate for such shares in a name other
than that of the holder of the shares of Series D Preferred Stock in respect
of which such shares are being issued.
(h) Reservation of Shares. The Corporation shall
reserve at all times so long as any shares of Series D Preferred Stock remain
outstanding, free from preemptive rights, out of its treasury stock (if
applicable) or its authorized but unissued shares of Common Stock, or both,
solely for the purpose of effecting the conversion of the shares of Series D
Preferred Stock, sufficient shares of Common Stock to provide for the conversion
of all outstanding shares of Series D Preferred Stock.
(i) Approvals. If any shares of Common Stock to be
reserved for the purpose of conversion of shares of Series D Preferred Stock
require registration with or approval of any governmental authority under any
Federal or state law before such shares may be validly issued or delivered upon
conversion, then the Corporation will in good faith and as expeditiously as
possible endeavor to secure such registration or approval, as the case may be.
If, and so long as, any Common Stock into which the shares of Series D Preferred
Stock are then convertible is listed on any national securities exchange, the
Corporation will, if permitted by the rules of such exchange, list and keep
listed on such exchange, upon official notice of issuance, all shares of such
Common Stock issuable upon conversion.
(j) Valid Issuance. All shares of Common Stock which
may be issued upon conversion of shares of Series D Preferred Stock will upon
issuance by the Corporation be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof, and the Corporation shall take no action which will cause a
contrary result.
6. Covenants. In addition to any other rights provided by law,
so long as any Series D Preferred Stock is outstanding, the Corporation, without
first obtaining the affirmative vote or written consent of the holders of not
less than two-thirds of such outstanding shares of Series D Preferred Stock,
will not:
(a) amend or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or By-Laws if such
action would alter adversely the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, any Series D Preferred Stock,
or increase the number of shares of Series D Preferred Stock authorized hereby;
(b) authorize or issue shares of any class or series
of stock having any preference or
5
<PAGE>
priority as to dividends or assets or other rights superior to any such
preference or priority of the Series D Preferred Stock, or authorize or issue
shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights to
purchase, any shares of stock of the Corporation having any preference or
priority as to dividends, assets or other rights superior to any such preference
or priority of the Series D Preferred Stock;
(c) reclassify any class or series of any stock
junior in liquidation rights to the Series D Preferred Stock ("Junior Stock")
into stock in parity with the Series D Preferred Stock with respect to
liquidation rights or stock senior to the Series D Preferred Stock with
respect to liquidation rights ("Senior Stock") or reclassify any series of
Junior Stock into Senior Stock;
(d) declare or pay on any Junior Stock any dividend
whatsoever, whether in cash, property or otherwise (other than dividends payable
in shares of the class or series upon which such dividends are declared or paid,
or payable in shares of Common Stock with respect to Junior Stock other than
Common Stock, together with cash in lieu of fractional shares), nor shall the
Corporation make any distribution on any Junior Stock, nor shall any Junior
Stock be purchased or redeemed by the Corporation, nor shall any monies be paid
or made available for a sinking fund nor the purchase or redemption of any
Junior Stock, unless all dividends to which the holders of Series D Preferred
Stock shall have been entitled for all previous dividend periods shall have
been paid or declared and a sum of money sufficient for the payment thereof
set apart.
7. No Preemptive Rights. No holders of Series D Preferred
Stock, nor of the security convertible into, nor of any warrant, option or right
to purchase, subscribe for or otherwise acquire Series D Preferred Stock,
whether now or hereafter authorized, shall, as such holder, have any preemptive
right whatsoever to purchase, subscribe for or otherwise acquire, stock of any
class of the Corporation nor of any security convertible into, nor of any
warrant, option or right to purchase, subscribe for or otherwise acquire, stock
of any class of the Corporation, whether now or hereafter authorized.
8. Exclusion of Other Rights. Except as may otherwise be
required by law, the shares of Series D Preferred Stock shall not have any
preferences or relative, participating, optional or other special rights, other
than those specifically set forth in this resolution (as such resolution may be
amended from time to time) and in the Corporation's Certificate of
Incorporation. The Shares of Series D Preferred Stock shall have no preemptive
or subscription rights.
9. Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
10. Severability of Provisions. If any right, preference
or limitation of the Preferred Stock set forth in this Certificate (as such
Certificate may be amended from time to time) is invalid, unlawful or
incapable of being enforced by reason of any rule of law or public policy, all
6
<PAGE>
other rights, preferences and limitations set forth in this Certificate (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable right, preference or limitation shall, nevertheless, remain in
full force and effect, and no right, preference or limitation herein set forth
shall be deemed dependent upon any other such right, preference or limitation
unless so expressed herein.
11. Status of Reacquired Shares. Shares of Series D
Preferred Stock which have been issued and reacquired in any manner shall (upon
compliance with any applicable provisions of the laws of the State of Delaware)
have the status of authorized and unissued shares of Series D Preferred Stock
issuable in series undesignated as to series and may be redesignated and
reissued.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed in its name and on its behalf by its President and
attested to this 13th day of January, 1998.
DIPLOMAT CORPORATION
By: /s/ JONATHAN ROSENBERG
-----------------------
Jonathan Rosenberg, President
ATTESTED
/s/ STUART A. LEIDERMAN
-----------------------
Stuart A. Leiderman
7
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
This Agreement and Plan of Merger ("Agreement") is made as of
December 23, 1997 by and among Diplomat Corporation, a Delaware corporation
("Parent"), Magram Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of Parent ("Subsidiary"), each with a place of business at 25 Kay
Fries Drive, Stony Point, New York 10980, Lew Magram Ltd. a New York corporation
("Target") with a place of business at 414 Alfred Avenue, Teaneck, New Jersey
07666, and the Stockholders (as defined herein).
PREAMBLE
WHEREAS, all of the outstanding capital stock of Target is owned
by Robert M. Rubin an individual with an address at 6060 Kings Gate Circle,
Delray Beach, Florida 33484; Jay Kaplowitz an individual with an address at 205
East 69th Street, New York, New York 10021; Irving Magram an individual with an
address at 56 Huyler Landing, Cresskill, New Jersey 07626; Warren Golden an
individual with an address at 703 Hollywood Ave., Bronx, New York 10465, and
Stephanie Sobel an individual with an address at 21 Alice Ave., Merrick, New
York 11566. The term "Stockholders" shall mean Robert M. Rubin, Jay Kaplowitz,
Irving Magram, Warren Golden and Stephanie Sobel; and
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law") and the Business Corporation Law of the State of New
York ("New York Law"), Subsidiary will be merged with and into Target (the
"Merger").
NOW THEREFORE, in consideration of the mutual promises herein
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. The Merger.
(a) The Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with New York Law, at
the Effective Time (as herein defined) Subsidiary shall be merged with and into
Target, the separate existence of Subsidiary shall cease and Target shall
continue as the surviving corporation of the Merger (the "Surviving
Corporation").
(b) Consummation of the Merger. Subject to the
satisfaction or waiver of the conditions set forth in Section 6, the
consummation of the Merger will take place as promptly as practicable after the
satisfaction or waiver of the conditions set forth in Section 6 at the offices
of Gersten, Savage, Kaplowitz & Fredericks, LLP, 101 East 52nd Street, New York,
New York 10022 unless such other time and place is agreed to in writing by the
parties hereto (the "Closing" or "Closing Date").
(c) Effective Time. As promptly as practicable after
the satisfaction or waiver of the conditions set forth in Section 6, the parties
hereto shall cause the Merger to be
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consummated by filing a certificate of merger (the "Merger Certificate") with
the Department of State of the State of New York in the form annexed hereto as
Exhibit 1(c) required by, and executed in accordance with the relevant
provisions of, New York Law (the date and time of such filing, or such later
date or time as set forth therein, being the "Effective Time".
(d) Effect of the Merger. At and after the Effective
Time, the Merger shall be effective as provided in the applicable provisions of
New York Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, except as otherwise provided herein, all the
property, rights, privileges, powers and franchises of Target and Subsidiary
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of Target and Subsidiary shall become the debts, liabilities and duties of the
Surviving Corporation.
(e) Certificate of Incorporation; By-Laws. At and after
the Effective Time, the Certificate of Incorporation and By-Laws of Target, as
in effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation and By-Laws of the Surviving Corporation.
(f) Directors and Officers. At and after the Effective
Time, the directors and officers of the Surviving Corporation shall be as
identified in Schedule 1(f), until their respective successors shall have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Certificate of Incorporation and
By-Laws of the Surviving Corporation.
(g) Further Actions. At and after the Effective Time,
the Surviving Corporation shall take all action as shall be required in
connection with the Merger, including, but not limited to, the execution and
delivery of any further deeds, assignments, instruments or documentation as are
necessary or desirable to carry out the provisions of this Agreement.
2. Conversion of Shares in the Merger.
(a) Conversion of Shares. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of Target, the holders of the shares of Common Stock, $0.01 par
value per share, of Target ("Target Common Stock") issued and outstanding on the
date hereof, shall receive in exchange therefore the number of shares of validly
issued, fully paid and nonassessable Series D Preferred Stock, $0.10 par value
per share of Parent ("Series D Preferred Stock") and the number of validly
issued, fully paid and nonassessable shares of Common Stock, $.0001 par value
per share of Parent ("Additional Common Stock"), and the shares of Senior
Convertible Preferred Stock of Target issued and outstanding on the date hereof
shall receive in exchange therefore the number of shares of validly issued,
fully paid and nonassessable Series D Preferred Stock of Parent, in the amount
and as provided in Section 2(b) hereof. The consideration referred to in this
Section 2(a) is hereinafter referred to as the "Merger Consideration."
(b) Exchange of Certificates. At the Closing each of
the Stockholders shall surrender to Parent certificates for the Target Common
Stock and Senior Convertible Preferred
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Stock owned by such Stockholder. At the Closing, Parent shall issue to each
Stockholder certificates of Parent representing good and marketable title to the
number of shares of duly and validly issued, fully paid and non-assessable
Series D Preferred Stock and Additional Common Stock set forth next to such
Stockholder's name in Schedule 2(b) hereto, free and clear of any and all liens,
claims, encumbrances, adverse interests of any kind and other claims. Each such
certificate shall be in negotiable form. In addition, at the Closing each party
shall execute and deliver the Concurrent Agreements under Section 8 herein to
which each party is also a party. At the Closing the Stockholders shall make
available the written resignations of all of the directors of Target effective
as of the Closing and shall cause to be made available the books and records of
Target to Parent. At the Closing, Target and the Stockholders shall deliver to
Parent all certificates, opinions and other documents referred to in Section
6(a) hereof, and Parent and Subsidiary shall deliver to Target and the
Stockholders all certificates, opinions and other documents referred to in
Section 6(b) hereof. At any time and from time to time after the Closing, the
parties shall duly execute, acknowledge and deliver all such further
assignments, conveyances, instruments and documents, and shall take such other
action consistent with the terms of this Agreement to carry out the transactions
contemplated by this Agreement.
(c) From and after the Effective Time, Parent shall be
entitled to treat the certificates which immediately prior to the Effective Time
represented shares of Target Common Stock and Senior Convertible Preferred Stock
and which have not yet been surrendered for exchange as evidencing the ownership
of the number of full shares of Series D Preferred Stock and Additional Common
Stock into which the shares of Target Common Stock and Senior Convertible
Preferred Stock represented by such certificates shall have been converted
pursuant to Section 2(a), notwithstanding the failure to surrender such
certificates. However, notwithstanding any other provision of this Agreement,
until holders or transferees of certificates which immediately prior to the
Effective Time represented shares of Target Common Stock and Senior Convertible
Preferred Stock have surrendered them for exchange as provided herein, no
dividends shall be paid with respect to any shares represented by such
certificates.
(d) Terms of Series D Preferred Stock. The principal
terms of Series D Preferred Stock shall be as follows:
(i) Certificate of Designation. Except as
provided in Section 2(d)(ii), the liquidation preferences, dividend preferences,
conversion rights, voting rights and other terms of Series D Preferred Stock are
as defined in the Certificate of Designation annexed hereto as Exhibit 2(d),
incorporated by reference herein (the "Certificate of Designation").
(ii) Conversion and Adjustment of Conversion
Price. Series D Preferred Stock shall be convertible at or at any time after the
Closing into 3,166,667 shares of common stock of Parent (the "Parent Common
Stock") assuming a valuation of Parent Common Stock of no less than $3.00 per
share on the Closing Date; provided, however, if the average closing price of
Parent Common Stock during the ten (10) trading days prior to Closing is less
than $3.00 per share, the number of shares of Parent Common Stock into which the
Preferred Stock is
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convertible shall be 3,166,667 multiplied by a fraction, the numerator of which
shall be $3.00 and the denominator of which shall be the average closing price
of Parent Common Stock during the ten (10) trading days prior to the Closing. If
the average closing price of Parent Common Stock during the ten (10) trading
days prior to the Closing results in a denominator in said fraction of less than
$1.75 per share, Parent shall give notice to the Stockholders that the
Stockholders holding a majority of the Shares may elect to terminate or complete
the transaction using $1.75 as the denominator. If the average closing price of
Parent Common Stock during the ten (10) trading days prior to the Closing is
more than $4.50 per share, then the number of shares of Parent Common Stock into
which the Preferred Stock is convertible shall be 3,166,667 multiplied by a
fraction, the numerator of which shall be $4.50 and the denominator of which
shall be the average closing price of Parent Common Stock during the ten (10)
trading days prior to the Closing. In no event shall the number of shares of
Parent Common Stock into which the Preferred Stock is convertible have a market
value in excess of $14,250,000.
(e) Waiver of Appraisal or Dissenter's Rights. Each
Stockholder waives any appraisal or dissenter's right each such Stockholder has
or may have in connection with the Merger.
3. Representations and Warranties of Target and Stockholders.
Except as set forth in the Schedules hereto, disclosure in any one of which
shall apply to any representation and/or warranty made herein, including,
without limitation Section 3(v), and/or except as otherwise disclosed in writing
to Parent, Target and the Stockholders, separately in accordance with the
Stockholders percentage interests as set forth in Schedule 2(b) herein,
represent and warrant to Parent and Subsidiary, subject to Section 3(v) herein:
(a) Organization, Standing, etc. of Target. Target is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York and has full corporate power and authority to conduct
its business as presently conducted by it and to enter into and perform this
Agreement and to carry out the transactions contemplated by this Agreement.
Target is duly qualified to do business as a foreign corporation doing business
in the States of New York and New Jersey. There are no other jurisdictions in
which the conduct of its business or its ownership or leasing of property
requires that Target qualify as a foreign corporation. Target has no
subsidiaries and does not own any shares of capital stock of any other
corporation.
(b) Capitalization. The authorized capital stock of Target
consists of 2,000 shares of common stock and 2,000 shares of preferred stock
designated as "Senior Convertible Preferred Stock." As of the date hereof, there
were issued and outstanding 70.59 shares of common stock and 2,000 shares of
Senior Convertible Preferred Stock convertible into such number of shares of
Common Stock equal to 50% of the issued and outstanding common stock of Target
immediately following such conversion which were held of record and beneficially
by the persons listed on Schedule 3(b) hereto. Except for 70.59 shares of common
stock reserved for issuance upon conversion of the Senior Convertible Preferred
Stock, no shares of capital stock have been reserved for issuance to any person,
and there are no outstanding rights, warrants, options or agreements for
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the purchase of capital stock from Target except for this Agreement. No person
is entitled to any preemptive or similar right with respect to the issuance of
any capital stock of Target. The outstanding shares of Target Common Stock and
Senior Convertible Preferred Stock are validly issued, fully paid,
nonassessable, and have been issued in compliance with all state and federal
securities laws.
(c) Authority for Agreement. Except as set forth in
Schedule 3(c) hereto and/or as otherwise disclosed in writing to Parent, the
execution, delivery, and performance of this Agreement by Target has been duly
authorized by all necessary corporate action, and this Agreement constitutes a
valid and binding obligation of Target and Stockholders enforceable against them
in accordance with its terms. The execution and carrying out of the transactions
contemplated by this Agreement and compliance with its provisions by Target will
not violate any provision of law and will not conflict with or result in any
breach of any of the terms, conditions, or provisions of, or constitute a
default under, its Certificate of Incorporation (except for the exchange of
securities as provided for in Section 2(a)) or its By-Laws or, in any material
respect, any indenture, lease, loan agreement (other than the Loan Agreement, as
hereinafter defined), agreement, or other instrument to which Target is a party
or by which it or any of its properties are bound, or any decree, judgment,
order, statute, rule or regulation applicable to Target.
(d) Governmental Consent, etc. Except as otherwise
required under Section 6(a)(vii) herein and/or as otherwise disclosed in writing
to Parent, and as otherwise expressly provided in this Agreement, no material
consent, approval, order or authorization of, or registration, qualification,
designation, declaration, or filing with, any governmental authority is required
on the part of Target in connection with the execution and delivery of this
Agreement, or the consummation of the other transactions contemplated by this
Agreement.
(e) Litigation. Except as otherwise disclosed in
writing to Parent, Target has not received notice of any material action, suit
or proceeding, or governmental inquiry or investigation (including the Federal
Trade Commission or Federal Postal Authorities), pending or threatened against
Target, and Target, to its knowledge, is in compliance in all material respects
with all laws and regulations materially affecting it, its properties and its
business.
(f) Financial Statements. Except as set forth in
Schedule 3(f) and/or as otherwise disclosed in writing to Parent, Target has
furnished to Parent a true and correct copy of Target's unaudited balance sheet
and accompanying income statement and statement of cash flow (the "Financial
Statement") as of July 5, 1997 (the "Balance Sheet Date"), an audited financial
statement for the fiscal year ended January 4, 1997, as well as audited
financial statements for the preceding two fiscal years (the "Audited
Statements"). Except as set forth in Schedule 3(f) and/or as otherwise disclosed
in writing to Parent: the Financial Statement and the Audited Statements fairly
present the financial condition of Target as of the dates thereof, and have been
prepared in accordance with generally accepted accounting principles
consistently applied, and with regard to the Financial Statement only, subject
to normal year end audit adjustments and accruals, which adjustments and
accruals shall not be material; there has been no material adverse change in the
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financial condition, operations or business of Target since the Balance Sheet
Date, and Target has not incurred any material liability since the Balance Sheet
Date, other than those incurred in the ordinary course of business or disclosed
on Schedule 3(f) hereto as of the Balance Sheet Date, except as set forth on the
Financial Statement and Schedule 3(f) hereto and/or as otherwise disclosed in
writing to Parent; Target had no material liabilities, contingent or otherwise,
liability for taxes, commitments extending for over one year and requiring the
expenditure of more than $25,000 in the aggregate or unrealized or anticipated
losses aggregating a material amount, and the inventory shown in the Financial
Statement is in good and saleable condition and in amount and types reasonably
required in the conduct of Target's business.
(g) Title to Properties; Liens. Target has good title
to, or a valid and current leasehold interest in, the properties and assets
reflected on the Financial Statement, except those disposed of since the date
thereof in the ordinary course of business, and such properties and assets are
free and clear of all liens, security interests, charges and encumbrances,
except (i) as disclosed on the Financial Statement, (ii) liens for current taxes
not yet due and payable, (iii) liens in favor of Congress Financial Corporation,
(iv) such imperfections of title or zoning restrictions, easements or
encumbrances, if any, as do not materially interfere with the present use of
such property or assets and (v) liens which arise by operation of law.
(h) Material Contracts. Except as disclosed on
Schedule OP3(h) and/or as otherwise disclosed in writing to Parent and other
than purchase orders issued for merchandise in the normal course of business,
Target is not a party to or bound by any indenture, lease, license, agreement
or contract which requires future expenditures by Target in excess of $25,000
or which is otherwise material to Target's business or operations.
(i) Compliance with Other Instruments. Except as
previously disclosed in writing to Parent, Target is not in violation of any
material term or provision of its Certificate of Incorporation or By-Laws, or of
any material term of any instrument, loan agreement, agreement, judgment,
decree, order, statute, rule or regulation applicable to Target, except with
respect to the Loan Agreement.
(j) Labor Relations. Except as otherwise disclosed in
writing to Parent, Target has no pension, retirement or similar plan or
obligation, and all payments due under any benefit plan are current. Target is
not a party to any collective bargaining agreement and, to the best of its
knowledge, no organization efforts are presently being made with respect to any
of its employees. Target has complied in all material respects with all
applicable laws (including, but not limited to, Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and regulations relating to
employment matters including, but not limited to, those relating to wages,
hours, discrimination and payment of social security and similar taxes.
(k) Tax Returns and Payment. All of the tax returns and
reports of Target required by law to be filed have been duly and accurately
filed or Target has obtained proper extensions therefor and all taxes shown due
thereon have been paid and all payroll tax withholdings
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have been timely deposited. There are in effect no waivers of the applicable
statute of limitations for federal, state or local taxes for any period, except
in connection with the ongoing sales and use tax audit by the State of New York.
The Stockholders agree to indemnify and save Parent harmless and to promptly pay
to Parent or reimburse Parent for all losses, liabilities or obligations
incurred by Parent resulting from such sales and use tax audit by the State of
New York, to the extent such losses, liabilities and obligations are in excess
of $100,000, subject to and pursuant to the terms of Section 7 hereof
(including, without limitation, the limitations set forth in Section 7(c) and
the provision set forth in Section 7(b) enabling the Stockholders to satisfy
their obligations with Parent Common Stock in lieu of cash. No deficiency
assessment or proposed adjustment of Target's federal, state and local taxes is
pending, and Target has no knowledge of any proposed liability for any tax to be
imposed upon its properties or assets, for which there is not an adequate
reserve reflected in the Financial Statement.
(l) Patents, Trademarks. Target has good title to all
material patents, trademarks, including but not limited to exclusive rights to
the trademark "Lew Magram", Registration Number 1,554,789, registered in the
name of Target, copyrights, trade names and trade secrets, or adequate licenses
and rights to use patents, trademarks, copyrights, trade names and trade secrets
of others necessary to the conduct of its business. The business of Target is
being carried on without known conflicts with patents, licenses, trademarks,
copyrights, trade names and trade secrets of others and to the best of Target's
knowledge, no other persons are conducting their businesses in conflict with
patents, licenses, trademarks, copyrights, trade names and trade secrets used by
Target.
(m) Environmental Matters. To the best knowledge of
Target and the Stockholders and except as required under Section 6(a)(vii)
herein and/or as otherwise disclosed in writing to Parent: (i) Target has
obtained all material permits and licenses which are required in connection with
its business under all applicable laws and regulations relating to pollution or
protection of the environment (the "Environmental Laws") and is in material
compliance therewith; (ii) Target has at all times conducted its business in
material compliance with all Environmental Laws and Target has not received any
written notice of any past, present or future events, conditions or
circumstances, which would interfere with or prevent material compliance or
continued material compliance with any Environmental Laws or which form the
material basis of any claim, demand or investigation, based on or related to
Target's business or other activities; (iii) there is no civil, criminal or
administrative action or proceeding pending or threatened against Target,
arising under any Environmental Laws; (iv) there do not exist, and at no time
since Target acquired any premises owned, leased or used by it (the "Subject
Premises"), have there existed any conditions which would require remediation by
Target under any Environmental Laws; (v) there are no underground storage tanks
located on the Subject Premises and (vi) Target has at all times during its
ownership or occupation of the Subject Premises disposed of all wastes,
hazardous or otherwise, generated by the use of the Subject Premises in a manner
which materially complies with Environmental Laws.
(n) Compliance with Laws and Regulations. To Target's
knowledge, Target has complied in all material respects with all laws and
regulations applicable to the conduct of its business, including, but not
limited to, all regulations of the U.S. Federal Trade Commission,
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except as otherwise previously disclosed in writing to Parent.
(o) Insurance. Target has in full force and effect
fire, casualty, workers, compensation and general liability insurance policies,
with extended coverage, in amounts as previously disclosed to Parent.
(p) Operation since the Balance Sheet Date. Since the
Balance Sheet Date and except as contemplated by this Agreement, Target:
(1) has operated its business substantially as
it was operated prior to that date and only in the ordinary course;
(2) other than dividends payable in connection
with Target's preferred stock, has not created or otherwise become liable with
respect to any indebtedness or declared or made any dividend or distribution of
cash, assets or capital stock;
(3) has maintained or kept current its books,
accounts, records, payroll, and filings in the usual and ordinary course of
business, consistent with standard practice;
(4) has not made any capital expenditure,
commitment or investment other than in the ordinary course of business.
(q) Minute Books. The minute books of Target, which
have been provided to Parent, contain a complete summary of all meetings,
consents and resolutions of directors and stockholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material aspects.
(r) Employment Agreements. Schedule 3(r) is a list of
each employment agreement between Target and any director, officer or employee
of Target and copies of all such agreements have been provided to Parent prior
to the date hereof. Except as provided by the employment agreements and except
as set forth on Schedule 3(r) hereto, all other employees of Target are
terminable at will without expense or liability to Target.
(s) Warranty Claims. To Target's knowledge, there are
no pending or threatened material claims against Target for any work performed
by Target for any customer, including but not limited to, any services rendered
under any warranties, to Target's knowledge, whether express or implied, by a
customer of Target, nor, to Target's knowledge, does there exist any basis
therefor.
(t) Product Liability Claims. To Target's knowledge,
there are no pending or threatened product liability claims not otherwise
covered by insurance by customers or any third parties of Target which are
material with respect to the business or operations of Target, any products now
or previously manufactured and/or sold by Target, nor, to Target's knowledge,
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does there exist a basis therefor.
(u) Full Disclosure. Neither the Financial Statement,
Audited Statements nor the representations and warranties of Target contained in
this Agreement contains any untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein or herein not
misleading.
(v) Brownstone Acquisition. Since the Balance Sheet
Date, the nature of the business of Target has materially changed as a result of
the acquisition by Brownstone Holdings, Inc., a wholly-owned subsidiary of
Parent, of substantially all of the assets of Jean Grayson's Brownstone Studio,
Inc. and Wilroy, Inc. and the inclusion of such assets in the operation of
Target's business (the "Brownstone Acquisition"). Accordingly, the
representations and warranties of the Stockholders herein are subject to the
changes to Target's business as a result of the Brownstone Acquisition, and the
parties hereto hereby agree that none of the changes to Target's business as a
result of the Brownstone Acquisition (including, without limitation, changes to
assets, liabilities, contingencies, statements of facts or operational matters)
shall be deemed a breach of the representations and warranties of the
Stockholders herein.
4. Investment Representations of Stockholders.
(a) Authority. Each Stockholder has full power and
authority to enter into and to perform this Agreement in accordance with its
terms.
(b) Investment Representations. Each Stockholder
represents and warrants that he or she is acquiring the Series D Preferred Stock
(and any Common Stock into which it may be converted) and the Additional Common
Stock for his or her own account, for investment and not with a view to, or for
sale in connection with, any distribution of such Series D Preferred Stock or
the Additional Common Stock or any part thereof, except as permitted pursuant to
the Registration Rights and Transfer Agreement annexed hereto as Exhibit 8(b).
(c) Investment Experience; Access to Information. Each
Stockholder represents and warrants that he or she is an investor experienced in
the evaluation of businesses similar to Target, is able to fend for his or
herself in the transactions contemplated by this Agreement, has such knowledge
and experience in financial business matters as to be capable of evaluating the
merits and risks of this investment, has had access to such information as is
specified in Rule 502 promulgated under the Securities Act of 1933 ("Securities
Act"). The foregoing, however, does not limit or modify the representations and
warranties of Parent, Subsidiary, Target or the Stockholders in this Agreement.
Each Stockholder represents and warrants that, during the course of this
transaction and prior to the purchase of any Series D Preferred Stock, he or she
has had the opportunity to ask questions of and receive answers from Parent
concerning the terms and conditions of the merger and to obtain any additional
information necessary to verify the accuracy of the representations and
warranties and other information contained in this Agreement. Each Stockholder
confirms that all documents, records and books pertaining to its investment in
Parent
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and requested by him or her have been made available or delivered to him
or her.
(d) Absence of Registration. Each Stockholder
understands that:
(1) Subject to Parent's obligations under the
Registration Rights and Transfer Agreement annexed hereto as Exhibit 8(b), the
Series D Preferred Stock (and the Common Stock into which it may be converted)
and the Additional Common Stock to be sold and issued hereunder has not been
registered under the Securities Act and may be required to be held indefinitely
unless it is subsequently registered under the Securities Act, or an exemption
from such registration is available.
(2) Except as provided in the Registration
Rights and Transfer Agreement in the form attached as Exhibit 8(b) hereto,
Parent is under no obligation to file a registration statement with the
Securities and Exchange Commission (the "Commission") with respect to the Series
D Preferred Stock (or the Common Stock into which it may be converted) or the
Additional Common Stock.
(3) Rule 144 promulgated under the Securities
Act ("Rule 144"), which provides for certain limited sales of unregistered
securities, is not presently available with respect to the Series D Preferred
Stock (or the Common Stock into which it may be converted) or the Additional
Stock.
(e) Restrictions on Transfer. Except as otherwise
provided in the Registration Rights and Transfer Agreement attached hereto as
Exhibit 8(b), (a) each Stockholder agrees that he or she will not, and is not
permitted to, offer, sell, pledge, hypothecate, or otherwise dispose of the
Series D Preferred Stock (or the Common Stock into which it may be converted) or
the Additional Common Stock unless such offer, sale, pledge, hypothecation or
other disposition is (i) registered under the Securities Act, or (ii) such
offer, sale, pledge, hypothecation or other disposition thereof does not violate
the Securities Act, and (b) the certificates representing the Series D Preferred
Stock (and any Common Stock into which it may be converted) and the Additional
Common Stock shall bear a legend stating in substance:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND SUCH LAWS, OR SUCH OFFER,
SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS OTHERWISE EXEMPT FROM
REGISTRATION UNDER SAID ACT AND SUCH LAWS.
(f) Transfer Instructions. Each Stockholder agrees that
Parent may provide for appropriate transfer instructions to implement the
provisions of Section 4(e) hereof.
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(g) Economic Risk. Each Stockholder understands that he
or she must bear the economic risk of the investment represented by the purchase
of Series D Preferred Stock (and any Common Stock into which it may be
converted) and the Additional Common Stock for an indefinite period.
5. Representations and Warranties of Parent and Subsidiary.
Except as set forth in the Schedules hereto, disclosure in any one of which
shall apply to any representation and/or warranty made herein, including without
limitation Section 5(g), and/or except as otherwise disclosed in writing to
Target and/or the Managing Stockholders, each of Parent and Subsidiary, jointly
and severally, represents and warrants to Target and Stockholders subject to
Section 5(g) herein:
(a) Organization, Standing, etc, of Parent. Each of
Parent and Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and New York,
respectively, and has full corporate power and authority to conduct its business
as presently conducted by it and to enter into and perform this Agreement and to
carry out the transactions contemplated by this Agreement. Each of Parent and
Subsidiary is duly qualified to transact business and is in good standing in
each jurisdiction in which the failure to so qualify would have a material
adverse effect on its business, properties, prospects or financial condition.
(b) Capitalization and Voting Rights. The authorized
capital of Parent consists of:
(i) Preferred Stock. There are authorized one
million (1,000,000) shares of Parent's preferred stock, of which one hundred
(100,000) shares have been designated as Series A Preferred Stock (the "Series A
Preferred Stock"), two hundred ninety thousand (290,000) shares have been
designated as Series B Preferred Stock (the "Series B Preferred Stock"), sixty
thousand (60,000) shares have been designated as Series C Preferred Stock (the
"Series C Preferred Stock"), ninety five thousand (95,000) shares have been
designated as Series D Preferred Stock (the "Preferred Stock" or the "Series D
Preferred Stock") and thirty-four hundred eighty (3,480) shares have been
designated as Series E Preferred Stock (the "Series E Preferred Stock"). One
hundred thousand (100,000) shares of Series A Preferred Stock are outstanding
and are convertible into a total of one million (1,000,000) shares of Parent
Common Stock. Two hundred ninety thousand (290,000) shares of Series B Preferred
Stock are outstanding and are convertible into the number shares of Parent
Common Stock equal to $2,900,285, the liquidation value of the Series B
Preferred Stock, divided by 75% of the market price per share of Parent Common
Stock immediately prior to conversion. Sixty thousand (60,000) shares of Series
C Preferred Stock are outstanding and are convertible into the number shares of
Parent Common Stock equal to $600,000, the liquidation value of the Series C
Preferred Stock, divided by 75% of the market price per share of Parent Common
Stock immediately prior to conversion. Thirty-four hundred eighty (3,480) shares
of Series E Preferred Stock are outstanding and are not convertible. No other
shares of Parent's preferred stock are issued and outstanding. The outstanding
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series E Preferred Stock are validly issued, fully paid and
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nonassessable and have been issued in compliance with applicable state and
federal securities laws. The Series D Preferred Stock and Additional Common
Stock will be issued in compliance with applicable state and federal securities
laws. The rights, preferences, privileges and restrictions of the Series D
Preferred Stock are as stated in the Certificate of Designation. At the Closing,
the Certificate of Designation will have been duly adopted in conformity with
Parent's Certificate of Incorporation and Bylaws. The shares of Series D
Preferred Stock and Additional Common Stock have been duly authorized, and, at
the Closing, will be validly issued and delivered, fully paid and nonassessable,
and free from restrictions on transfer except as set forth in this Agreement.
(ii) Parent Common Stock. There are authorized
fifty million (50,000,000) shares of Parent Common Stock, of which 8,019,433
shares of Parent Common Stock have been duly authorized, validly issued and are
outstanding, as of the date hereof. Subject to Schedule 5(b)(ii) hereof, as of
the date hereof, assuming the exercise of all options, warrants, rights
(including conversion or preemptive rights) or agreements for the purchase or
acquisition from Parent of any shares of its capital stock, there would be
outstanding approximately 17,000,000 shares of Parent Common Stock. The
outstanding shares of Parent Common Stock are fully paid, nonassessable and have
been issued in compliance with all state and federal securities laws. Parent
Common Stock issuable upon conversion of the Series D Preferred Stock (the
"Conversion Stock") have been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of Parent's Certificate of Incorporation
and Bylaws and the Certificate of Designation, will be duly and validly issued,
fully paid and nonassessable and will be free of restrictions on transfer other
than restrictions on transfer set forth in this Agreement.
(iii) Options. Except as provided in Schedule
5(b)(iii), there are not outstanding any options, warrants, rights (including
conversion or rights) or agreements for the purchase or acquisition from Parent
of any shares of its capital stock. Except as provided in this Agreement, Parent
is not a party or subject to any agreement or understanding, and, to Parent's
best knowledge, there is no agreement or understanding between any persons
and/or entities, which affects or relates to the voting or giving of written
consents with respect to any of Parent's voting securities or securities
convertible into such voting securities.
(iv) Principal Stockholders. The parties listed
on Schedule 5(b)(iv) attached hereto constitute all of the holders of Parent's
capital stock and/or options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from Parent of
any shares of its capital stock which own (a) 5% or more of Parent's common
stock on a fully diluted basis (assuming the exercise of any such options,
warrants, rights or agreements) or (b) 5% or more of any class or series of
Parent's capital stock. Such holders own the number of shares and/or the rights
set forth on Schedule 5(b)(iv).
(c) Authority for Agreement. The execution, delivery,
and performance of this Agreement by each of Parent and Subsidiary has been duly
authorized by all necessary corporate action, and this Agreement constitutes a
valid and binding obligation of each of Parent and Subsidiary enforceable
against it in accordance with its terms. The execution and carrying out of the
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transactions contemplated by this Agreement and compliance with its provisions
by each of Parent and Subsidiary will not violate any provision of law and will
not conflict with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under, each of Parent's or Subsidiary's
Certificate of Incorporation or By-Laws or, in any material respect, any
indenture, lease, loan agreement, agreement or other instrument to which Parent
or Subsidiary is a party or by which either Parent or Subsidiary or any of their
properties are bound, or any decree, judgment, order, statute, rule or
regulation applicable to each of Parent or Subsidiary.
(d) Governmental Consent, etc. Except as otherwise
expressly provided in this Agreement, no material consent, approval, order or
authorization of, or registration, qualification, designation, declaration, or
filing with, any federal, state or local, governmental authority or any other
third party is required on the part of either Parent or Subsidiary in connection
with the execution and delivery of this Agreement, or the offer, sale and
delivery of the Series D Preferred Stock or the conversion thereof to Parent's
common stock or the Additional Common Stock; or the consummation of the other
transactions contemplated by this Agreement. The sale of the Series D Preferred
Stock (and the conversion thereof) and the Additional Common Stock will be in
compliance with applicable federal and state securities laws.
(e) Issuance of Series D Preferred Stock. The issuance,
sale and delivery of the Series D Preferred Stock and the Additional Common
Stock in accordance with this Agreement has been, or will be at the Closing
Date, duly authorized by all necessary corporate action, and the Series D
Preferred Stock and the Additional Common Stock when so issued, sold and
delivered against payment therefor in accordance with the provisions of this
Agreement will be duly and validly issued, fully paid and non-assessable. No
person or entity is entitled to any preemptive rights with respect to the
issuance of the Series D Preferred Stock and the Additional Common Stock.
(f) Information about Parent. Each of (i) the Annual
Report on Form 10-K of Parent for the fiscal year September 30, 1996 (the
"Annual Report") and (ii) the Quarterly Reports on Form 10-Q for Parent for each
of the fiscal quarters ended December 31, 1996, March 31, 1997 and June 30, 1997
(together, the "Quarterly Reports" and, collectively with the Annual Report, the
"Reports") contains all statements which are required to be made therein and
conforms in all material respects to the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the Securities and
Exchange Commission thereunder, and none of (a) the Reports, (b) Parent
Financial Statement, (c) Parent Audited Statements or (d) the representations
and warranties contained in this Agreement contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein or herein not misleading in the light of the circumstances
under which they were made. Parent is current in all of its required filings
under the Securities Exchange Act of 1934, as amended.
(g) Brownstone Acquisition; Material Adverse Change.
Since the Balance Sheet Date, the nature of the business of Parent has
materially changed as a result of the acquisition by Brownstone Holdings, Inc.,
a wholly-owned subsidiary of Parent of all of the assets of Jean
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Grayson's Brownstone Studio, Inc. and Wilroy, Inc. and the inclusion of such
assets in the financial condition and results of operations of Parent's business
(the "Brownstone Acquisition"). Accordingly, the representations and warranties
of Parent and Subsidiary herein are subject to, and modified to reflect, the
changes to Parent's business as a result of the Brownstone Acquisition, and the
parties hereto hereby agree that none of the changes to Parent's business as a
result of the Brownstone Acquisition (including, without limitation, changes to
assets, liabilities, contingencies, statements of facts or operational matters)
shall be deemed a breach of the representations and warranties of Parent or
Subsidiary herein.
(h) Litigation. Except as disclosed on Schedule 5(h),
neither Parent nor Subsidiary has received notice of any material action, suit
or proceeding, or governmental inquiry or investigation (including the Federal
Trade Commission or Federal Postal Authorities) pending or, to the knowledge of
Parent or Subsidiary, threatened against Parent, Subsidiary or either of
Parent's or Subsidiary's assets, properties or business, or which would have a
material adverse effect on Parent's or Subsidiary's business, properties,
assets, prospects or financial condition, and, to each of Parent's and
Subsidiary's knowledge, each of Parent and Subsidiary is in compliance in all
material respects with all laws and regulations materially affecting it, its
properties and its business. Neither Parent nor Subsidiary is a party or subject
to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality that would reasonably be expected
to have a material adverse affect on Parent's or Subsidiary's business, assets,
properties, properties or financial condition. There is no action, suit or
proceeding by Parent or Subsidiary currently pending or that Parent or
Subsidiary currently intends to initiate which, if determined adversely to
Parent or Subsidiary, could reasonably be expected to have a material adverse
effect on Parent's or Subsidiary's business, assets, properties, prospects or
financial condition.
(i) Financial Statements. Parent has furnished to
Target and the Stockholders a true and correct copy of Parent's unaudited
balance sheet and accompanying income statement and statement of cash flow (the
"Parent Financial Statement") as of June 30, 1997 (the "Parent Balance Sheet
Date"), an audited financial statement for the fiscal year ended September 30,
1996, as well as audited financial statements for the preceding two fiscal years
(the "Parent Audited Statements"). Parent Financial Statement and Parent Audited
Statements fairly present the financial condition of Parent as of the dates
thereof, and have been prepared in accordance with generally accepted accounting
principles consistently applied, and with regard to Parent Financial Statement
only, subject to normal year end audit adjustments and accruals, which
adjustments and accruals shall not be material. There has been no material
adverse change in the financial condition, operations or business of Parent
since Parent Balance Sheet Date, and Parent has not incurred any material
liability since Parent Balance Sheet Date, other than those incurred in the
ordinary course of business or disclosed on Schedule 5(i) hereto as of the
Parent Balance Sheet Date. Except as set forth on Parent Financial Statement and
Schedule 5(i) hereto, Parent had no material liabilities, contingent or
otherwise, liability for taxes, commitments ending for over one year and
requiring the expenditure of more than $25,000 in the aggregate or unrealized or
anticipated losses aggregating a material amount. The inventory shown in Parent
Financial Statement is in good and saleable condition and in amount and types
reasonably required in the conduct of Parent's business.
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(j) Title to Properties; Liens. Parent has good title
to, or a valid and current leasehold interest in, the properties and assets
reflected on Parent Financial Statement, except those disposed of since the date
thereof in the ordinary course of business, and such properties and assets are
free and clear of all liens, security interests, charges and encumbrances,
except (i) as disclosed on Parent Financial Statement, (ii) liens for current
taxes not yet due and payable, (iii) such imperfections of title or zoning
restrictions, easements or encumbrances, if any, as do not materially interfere
with the present use of such property or assets, and (iv) liens which arise by
operation of law.
(k) Prior Issuance of Capital Stock. All presently
outstanding shares of capital stock of Parent have been sold and issued in
compliance with applicable federal and state securities laws and are validly
issued, fully paid and nonassessable.
(l) Material Contracts. Except as disclosed on Schedule
5(l) and other than purchase orders issued for merchandise in the normal course
of business, neither Parent or Subsidiary is a party to or bound by any
indenture, lease, license, agreement or contract which requires future
expenditures by Parent or Subsidiary in excess of $25,000 or which is otherwise
material to Parent's business or operations.
(m) Compliance with Other Instruments. Neither Parent
nor Subsidiary is in violation of any material term or provision of its
Certificate of Incorporation or By-Laws, or of any material term of any
instrument, loan agreement, agreement, judgment, decree, order, statute, rule or
regulation applicable to Parent or Subsidiary.
(n) Labor Relations. Except as set forth in Schedule
5(n) hereof, neither Parent nor Subsidiary has any pension, retirement or
similar plan or obligation, and all payments due under any benefit plan are
current. Neither Parent nor Subsidiary is a party to any collective bargaining
agreement and, to the best of each of Parent's and Subsidiary's knowledge, no
organization efforts are presently being made with respect to any of their
employees. Each of Parent and Subsidiary has complied in all material respects
with all applicable laws (including, but not limited to, ERISA), and regulations
relating to employment matters including, but not limited to, those relating to
wages, hours, discrimination and payment of social security and similar taxes.
(o) Tax Returns and Payment. All of the tax returns and
reports of Parent and Subsidiary required by law to be filed have been duly and
accurately filed or Parent or Subsidiary has obtained proper extensions therefor
and all taxes shown due thereon have been paid and all payroll tax withholdings
have been timely deposited. There are in effect no waivers of the applicable
statute of limitations for federal, state or local taxes for any period. No
deficiency assessment or proposed adjustment of Parent's or Subsidiary's
federal, state and local taxes is pending, and neither Parent nor Subsidiary
have any knowledge of any proposed liability for any tax to be imposed upon its
properties or assets, for which there is not an adequate reserve reflected in
Parent Financial Statement.
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(p) Patents, Trademarks. Parent has good title to all
material patents, trademarks, copyrights, trade names and trade secrets, or
adequate licenses and rights to use patents, trademarks, copyrights, trade names
and trade secrets of others necessary to the conduct of its business. The
business of Parent is being carried on without known conflicts with patents,
licenses, trademarks, copyrights, trade names and trade secrets of others and to
the best of Parent's knowledge, no other persons are conducting their businesses
in conflict with patents, licenses, copyrights, trade names and trade secrets
used by Parent.
(q) Environmental Matters. To the best knowledge of
Parent: (i) each of Parent and Subsidiary has obtained all material permits and
licenses which are required in connection with its business under all
Environmental Laws and is in material compliance therewith; (ii) Parent has at
all times conducted its business in material compliance with all Environmental
Laws and Parent has not received any written or verbal notice of any past,
present or future events, conditions or circumstances which would interfere with
or prevent compliance or continued material compliance with any Environmental
Laws or which would form the basis of any claim, demand or investigation, based
on or related to Parent's or Subsidiary's business or other activities; (iii)
there is no civil, criminal or administrative action or proceeding pending or
threatened against each of Parent and Subsidiary, relating in any way to any
Environmental Laws; (iv) there do not exist, and at no time since Parent
acquired any premises owned, leased or used by it (the "Parent Premises"), have
there existed any conditions which would require remediation by Parent under any
Environmental Laws; (v) there are no underground storage tanks located on Parent
Premises and (vi) Parent has at all times during its ownership or occupation of
Parent Premises disposed of all wastes, hazardous or otherwise, generated by the
use of Parent Premises in accordance with Environmental Laws.
(r) Compliance with Laws and Regulations. To each of
Parent's and Subsidiary's knowledge, each of Parent and Subsidiary has complied
in all material respects with all laws and regulations applicable to the conduct
of its business, including, but not limited to, all regulations of the U.S.
Federal Trade Commission.
(s) Insurance. Parent has in full force and effect
fire, casualty, workers compensation and general liability insurance policies,
with extended coverage, in amounts as previously disclosed to Target.
(t) Operation since the Balance Sheet Date. Since the
Parent Balance Sheet Date and except as contemplated by this Agreement, Parent:
(1) has operated its business substantially as
it was operated prior to that date and only in the ordinary course;
(2) other than dividends payable in connection
with Parent's preferred stock, has not created or otherwise become liable with
respect to any indebtedness or declared or made any dividend or distribution of
cash, assets or capital stock;
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(3) has maintained or kept current its books,
accounts, records, payroll, and filings in the usual and ordinary course of
business, consistent with standard practice;
(4) has not made any capital expenditure,
commitment or investment other than in the ordinary course of business.
(u) Minute Books. The minute books of Parent, copies of
which have been provided to Target and the Stockholders, contain a complete
summary of all meetings, consents and resolutions of directors and stockholders
since the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material aspects.
(v) Employment Agreements. Schedule 5(v) is a list of
each employment agreement between Parent and any director, officer or employee
of Parent and copies of all such agreements have been provided to the
Stockholders prior to the date hereof. Except as provided by the employment
agreements and except as set forth on Schedule 5(v), all other employees of
Parent are terminable at will without expense or liability to Parent.
(w) Warranty Claims. To Parent's knowledge, there are
no pending or threatened material claims against Parent for any work performed
by Parent for any customer, including, but not limited to, any services rendered
under any warranties, to Parent's knowledge whether express or implied, by any
customer of Parent, nor, to Parent's knowledge, does there exist any basis
therefor.
(x) Product Liability Claims. To Parent's knowledge,
there are no pending or threatened product liability claims not otherwise
covered by insurance by customers of Parent or any third parties of Parent which
are material with respect to the business or operations of Parent, any products
now or previously manufactured and/or sold by Parent, nor, to Parent's
knowledge, does there exist a basis therefor.
6. Conditions to Closing.
(a) Conditions Precedent to Parent's and Subsidiary's
Obligations. The obligations of Parent and Subsidiary as provided in Section 1
and Section 2 hereof shall be subject to each of the following conditions
precedent, any one or more of which may be waived by Parent and Subsidiary:
(i) Representations and Warranties. The
representations and warranties by Target and Stockholders in Section 3 hereof
shall be true and accurate in all material respects on and as of the Closing
with the same force and effect as though such representations and warranties had
been made at and as of the time of Closing, except to the extent that any
changes therein are specifically contemplated by this Agreement.
(ii) Performance. Target and Stockholders shall
have performed
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and complied in all material respect with all agreements and conditions
contained herein or in other ancillary documents incident to the transactions
contemplated by this Agreement required to be performed or complied with by it
prior to or at the Closing.
(iii) Consents, Etc. Other than filing the
Merger Certificate, Target and the Stockholders shall have secured all permits,
consents and authorizations that shall be necessary or required lawfully to
consummate this Agreement and the Merger.
(iv) Compliance Certificate. Target shall have
delivered to Parent or its representative at the Closing an Officer's
Certificate to the effect that the representations and warranties of Target
continue to be true and accurate in all material respects on the Closing with
the same force and effect as though such representations and warranties had been
made at and as of the time of Closing, except to the extent that any changes
therein are specifically contemplated by this Agreement, and that all conditions
specified in Sections 6(a)(i) through (iii), inclusive, (x) and (xi) have been
fulfilled in all material respects.
(v) Proceedings and Documents. All corporate and
other proceedings in connection with the transactions contemplated by this
Agreement and all documents and instruments incident to such transactions shall
be satisfactory in substance and form to Parent and its counsel, and Parent and
its counsel shall have received all such counterpart originals (or certified or
other copies) of such documents as they may reasonably request.
(vi) Opinion of Target's Counsel. Parent shall have
received from counsel for Target, a favorable opinion, dated the date of the
Closing in the form attached hereto as Exhibit 6(a)(vi).
(vii) Compliance with the New Jersey Industrial
Site Recovery Act ("ISRA").
(A) Target shall have received from the
New Jersey Department of Environmental Protection or its predecessor or
successor ("DEP"), on or before the Closing, either (i) a letter of
non-applicability; (ii) a de minimis quantity exemption; (iii) a no-action
letter or an approval of a negative declaration; (iv) approval of a remedial
action workplan and/or a signed Remedial Action Agreement which meets the
conditions of Section 6(a)(vii)(B), for which the Stockholders shall promptly
apply pursuant to ISRA and the regulations promulgated thereunder.
(B) Unless otherwise agreed by Parent,
neither the Stockholders' nor Target's negative declaration or remedial action
workplan shall involve or permit any engineering or institutional controls, at,
under or about the Subject Premises or any part thereof including without
limitation capping, a notice of contamination recorded on the record, or any use
or access restrictions or the posting of signs.
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(C) Receipt by the Stockholders and/or
Target of a clean-up deferral, a remediation already in progress waiver, an
underground storage tank waiver or a minimal environmental concern determination
shall not satisfy the Stockholders, and/or Target's obligation under Section
6(a)(vii)(A) of this Agreement.
(D) To enable Parent to monitor the
Stockholders' and/or Target's compliance with ISRA, the Stockholders and/or
Target shall promptly provide Parent with a copy of all notices, correspondence,
submissions, reports, sampling results, negative declarations and remedial
action workplans which it intends to submit or receives from the DEP or any
other relevant party.
(E) The Stockholders and/or Target shall
notify Parent in advance of all meetings scheduled between the Stockholders, the
Stockholders' representatives, or representatives of Target and the DEP and
Parent and Parent's representative shall have the right, but not the obligation,
to attend and participate in all such meetings.
(viii) Approval of Lender. The parties jointly
shall have obtained the approval of Congress Financial Corporation to consummate
the transactions contemplated by this Agreement, which approval is required
pursuant to that certain Loan and Security Agreement dated August 13, 1996, as
amended May 14, 1997, by and between Congress Financial Corporation and Target
(the "Loan Agreement"), such approval to include a waiver of any defaults under
the Loan Agreement or a modification of that financial covenants contained in
the Loan Agreement such that Target would be in compliance thereunder following
the Closing (the "Congress Approval").
(ix) Concurrent Agreements. Each of the parties
shall have executed the Concurrent Agreements as defined in Section 8 hereof.
(x) Resignations. The Stockholders and Target
shall cause the members of the Board of Directors of Target and Surviving
Corporation to resign at or prior to the Closing.
(xi) Material Changes; Due Diligence. Since the
date of this Agreement, there shall not have been any material adverse change in
the financial condition, business, assets or operations of Target.
(b) Conditions Precedent to Target's and Stockholders'
Obligations. The obligation of Target and the Stockholders on the Closing Date
as provided in Sections 1 and 2 hereof shall be subject to the satisfaction, on
or prior to the Closing Date, of the following conditions precedent, any one or
more of which may be waived by the unanimous consent of the Stockholders.
(i) Representations and Warranties. On the
Closing Date, the representations and warranties by Parent and Subsidiary in
Section 5 hereof shall be true and accurate in all material respects on and as
of the Closing with the same force and effect as though
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such representations and warranties had been made at and as of the time of
Closing, except to the extent that any changes therein are specifically
contemplated by this Agreement or, except to the extent that Parent issues any
of its common stock (i) upon exercise of conversion of any of its outstanding
convertible securities or (ii) for fair market value consideration.
(ii) Performance. Each of Parent and Subsidiary
shall have performed and complied in all material respects with all agreements,
obligations and conditions contained herein or in other ancillary documents
incident to the transactions contemplated by this Agreement required to be
performed or complied with by it prior to or at the Closing Date.
(iii) Consents. Etc. Other than filing the
Merger Certificate, each of Parent and Subsidiary shall have secured all
permits, consents and authorizations that shall be necessary or required
lawfully to consummate this Agreement, to issue the Series D Preferred Stock and
Additional Common Stock to be purchased by the Stockholders at the Closing and
to issue the Common Stock into which it may be converted, and the Certificate of
Designation of Parent set forth in Exhibit 2(d) shall have been duly authorized
and filed with the Secretary of State of the State of Delaware. At the time of
the Closing, the sale and issuance of the Series D Preferred Stock and
Additional Common Stock and the proposed issuance of the Conversion Stock shall
be legally permitted by all laws and regulations to which Parent, Target and/or
the Stockholders are subject.
(iv) Compliance Certificate. Parent shall have
delivered to Target and the Stockholders at the Closing an Officer's Certificate
to the effect that the representations and warranties of Parent and Subsidiary
continue to be true and accurate in all material respects on the Closing with
the same force and effect as though such representations and warranties had been
made at and as of the time of Closing, except to the extent that any changes
therein are specifically contemplated by this Agreement, and that all conditions
specified in Sections 6(b)(i) through (iii), inclusive, and 6(b)(ix), (xi) and
(xiv) have been fulfilled in all material respects.
(v) Proceedings and Documents. All corporate and
other proceedings in connection with the transactions contemplated by this
Agreement and all documents and instruments incident to such transactions shall
be satisfactory in substance and form to Target, the Stockholders and their
counsel, and Target, the Stockholders and their counsel shall have received all
such counterpart originals (or certified or other copies) of such documents as
they may reasonably request.
(vi) Opinion of Parent's Counsel. Target and the
Stockholders shall have received from counsel for Parent, a favorable opinion,
dated the date of the Closing and satisfactory in form and substance to Target,
the Stockholders and their counsel, in the form of Exhibit 6(b)(vi) hereto.
(vii) Cancellation of Guarantee. Parent shall
use its best efforts to obtain and shall have obtained the consent of Congress
Financial Corporation to the cancellation of that certain Limited Guarantee
dated August 13, 1996 between Congress Financial Corporation and
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Irving Magram, executed in connection with the Loan Agreement (the "Guarantee")
and the Guarantee shall have been duly canceled as of the Closing Date.
(viii) Approval of Lender. The parties shall
jointly have obtained the Congress Approval.
(ix) Parent Directors. Effective as of the
Closing, the authorized number of directors of Parent shall be seven (7).
Concurrently with the Closing, Warren Golden shall be appointed as a director of
Parent.
(x) Concurrent Agreements. Each of the parties
shall have executed the Concurrent Agreements.
(xi) Material Changes; Due Diligence. Since the
date of this Agreement, there shall not have been any material adverse change in
the financial condition, business, assets or operations of Parent.
(xii) Insurance. Parent shall have obtained and
shall be maintaining in full force and effect directors' and officers' liability
insurance in reasonable amounts from established and reputable insurers.
(xiii) Surviving Corporation Directors. The
Directors set forth on Schedule 1(f) hereto shall be appointed, as of the
Effective Date, as the Directors of the Surviving Corporation.
(xiv) Preferred Stock. Parent shall have duly
adopted, and properly filed with the Delaware Secretary of State, the
Certificate of Designation in such form that the Series D Preferred Stock may be
issued, attached hereto as Exhibit 2(d).
(xv) Put Shares. Provided that Irving Magram has
so elected, Robert M. Rubin and Jay Kaplowitz shall have purchased from Irving
Magram, at or prior to the Closing Date, 222,223 shares of common stock of
Parent for an aggregate purchase price of $500,000.
7. Indemnification.
(a) Indemnification. The Stockholders hereby severally
(in proportion to their percentage interests in Target as of the date hereof)
agree to indemnify and hold harmless Parent and Surviving Corporation, and
Parent hereby agrees to indemnify and hold harmless the Stockholders, from and
against all losses, liabilities, costs, damages, obligations, suits,
proceedings, demands, judgments, claims and expenses, including reasonable
attorneys fees ("Damages"), incurred by the indemnified party resulting from,
arising out of, or connected with any damage or deficiency resulting from the
material breach of any representation or warranty in this Agreement
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or any instrument furnished to the indemnified party hereunder, any material
misrepresentation or omission, material breach of warranty, material
nonfulfillment of any agreement or covenant on the part of the indemnifying
party under this Agreement or from any misrepresentation in or omission from any
certificate, document or other instrument furnished to the indemnified party
hereunder.
(b) Notice; Control of Defense; Payments. If any event
shall occur which may result in indemnification hereunder, the indemnified party
or parties agree to give the indemnifying party or parties prompt written notice
thereof. If such event involves a claim by a third party, the indemnifying party
or parties shall have the right at its or their sole expense to control and
assume the defense of the matter giving rise to such indemnification with
counsel reasonably satisfactory to the indemnified party or parties and to
compromise or settle any such matter, provided that such compromise or
settlement entirely and unconditionally releases the indemnified party or
parties from all liability with respect thereto. If the indemnifying party or
parties shall assume the defense of the indemnified party or parties, the
indemnified party or parties shall have the right to participate in such defense
but only at its or their own expense and the indemnifying party or parties shall
not be obligated to pay the fees of counsel to the indemnified party or parties
incurred after such assumption. If the indemnifying party or parties do not
assume the defense of such matter within a reasonable time after notice thereof,
the indemnified party or parties may defend, settle and/or compromise such
matter for the account and the expense of the indemnifying party or parties. All
amounts payable by any indemnitor as detailed in this Section 7 shall be paid in
U.S. Dollars; provided, however, that any Stockholder may satisfy any obligation
to make payments pursuant to this Section 7 (including, without limitation, any
amounts payable pursuant to Section 3(k) hereof), in whole or in part, at such
Stockholder's option, by delivering to Parent in lieu of cash Parent Common
Stock equal in value to such amounts payable under this Section 7. For purposes
of this Section 7(b), the value of Parent Common Stock shall be calculated using
the valuation of Parent Common Stock as of the Closing Date (the "Closing Date
Valuation").
(c) Limitations on Indemnification.
(i) Neither the Stockholders, on the one hand,
nor Surviving Corporation or Parent, on the other hand, shall be entitled to be
indemnified pursuant to this Section 7 unless and until the aggregate of all
Damages incurred by the Stockholders, on the one hand, or Surviving Corporation
or Parent, on the other hand, exceeds $250,000, except that with respect to a
breach of the third sentence of Section 3(k) herein, such threshold amount shall
be $100,000.
(ii) The maximum liability of the Stockholders,
on the one hand, or Parent, on the other hand, shall not exceed $9,500,000 in
the aggregate.
(iii) The obligations of the parties pursuant to
this Section 7 shall terminate on the first anniversary of the Closing Date (the
"Termination Date"), and no party shall be liable, following the Termination
Date (except in connection with claims brought in good faith prior to the
Termination Date), to indemnify or hold harmless another party from or against
any Damages arising from or in connection with this Agreement or any
certificate, document or other
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<PAGE>
instrument furnished hereunder, regardless of whether such Damages arise prior
to the termination Date.
(iv) Parent shall not be entitled to recover
from any individual Stockholder pursuant to this Section 7 unless Parent's claim
for indemnification is asserted and pursued with commensurate efforts against
all of the Stockholders unless Parent has otherwise released such Stockholder
from the obligation under this Section 7 pursuant to the Assignment of Rights
Agreement annexed hereto as Exhibit 8(c).
8. Concurrent Agreements.
(a) Employment Agreements. At the Closing, Parent shall
enter into certain employment agreements in the form attached hereto as Exhibit
8(a) ("Employment Agreements") with Irving Magram, Warren Golden and Stephanie
Sobel.
(b) Registration Rights and Transfer Agreement. Parent
shall enter into the Registration Rights and Transfer Agreement in the form
attached hereto as Exhibit 8(b) with Irving Magram, Warren Golden and Stephanie
Sobel. Parent shall file as soon as practicable following the execution of this
Agreement a registration statement as provided in Section 1(b)(i) of the
Registration Rights and Transfer Agreement.
(c) Assignment Agreement. Parent, Target and
Stockholders shall enter into an Assignment of Rights Agreement in the form
attached hereto as Exhibit 8(c).
9. Covenants of Target. Target covenants as follows:
(a) Operation of Target Prior to Closing. From the date
hereof until Closing, except as otherwise expressly provided for in this
Agreement, Target shall conduct its business as presently operated and solely in
the ordinary course, and consistent with such operation. Target:
(i) shall not effect any amendment to Target's
articles or certificate of incorporation or bylaws;
(ii) shall not pay or agree to pay to any
employee, officer or director of Target, compensation that is in excess of the
current compensation level of such employee, officer or director other than
salary increases or payments made in the ordinary course of business;
(iii) shall not merge or consolidate Target with
any other entity or allow it to acquire or agree to acquire any other entity
(subject to fiduciary duty);
(iv) shall not sell, transfer, or otherwise dispose
of any Target assets
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except in the ordinary course of business consistent with past practices;
(v) shall not create, incur, assume, or
guarantee any indebtedness for money borrowed except in the ordinary course of
business, or create or suffer to exist any mortgage, lien or other encumbrance
on any of its assets, except those in existence on the date hereof;
(vi) shall not make any capital expenditure or
series of capital expenditures in excess of $100,000 except in connection with
the Brownstone Acquisition;
(vii) other than dividends payable in connection
with Target's Preferred Stock, shall not declare or pay any dividends on or make
any distribution of any kind with respect to any of its capital stock;
(viii) shall maintain the facilities, assets and
properties of Target in good operating repair, order and condition, reasonable
wear and tear excepted, and to notify Parent immediately in the event of any
loss or damage to any of Target's assets;
(ix) shall maintain in full force and effect with
respect to the assets, employees and business of Target, all present insurance
coverage of the types and in the amounts as are in effect as of the date of this
Agreement and to apply the proceeds received under any such insurance policy or
as a result of any loss or destruction of or damage to any assets of Target to
the repair or replacement of such assets;
(x) shall use its best efforts to preserve the
present employees, reputation and business organization of Target, and the
relationship of Target with its customers and others having business dealings
with it;
(xi) shall not permit the issuance of any
additional shares of the capital stock of Target or take any action affecting
the capitalization of Target; and
(xii) shall comply with and not be in default or
violation under any law, regulation, decree or order applicable to the business,
operations or assets of Target.
(b) Inspection. Target shall permit Parent to visit and
inspect Target's properties, to examine its books of account and records and to
discuss Target's affairs, finances and accounts with its officers, all at such
reasonable times and for such duration so as not to interfere with Target's
normal operations as may be requested by the Stockholders.
(c) Approval of Lenders. Target shall use its best efforts
to obtain the Congress Approval.
10. Covenants of Parent. Parent covenants as follows:
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<PAGE>
(a) Operation of Parent Prior to Closing. From the date
hereof until Closing, except as otherwise expressly provided for in this
Agreement, Parent shall conduct its business as presently operated and solely in
the ordinary course, and consistent with such operation. Parent:
(i) except to provide for designation of
Preferred Stock, shall not effect any amendment to Parent's articles or
certificates of incorporation or bylaws;
(ii) shall not pay or agree to pay to any
employee, officer or director of Parent, compensation that is in excess of the
current compensation level of such employee, officer or director other than
salary increases or payments made in the ordinary course of business;
(iii) shall not merge or consolidate Parent with
any other entity or allow it to acquire or agree to acquire any entity (subject
to fiduciary duty);
(iv) shall not sell, transfer, or otherwise
dispose of Parent assets except in the ordinary course of business consistent
with past practices or for fair market consideration;
(v) shall not create incur, assume, or guarantee
any indebtedness for money borrowed except in the ordinary course of business,
or create or suffer to exist any mortgage, lien or other encumbrance on any of
its assets, except those in existence on the date hereof;
(vi) shall not make any capital expenditure or
series of capital expenditures in excess of $100,000, except with respect to the
Brownstone Acquisition;
(vii) other than dividends payable in connection
in Parent's Preferred Stock shall not declare or pay any dividends on or make
any distribution of any kind with respect to any of its capital stock;
(viii) shall maintain the facilities, assets and
properties of Parent in good operating repair, order and condition, reasonable
wear and tear excepted, and to notify Target immediately in the event of any
loss or damage to any of Parent's assets;
(ix) shall maintain in full force and effect with
respect to the assets, employees and business of Parent, all present insurance
coverage of the types and in the amounts as are in effect as of the date of this
Agreement and to apply the proceeds received under any such insurance policy or
as a result of any loss or destruction of or damage to any assets of Parent to
the repair or replacement of such assets;
(x) shall use its best efforts to preserve the
present employees,
25
<PAGE>
reputation and business organization of Parent, and the relationship of Parent
with its customers and others having business dealings with it;
(xi) shall make such filings with the U.S.
Securities and Exchange Commission as required, in a timely manner, of issuers
registered under Section 12 of the Securities Exchange Act of 1934, as amended;
and
(xii) shall materially comply with and not be in
default or violation under any law, regulation, decree or order materially
applicable to the business, operations or assets of Parent.
(b) Inspection. Parent shall permit the Stockholders to
visit and inspect Parent's properties, to examine its books of account and
records and to discuss Parent's affairs, finances and accounts with its
officers, all at such reasonable times and for such duration so as not to
interfere with Parent's normal operations as may be requested by the
Stockholders.
(c) Appointment of Directors. For such time as the
Stockholders own the Preferred Stock, the Stockholders, as owners of the Series
D Preferred Stock, shall be entitled to nominate one (1) person for election to
Parent's Board of Directors.
(d) Cancellation of Guarantee. Parent shall use its
best efforts to obtain the consent of Congressional Financial Corporation to the
cancellation of the Guarantee.
(e) Approval of Lenders. Parent shall use its best
efforts to obtain the Congress Approval.
11. Confidentiality. Parent, on the one hand, and Target and
the Stockholders, on the other hand, will keep confidential all information and
documents obtained from the other (except for any information disclosed to the
public pursuant to a press release authorized by the parties) and in the event
the Closing does not occur will promptly return such documents and will not use
such information for its own advantage, except to the extent that (a) the
information must be disclosed by law, (b) the information becomes publicly
available by reason other than disclosure by the party subject to the
confidentiality obligation, (c) the information is independently developed, (d)
the information is obtained from another source not obligated to keep such
information confidential, or (e) the information is already publicly known or
known to the receiving party when disclosed.
12. Miscellaneous.
-------------
(a) Brokers. Each of Parent and Subsidiary on the one
hand and the Stockholders and Target on the other hand represent and warrant to
each other that no broker, investment banker or finder is entitled to any
financial advisory fee, brokerage fee or finder's fee or other similar payment
from it or him or her, as the case may be, with respect to the execution of this
26
<PAGE>
Agreement or the transactions contemplated hereby. Parent on the one hand and
the Stockholders and Target on the other hand each agree to hold each other
harmless against and in respect of all claims, losses, liabilities and expenses
which may be asserted by any broker or other person who claims to be entitled to
a broker's or finder's fee or similar fee or commission from it or him or her as
the case may be, in respect of the execution of this Agreement, or the
consummation of the transactions contemplated hereby by reason of it, his or her
acting at the request of said person.
(b) Expenses. Each of Parent and Subsidiary, on the one
hand, and the Target, on the other hand, shall bear its own costs, including
attorneys fees, involved in the negotiating of this Agreement and consummation
of the transactions contemplated hereby.
(c) Survival of Agreements. All agreements, covenants,
representations and warranties contained herein or made in writing in connection
with the transactions contemplated hereby shall survive the execution and
delivery of this Agreement until one (1) year from the Effective Time and
thereafter the representations, warranties and indemnification obligations
(except in connection with claims brought in good faith prior to the Termination
Date) hereunder shall terminate and no action can be brought in connection
therewith.
(d) Notices. All notices, requests, consents and other
communications herein shall be in writing and shall be mailed by first class or
certified mail, postage prepaid, or personally delivered to the party at such
address as indicated on the first page hereof or such other addresses as each of
the parties hereto may provide from time to time to the other parties by written
notice in accordance with the terms of this Section 11(d). For purposes of
computing the time periods set forth in this Agreement, the date of mailing
shall be deemed to be the delivery date.
(e) Modifications; Waiver. Neither this Agreement nor
any provision hereof may be changed, waived, discharged or terminated orally or
in writing, except that any provision of this Agreement may be amended and the
observance of any such provision may be waived (either generally or in a
particular instance and either retroactively or prospectively) with (but only
with) the written consent of the parties hereto.
(f) Entire Agreement. This Agreement and the Concurrent
Agreements contain the entire agreement between the parties with respect to the
transactions contemplated hereby, and supersede all negotiations, agreements,
representations, warranties and commitments, whether in writing or oral, prior
to the date hereof.
(g) Successors and Assigns. All of the terms of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successor and assigns of the parties hereto.
(h) Remedies Cumulative: Waiver. No remedy referred to
herein including, but not limited to indemnification under Section 7 herein is
intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to above or otherwise available
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<PAGE>
at law or in equity. No express or implied waiver of any default shall be a
waiver of any future or subsequent default. The failure or delay in exercising
any rights granted a party hereunder shall not constitute a waiver of any such
right and any single or partial exercise of any particular right shall not
exhaust the same or constitute a waiver of any other right provided herein.
(i) Execution and Counterparts. This Agreement may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed an original, and such counterparts together shall
constitute one instrument.
(j) Governing Law and Severability. Except to the
extent that Delaware Law is mandatorily applicable to the Merger, this Agreement
shall be governed by the laws of the State of New York as applied to agreements
entered into and to be performed entirely within New York. If any provision of
this Agreement or any application thereof is held to be unenforceable, the
remainder of the Agreement and any application of such provision shall not be
affected thereby and to the extent permitted by law, there shall be substituted
for the provisions held unenforceable, provisions which shall, as nearly as
possible, have the same economic effect as the provisions held unenforceable.
(k) Headings. The descriptive headings of the Sections
hereof and the Schedules and Exhibits hereto are inserted for convenience only
and do not constitute a part of this Agreement.
DIPLOMAT CORPORATION
By:/s/ ROBERT M. RUBIN
Robert M. Rubin
Chairman
MAGRAM ACQUISITION CORP.
By:/s/ JONATHAN ROSENBERG
Jonathan Rosenberg
President
LEW MAGRAM LTD.
By:/s/ IRVING MAGRAM
Irving Magram
President
/s/ ROBERT M. RUBIN
Robert M. Rubin
<PAGE>
/s/ JAY M. KAPLOWITZ
Jay Kaplowitz
/s/ IRVING MAGRAM
Irving Magram
/s/ WARREN GOLDEN
Warren Golden
/s/ STEPHANIE SOBEL
Stephanie Sobel
[Schedules Omitted]
[Exhibit 6(a)(vi) Omitted]
[Exhibit 6(b)(vi) Omitted]
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<PAGE>
EXHIBIT 1(c)
CERTIFICATE OF MERGER
OF
MAGRAM ACQUISITION CORP.
INTO
LEW MAGRAM LTD.
Under Section 904 of the Business Corporation Law
The undersigned corporations organized and existing under and by virtue
of, the Business Corporation Law of New York.
DO HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituents corporations of the merger is as follows:
Magram Acquisition Corp., a New York Corporation
Lew Magram Ltd., a New York Corporation.
SECOND: That the name of the surviving corporation of the merger is
Lew Magram Ltd.
THIRD: That Magram Acquisition Corp. has one class of outstanding
shares designated common shares, of which 100 common shares
are outstanding and which are entitled to vote.
FOURTH: That Lew Magram Ltd. has one class of outstanding shares
designated common shares, of which 141.18 shares are
outstanding and which are entitled to vote.
FIFTH: That there are no amendments or changes to the Certificate of
Incorporation of Lew Magram to be effected by the merger.
SIXTH: That the effective date of the merger shall be the date of
filing of the Certificate of Merger by the Department of
State.
SEVENTH: That the Certificate of Incorporation of Magram Acquisition
Corp. was filed with the Department of State on October 24,
1997; and that the Certificate of Incorporation of Lew Magram
Ltd. was filed with the Department of State on April 16, 1957,
under the name of Lew Magram Shirt Maker to the Stars, and as
amended March 21, 1983, as amended June 3, 1987.
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<PAGE>
EIGHTH: That an Agreement and Plan of Merger between the parties to
the merger has been approved, adopted, certified, executed and
acknowledged by the board of directors of each of the
constituent corporations in accordance with the requirements
of Section 902 of the Business Corporation Law and by the
shareholders of each of the constituent corporations in
accordance with Section 903 of the Business Corporation Law.
IN WITNESS WHEREOF, each of the constituent corporations has
caused this certificate to be signed by a duly authorized officer this ______
day of _______, 1997, and affirm as true the foregoing under penalties or
perjury.
MAGRAM ACQUISITION CORP.
By:_____________________________
Name:
Title:
By:______________________________
Name:
Title:
LEW MAGRAM LTD.
By: _____________________________
Name:
Title:
By:______________________________
Name:
Title:
<PAGE>
EXHIBIT 2(d)
CERTIFICATE OF DESIGNATION
OF
SERIES D PREFERRED STOCK
OF
DIPLOMAT CORPORATION
Pursuant to Section 151 of the Delaware General Corporation Law,
Diplomat Corporation (the "Corporation"), a corporation organized and existing
under and by virtue of the provisions of the Delaware General Corporation Law
that pursuant to authority conferred upon the Board of Directors of the
Corporation (the "Board") by the Certificate of Incorporation of the
Corporation, the Board, by a Unanimous Written Consent dated ___________, 1997,
adopted the following resolution authorizing the creation and issuance of a
series of 95,000 shares of Series D Preferred Stock, (the "Series D Preferred
Stock" or the "Series"), which resolution is as follows:
RESOLVED, that pursuant to authority expressly granted to and
vested in the Board of Directors by the Certificate of Incorporation, as
amended, of the Corporation, the Board hereby creates a series of 95,000 shares
of Series D Preferred Stock, of the Corporation and authorizes the issuance
thereof, and hereby fixes the designation thereof, and the voting powers,
preferences and relative, participating, optional and other special limitations
or restrictions thereon (in addition to the designations, preferences and
relative, participating and other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation, as amended, of the Corporation, which are applicable to the
preferred stock of all series, if any) as follows:
1. Designation. The shares of the Series shall be designated
"Series D Preferred Stock", and the number of shares constituting the Series
shall be 95,000.
2. Dividends. Holders of the Series D Preferred Stock (the
"Holders") shall be entitled to an annual cumulative dividend of eight and
one-half percent (8.5%) of the Liquidation Value of the Series D Preferred
Stock, from the date of issuance and payable monthly commencing , 1997.
Dividends will be payable in cash or accumulated and payable in kind in Common
Stock upon conversion pursuant to Section 5 herein. The Corporation may set a
record date for the payment of any dividend, on at least 10 days prior notice to
all holders, which record date shall be not more than 60 days prior to a
dividend payment date. Dividends payable for any period less than a full year,
will be computed on the basis of a 360 day year with equal months of 30 days.
3. Liquidation.
(a) Liquidation Preference. Upon any liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
and after provision for the payment of creditors, the Holders shall be entitled
to be paid an amount equal to $100.00 per share ("Liquidation
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<PAGE>
Value") of Series D Preferred Stock held, before any distribution or payment is
made upon any shares of Common Stock and any other series of stock junior to the
Series D Preferred Stock. The Series D Preferred Stock shall be in parity with
the most senior of the Corporation's preferred stock, including but not limited
to Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series E Preferred Stock (the "Parity Stock") with respect to liquidation
rights. The Corporation shall not authorize or issue any class or series of
preferred stock which is pari passu or senior to the Series D Preferred Stock
without the prior written consent of the Holder of the Series D Preferred Stock
(pursuant to Section 6 hereof).
(b) Ratable Distribution. If upon any liquidation,
dissolution or winding up of the Corporation, the net assets of the Corporation
to be distributed among the Holders shall be insufficient to permit payment in
full to the Holders of such Series D Preferred Stock, then all remaining net
assets of the Corporation after the provision for the payment of the
Corporation's debts shall be distributed ratably in proportion to the full
amounts to which they would otherwise be entitled to receive among the Holders
and the Holders of the Parity Stock.
(c) Corporate Changes. The sale, lease or exchange of
all or substantially all of the Corporation's assets or the merger or
consolidation of the Corporation which results in the holders of Common Stock of
the Corporation receiving in exchange for such Common Stock cash, notes,
debentures or other evidences of indebtedness or obligations to pay cash, or
preferred stock of the surviving entity which ranks on a parity with or senior
to the Series D Preferred Stock as to dividends or upon liquidation, dissolution
or winding-up shall be deemed to be a liquidation, dissolution or winding up of
the affairs of the Corporation within the meaning of this Section 3(c). In the
case of mergers or consolidations of the Corporation where holders of Common
Stock of the Corporation receive, in exchange for such Common Stock, common
stock or preferred stock in the surviving entity (whether or not the surviving
entity is the Corporation) of such merger or consolidation, or common stock or
preferred stock of another entity (in either case, such preferred stock to be
received in exchange for common stock is herein referred to as "Exchanged
Preferred Stock"), which is junior as to dividends and upon liquidation,
dissolution or winding up to the Series D Preferred Stock, the merger agreement
or consolidation agreement shall expressly provide that the Series D Preferred
Stock shall become preferred stock of such surviving entity or other entity, as
the case may be, with the same annual dividend rate and equivalent rights to the
rights set forth herein; provided however that if the Exchanged Preferred Stock
is to be mandatorily redeemed in whole or in part through the operation of a
sinking fund or otherwise the merger or consolidation agreement shall expressly
provide that, or other provisions shall be made so that, all shares of the
Series D Preferred Stock shall be mandatorily redeemed prior to the first
mandatory redemption of the Exchanged Preferred Stock; and provided further,
that in the event the Corporation or an affiliate of the Corporation optionally
redeems or otherwise acquires any or all of the then outstanding shares of
Exchanged Preferred Stock, the Corporation shall redeem all shares of Series D
Preferred Stock. In the event of a merger or consolidation of the Corporation
where the consideration received by the holders of common stock consists of two
or more types of the consideration set forth above, the holders of the Series D
Preferred Stock shall be entitled to receive either cash or securities based
upon the foregoing in the same proportion as the holders of common stock of the
Corporation are
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<PAGE>
receiving cash or debt securities, or equity securities in the surviving entity
or other entity.
4. Voting Rights. The Series D Preferred Stock shall have
voting rights equal to _________________ [amount of common stock into which
Series D Preferred Stock are convertible] shares of the Company's common stock
on all matters on which the common stock votes.
5. Conversion Rights. The Series D Preferred Stock shall be
convertible into Common Stock immediately as follows:
(a) Optional Conversion. Subject to and upon compliance
with the provisions of this Section 5, a Holder shall have the right at such
Holder's option at any time or from time to time, to convert any of such shares
of Series D Preferred Stock into fully paid and non-assessable shares of Common
Stock at the then Conversion Rate (as hereinafter defined), plus accrued and
unpaid dividends upon the terms hereinafter set forth.
(b) Conversion Rate. Each share of Preferred Stock is
convertible into [to be determined at closing date] shares of common
stock, subject to adjustment as set forth in Section 5(d) hereof.
(c) Mechanics of Conversion. The Holder may exercise
the conversion right specified in Section 5(a) by giving written notice to the
Corporation, that the Holder elects to convert a stated number of shares of
Series D Preferred Stock into a stated number of shares of Common Stock, and by
surrendering the certificate or certificates representing the Series D Preferred
Stock so to be converted, duly endorsed to the Corporation or in blank, to the
Corporation at its principal office (or at such other office as the Corporation
may designate by written notice, postage prepaid, to all Holders) at any time
during its usual business hours on or before the Conversion Date (as defined
below), together with a statement of the name or names (with addresses) of the
person or persons in whose name the certificate or certificates of Common Stock
shall be issued.
(1) Conversion Deemed Effective. Conversion
shall be deemed to have been effected on the date when delivery of notice of an
election to convert and certificates for shares are made and such date is
referred to as the "Conversion Date"; provided, however, that any such surrender
on any date when the stock transfer books of the Corporation shall be closed
shall constitute the person or persons in whose name or names the certificates
for such shares are to be issued as the record holder or holders thereof for all
purposes at the close of business on the next succeeding day on which such stock
transfer books are open.
(2) Issuance of Common Stock; Effect of
Conversion. Promptly after receipt from a Holder of the written notice referred
to in Section 5(c) and surrender of the certificate or certificates representing
the share or shares of Series D Preferred Stock to be converted, the Corporation
shall cause to be issued and delivered to said holder, registered in such name
or names as such holder may direct, a certificate or certificates for the number
of shares of Common
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<PAGE>
Stock issuable upon the conversion of such share or shares.
(d) Conversion Rate Adjustments. The Conversion Rate
shall be subject to adjustment from time to time as follows:
(1) Consolidation, Merger, Sale, Lease or
Conveyance. In case of any consolidation with or merger of the corporation with
or into another corporation, or in case of any sale, lease or conveyance to
another corporation of the assets of the Corporation as an entirety or
substantially as an entirety, each share of Series D Preferred Stock shall after
the date of such consolidation, merger, sale, lease or conveyance be convertible
into the number of shares of stock or other securities or property (including
cash) to which the Common Stock issuable (at the time of such consolidation,
merger, sale, lease or conveyance) upon conversion of such share of Series D
Preferred Stock would have been entitled upon such consolidation, merger, sale,
lease or conveyance; and in any such case, if necessary, the provisions set
forth herein with respect to the rights and interests thereafter of the holder
of the shares of Series D Preferred Stock shall be appropriately adjusted so as
to be applicable, as nearly as may reasonably be, to any shares of stock or
other securities or property thereafter deliverable on the conversion of the
shares of Series D Preferred Stock.
(2) Stock Dividends, Subdivisions,
Reclassification or Combinations. If the Corporation shall (i) declare a
dividend or make a distribution on its Common Stock in shares of its Common
Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify the outstanding
Common Stock into a smaller number of shares, the Conversion Rate in effect at
the time of the record date for such dividend or distribution or the effective
date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of Series D Preferred
Stock surrendered for conversion after such date shall be entitled to receive
the number of shares of Common Stock which he would have owned or been entitled
to receive had such Series D Preferred Stock been converted immediately prior to
such date. Successive adjustments in the Conversion Rate shall be made whenever
any event specified above shall occur.
(e) Fractional Shares. No fractional shares of Common
Stock or scrip shall be issued upon conversion of shares of Series D Preferred
Stock. If more than one share of Series D Preferred Stock shall be surrendered
for conversion at any one time by the same holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares Series D Preferred Stock so surrendered. Instead
of any fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series D Preferred Stock, the Corporation shall pay
a cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest of the then current market price.
(f) Treasury Stock. For the purposes of this Section 5,
the sale or other disposition of any Common Stock theretofore held in the
Corporation's treasury shall be deemed to be an issuance thereof.
4
<PAGE>
(g) Costs. The Holder shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of shares of Common Stock upon conversion of any shares of Series D Preferred
Stock; provided further that the Corporation shall not be required to pay any
taxes which may be payable in respect of any transfer involved in the issuance
or delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series D Preferred Stock in respect of which such shares
are being issued.
(h) Reservation of Shares. The Corporation shall
reserve at all times so long as any shares of Series D Preferred Stock remain
outstanding, free from preemptive rights, out of its treasury stock (if
applicable) or its authorized but unissued shares of Common Stock, or both,
solely for the purpose of effecting the conversion of the shares of Series D
Preferred Stock, sufficient shares of Common Stock to provide for the conversion
of all outstanding shares of Series D Preferred Stock.
(i) Approvals. If any shares of Common Stock to be
reserved for the purpose of conversion of shares of Series D Preferred Stock
require registration with or approval of any governmental authority under any
Federal or state law before such shares may be validly issued or delivered upon
conversion, then the Corporation will in good faith and as expeditiously as
possible endeavor to secure such registration or approval, as the case may be.
If, and so long as, any Common Stock into which the shares of Series D Preferred
Stock are then convertible is listed on any national securities exchange, the
Corporation will, if permitted by the rules of such exchange, list and keep
listed on such exchange, upon official notice of issuance, all shares of such
Common Stock issuable upon conversion.
(j) Valid Issuance. All shares of Common Stock which
may be issued upon conversion of shares of Series D Preferred Stock will upon
issuance by the Corporation be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof, and the Corporation shall take no action which will cause a
contrary result.
6. Covenants. In addition to any other rights provided by
law, so long as any Series D Preferred Stock is outstanding, the Corporation,
without first obtaining the affirmative vote or written consent of the holders
of not less than two-thirds of such outstanding shares of Series D Preferred
Stock, will not:
(a) amend or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or By-Laws if such
action would alter adversely the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, any Series D Preferred Stock,
or increase the number of shares of Series D Preferred Stock authorized hereby;
(b) authorize or issue shares of any class or series of
stock having any
5
<PAGE>
preference or priority as to dividends or assets or other rights superior to any
such preference or priority of the Series D Preferred Stock, or authorize or
issue shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights to
purchase, any shares of stock of the Corporation having any preference or
priority as to dividends, assets or other rights superior to any such preference
or priority of the Series D Preferred Stock;
(c) reclassify any class or series of any stock junior
in liquidation rights to the Series D Preferred Stock ("Junior Stock") into
stock in parity with the Series D Preferred Stock with respect to liquidation
rights or stock senior to the Series D Preferred Stock with respect to
liquidation rights ("Senior Stock") or reclassify any series of Junior Stock
into Senior Stock;
(d) declare or pay on any Junior Stock any dividend
whatsoever, whether in cash, property or otherwise (other than dividends payable
in shares of the class or series upon which such dividends are declared or paid,
or payable in shares of Common Stock with respect to Junior Stock other than
Common Stock, together with cash in lieu of fractional shares), nor shall the
Corporation make any distribution on any Junior Stock, nor shall any Junior
Stock be purchased or redeemed by the Corporation, nor shall any monies be paid
or made available for a sinking fund nor the purchase or redemption of any
Junior Stock, unless all dividends to which the holders of Series D Preferred
Stock shall have been entitled for all previous dividend periods shall have been
paid or declared and a sum of money sufficient for the payment thereof set
apart.
7. No Preemptive Rights. No holders of Series D Preferred
Stock, nor of the security convertible into, nor of any warrant, option or right
to purchase, subscribe for or otherwise acquire Series D Preferred Stock,
whether now or hereafter authorized, shall, as such holder, have any preemptive
right whatsoever to purchase, subscribe for or otherwise acquire, stock of any
class of the Corporation nor of any security convertible into, nor of any
warrant, option or right to purchase, subscribe for or otherwise acquire, stock
of any class of the Corporation, whether now or hereafter authorized.
8. Exclusion of Other Rights. Except as may otherwise be
required by law, the shares of Series D Preferred Stock shall not have any
preferences or relative, participating, optional or other special rights, other
than those specifically set forth in this resolution (as such resolution may be
amended from time to time) and in the Corporation's Certificate of
Incorporation. The Shares of Series D Preferred Stock shall have no preemptive
or subscription rights.
9. Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
10. Severability of Provisions. If any right, preference or
limitation of the Preferred Stock set forth in this Certificate (as such
Certificate may be amended from time to time)
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is invalid, unlawful or incapable of being enforced by reason of any rule of law
or public policy, all other rights, preferences and limitations set forth in
this Certificate (as so amended) which can be given effect without the invalid,
unlawful or unenforceable right, preference or limitation shall, nevertheless,
remain in full force and effect, and no right, preference or limitation herein
set forth shall be deemed dependent upon any other such right, preference or
limitation unless so expressed herein.
11. Status of Reacquired Shares. Shares of Series D Preferred
Stock which have been issued and reacquired in any manner shall (upon compliance
with any applicable provisions of the laws of the State of Delaware) have the
status of authorized and unissued shares of Series D Preferred Stock issuable in
series undesignated as to series and may be redesignated and reissued.
IN WITNESS WHEREOF, the Corporation has caused this Certificate
to be signed in its name and on its behalf by its President and attested to this
______ day of _______ 1997.
DIPLOMAT CORPORATION
By:_____________________________
Jonathan Rosenberg, President
ATTESTED
- -------------------------------
Stuart A. Leiderman
<PAGE>
EXHIBIT 8(a)-1
LEW MAGRAM LTD.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this ___ day of _______, 1998 by
and between LEW MAGRAM LTD., a New York corporation (hereinafter referred to as
"Employer"), a wholly-owned subsidiary of Diplomat Corporation, a Delaware
corporation ("Parent") and IRVING MAGRAM, (hereinafter referred to as
"Employee");
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as President; and
WHEREAS, Employee is willing to be employed as President in the
manner provided for herein, and to perform the duties of President of Employer
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein set forth it is agreed as follows:
1. Employment of Employee. Employer hereby employs Employee
as President.
2. Term. The term of this Agreement shall commence on the
execution hereof (the "Commencement Date") and expire three (3) years from such
date (which, with renewals, if any, the "Term"). Each 12 month period from the
Commencement Date forward during the Term shall be referred to as an "Annual
Period." After three years from the Commencement Date, this Agreement shall
automatically renew annually unless either Employer or Employee gives notice not
to renew at least one hundred eighty (180) days prior to the end of the
applicable Annual Period. During the Term, Employee shall devote substantially
all of his business time and efforts to Employer and its subsidiaries and
affiliates.
3. Duties. Employee hereby agrees that, throughout the period
of his employment hereunder, he shall devote his business time, attention,
knowledge and skills, diligently in furtherance of the business of Employer,
shall perform the duties assigned to him by the Board of Directors of Employer
(the "Board") consistent with his executive position at Lew Magram Ltd.
immediately prior to the date hereof, and shall observe and carry out such rules
and regulations, policies and directions as Employer may from time to time
establish to the extent consistent herewith. During the term of this Agreement,
Employee shall do such traveling as may be reasonably required of him in the
performance of his duties on behalf of Employer consistent with travel during
periods prior to the date hereof. Employee shall be available to confer and
consult with
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and advise the officers and directors of Employer at such times during business
hours that may be required reasonably by Employer. Employee shall report
directly and solely to the Board of Directors of Employer.
4. Compensation.
(a) Employee shall be paid a minimum of $200,000 for
each Annual Period such amount to be increased, if Parent is profitable for the
fiscal year ending September 30, 1998, in an amount determined by the majority
of the noninterested members of the Board excluding Employee at the Board's
discretion. Employee shall be paid periodically in accordance with the policies
of the Employer during the term of this Agreement, but not less frequently than
monthly. Employee is eligible for an annual bonus, if any, which will be
determined and paid in accordance with policies set from time to time by the
Board in addition to amounts received from the Total Bonus Pool pursuant to
Section 10 hereof.
(b) Employee shall be entitled to participate in and
receive the benefits of all pension, profit-sharing, deferred compensation,
retirement, hospitalization, insurance, medical or dental or other benefit plan
or arrangement generally available to executive employees of Parent or Employer
as may now or hereafter exist; provided that Employer shall provide Employee
medical benefits consistent with Lew Magram Ltd.'s former practices. Employee
shall also be entitled to participate in or receive all other benefits and
perquisites generally available to senior executives of Employer or Parent that
may be in effect from time to time during the Employee's employment hereunder.
Employer shall be under no obligation to institute or continue the existence of
any such employee plan, benefit or perquisite. Parent shall consider adopting a
deferred compensation/retirement benefits plan, in which, upon adoption,
Employee will be permitted to participate.
5. Expenses. Employer shall reimburse Employee, promptly upon
presentation of receipts or vouchers thereof, for all expenses reasonably
incurred by him in connection with the performance of his duties hereunder and
the business of Employer, in accordance with policies of Employer from time to
time in effect. Until expiration of the current automobile lease, Employer shall
furnish Employee a luxury automobile for so long as Employee shall remain in the
employ of Employer for his exclusive use in connection with the business of
Employer by paying the existing lease payments, insurance, and all costs
incident to the maintenance and operation of such automobile. After the current
lease expires, Employee will be entitled to a similar automobile procedurally
consistent with Parent's policies. Employer shall pay all expenses incident to
the maintenance and operation of such automobile, including, without limitation,
insurance, gasoline, oil, and repairs, the costs of furnishing such automobile
and of such maintenance and operation not to exceed $20,000 per Annual Period.
Employer shall also pay the cost of a parking space for Employee's automobile in
a facility as proximate to Employer's New York office as is practicable, where
needed. Employer shall also provide Employee with a cellular phone.
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6. Vacation. Employee shall be entitled to receive three (3)
weeks paid vacation time after each year of employment upon dates agreed upon by
Employer. Upon separation of employment, for any reason, vacation time accrued
and not used shall be paid at the salary rate of Employee in effect at the time
of employment separation.
7. Employee's Representations. Employee is free to enter into
this Employment Agreement and to perform each of the provisions contained
herein. Employee represents and warrants that Employee is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Employment Agreement, and that Employee's execution and performance of this
Employment Agreement is not a violation or breach of any agreement between
Employee and any other person or entity.
8. Nondisclosure of Confidential Information; Ownership of
Intellectual Property Rights; Non Competition; Covenant Not to Compete.
(a) Nondisclosure of Confidential Information. During
the term of this Employment Agreement and at all times thereafter, Employee will
keep confidential and will not directly or indirectly divulge to anyone nor use
or otherwise appropriate for Employee's own benefit, or on behalf of any other
person, firm, partnership or corporation by whom Employee might subsequently be
employed or otherwise associated or affiliated with, any Confidential
Information (as defined herein). For this purpose, "Confidential Information"
means any and all trade secrets or other confidential information of any kind,
nature or description relating to the business of Employer, provided that such
information is not and does not in the future become known or available to third
parties or general economic trade information known to the industry generally,
both of which does not arise as a result of a disclosure by Employee or his
agents.
(b) Employer Materials. All reports and analysis,
designs, drawings, contracts, contractual arrangements, specifications, computer
software, computer hardware and other equipment, computer printouts, computer
disks, documents, memoranda, notebooks, correspondence, files, lists and other
records, and the like, and all photocopies or other reproductions thereof,
relating to the business of Employer which Employee shall prepare, use,
construct, observe, possess or control, except Employee copies of all such
documents which pertain to Employee ("Employee Materials"), shall be and remain
the sole property of Employer. Upon termination of this Employment Agreement,
Employee shall deliver promptly to Employer all such Employer Materials.
(c) Certain Restrictions on Business Activities. During
the term of this Employment Agreement, Employee agrees that:
(i) Business Activities. He will not, directly
or indirectly, own an interest in, operate, join, control or participate in, or
be connected as an officer, employee, agent, independent contractor, partner,
shareholder or principal of any corporation, partnership, proprietorship, firm,
association, person or other entity providing services and/or products or a
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combination thereof which directly or indirectly compete with Employer's
business, and he will not undertake planning for or organization of any business
activity directly competitive with Employer's business, except for the period
after notice of non-renewal of Employee's employment, or combine or conspire
with other employees or representatives of Employer's business for the purpose
of organizing any such competitive business activity, except the purchase of
less than four percent (4%) of the stock of a publicly traded company which is
not affiliated with Employer.
(ii) Solicitation of Employees, Etc. During the
term of this Agreement and six (6) months thereafter, he will not, directly or
indirectly or by action in concert with others, induce or influence (or seek to
induce or influence) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Employer to terminate his or her
employment or engagement.
(d) Covenant Not to Compete. Employee covenants and
agrees that, if Employee's employment with Employer is terminated other than by
Employer without Cause (as defined herein) at any time, for a period of six (6)
months after the date of such termination, Employee will not engage or be
engaged, in any capacity, directly or indirectly, including but not limited as
employee, agent, consultant, manager, executive, owner or stockholder (except as
a passive investor holding less than a four percent (4%) equity interest in any
enterprise the securities of which are publicly traded) in any business entity
doing business in the United States engaged in direct competition with the
business conducted by Employer on the date of termination. This Covenant Not to
Compete shall survive the termination or expiration of the other provisions of
this Employment Agreement. If any court determines that this Covenant Not to
Compete, or any part thereof, is unenforceable because of the duration or
geographic scope of such provision, such court shall have the power to reduce
the duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
(e) Severability. Employee agrees, in the event that
any provision of this Section 8 or any word, phrase, clause, sentence or other
portion thereof shall be held to be unenforceable or invalid for any reason,
such provision or portion thereof shall be modified or deleted in such a manner
so as to make this Section 8 as modified legal and enforceable to the fullest
extent permitted under applicable laws. The validity and enforceability of the
remaining provisions or portions thereof shall not be affected thereby and shall
remain valid and enforceable to the fullest extent permitted under applicable
laws. A waiver of any breach of the provisions of this Section 8 shall not be
construed as a waiver of any subsequent breach of the same or any other
provision.
9. Termination.
(a) Termination by Employer.
(i) Employer may terminate this Agreement upon
written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging
by the Employee in conduct that constitutes activity in direct competition with
Employer's businesses; (B) the conviction of
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Employee for the commission of a felony; (C) the habitual abuse of alcohol or
controlled substances; (D) deliberate actions taken by Employee to the material
detriment of Employer; and/or (E) material breach of this Agreement.
Notwithstanding anything to the contrary in this Section 9(a)(i), Employer may
not terminate Employee's employment under this Agreement for Cause unless
Employee shall have first received notice from the Board advising Employee of
the specific acts or omissions alleged to constitute Cause, and such acts or
omissions continue after Employee shall have had a reasonable opportunity (at
least 20 days from the date Employee receives the notice from the Board) to
correct the acts or omissions so complained of.
(ii) In the event that during the term of his
employment with Employer, Employee shall become Disabled (as that term is
defined herein), Employer may terminate this Agreement and Employee's employment
hereunder at any time upon 10 days' written notice to Employee and Employee
shall be entitled to receive disability payments during the succeeding 12-month
period at a rate equal to one-half of the rate of the base salary as provided in
Section 4(a) to which he was theretofore entitled, payable in equal installments
no less frequently than monthly. For the purposes of this Agreement, Employee
shall be deemed to have become Disabled when by reason of his physical or mental
incapacity, Employee shall not perform his duties hereunder for a period of four
consecutive months or for an aggregate of 120 days in any consecutive period of
six months. Any proceeds of disability insurance policies or plans maintained by
Employer, in addition to the contributory state mandated minimum coverage
policy, for the benefit of Employee shall be paid to Employee and shall reduce
on a dollar for dollar basis the obligations of Employer under this Section 9.
(iii) This Employment Agreement and Employer's
obligations hereunder shall terminate upon Employee's death. Upon termination
for death, Employer shall continue to pay the compensation payments pursuant to
Section 4(a) to the surviving spouse of Employee (or if there is none to
Employee's estate) for the succeeding six (6) months.
(b) Termination by Employee. Employee shall have the
right to terminate his employment under this Agreement upon 30 days' notice to
Employer given within 90 days following the occurrence of any of the following
events:
(A) Employer acts to materially reduce
Employee's duties and responsibilities hereunder.
(B) A reduction in Employee's rate of base
compensation, the failure to pay Employee a bonus due under Section 10 hereof,
or material reduction in Employee's other benefits; or
(C) A material breach of this Agreement by
Employer, which is not cured within thirty (30) days of written notice of such
breach by Employer.
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If Employer shall terminate Employee's employment other than due to his death or
disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if
Employee shall terminate this Agreement under Section 9(b), Employee shall
continue to be entitled to receive all amounts provided for by Section 4 and all
additional employee benefits under Section 4 regardless of the amount of
compensation he may earn with respect to any other employment he may obtain for
the remainder of the Term as it may be extended from time to time.
10. Bonus. Each of Employee, Warren Golden and Stephanie Sobel
(collectively the "Total Bonus Pool Participants") shall be entitled to a
portion of an amount equal to ten percent (10%) of Employer's earnings before
income taxes up to a maximum of $150,000 per Annual Period ("Total Bonus Pool").
The allocation of the Total Bonus Pool to each Total Bonus Pool Participant
shall be as follows: Employee - 40%; Warren Golden-40%; Stephanie Sobel-20%. The
Total Bonus Pool shall be payable within 90 days after the end of Employer's
fiscal year commencing with the fiscal year ended September 30, 1998. So long as
any Total Bonus Pool Participant is an employee of Employer, the full amount of
the Total Bonus Pool shall be dispersed to the Total Bonus Pool Participants
annually.
11. Excise Tax. In the event that any payment or benefit
received or to be received by Employee in connection with a termination of his
employment with Employer would constitute a "parachute payment" within the
meaning of Code Section 280G or any similar or successor provision to 280G
and/or would be subject to any excise tax imposed by Code Section 4999 or any
similar or successor provision then Employer shall assume all liability for the
payment of any such tax and Employer shall immediately reimburse Employee on a
"grossed-up" basis for any income taxes attributable to Employee by reason of
such Employer payment and reimbursements.
12. Arbitration. Any controversies between Employer and
Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement, save and except for any breaches
arising out of Sections 7 and 8 hereof, shall on the written request of either
party served on the other be submitted to arbitration. Such arbitration shall
comply with and be governed by the rules of the American Arbitration
Association. An arbitration demand must be made within one (1) year of the date
on which the party demanding arbitration first had notice of the existence of
the claim to be arbitrated, or the right to arbitration along with such claim
shall be considered to have been waived. An arbitrator shall be selected
according to the procedures of the American Arbitration Association. The cost of
arbitration shall be born by the losing party or in such proportions as the
arbitrator shall decide. The arbitrator shall have no authority to add to,
subtract from or otherwise modify the provisions of this Agreement, or to award
punitive damages to either party.
13. Attorneys' Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which he may be
entitled.
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14. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
herein and supersedes, effective as of the date hereof any prior agreement or
understanding between Employer and Employee with respect to Employee's
employment by Employer. The unenforceability of any provision of this Agreement
shall not effect the enforceability of any other provision. This Agreement may
not be amended except by an agreement in writing signed by the Employee and the
Employer, or any waiver, change, discharge or modification as sought. Waiver of
or failure to exercise any rights provided by this Agreement and in any respect
shall not be deemed a waiver of any further or future rights.
15. Assignment. This Agreement shall not be assigned to other
parties.
16. Governing Law. This Agreement and all the amendments
hereof, and waivers and consents with respect thereto shall be governed by the
internal laws of the State of New York.
17. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed to
have been given when (a) delivered by hand; (b) sent be telex or telefax, (with
receipt confirmed), provided that a copy is mailed by registered or certified
mail, return receipt requested; or (c) received by the addressee as sent be
express delivery service (receipt requested) in each case to the appropriate
addresses, telex numbers and telefax numbers as the party may designate to
itself by notice to the other parties:
(i) if to the Employer:
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: Jonathan Rosenberg
Telefax: (914) 786-8727
Telephone: (914) 786-5552
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Telefax: (212) 980-5192
Telephone: (212) 752-9700
(ii) if to the Employee:
Irving Magram
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56 Huyler Landing
Cresskill, New Jersey 07626
Telefax:
Telephone:
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
Telefax: (212) 940-8776
Telephone: (212) 940-8800
18. Severability of Agreement. Should any part of this
Agreement for any reason be declared invalid by a court of competent
jurisdiction, such decision shall not affect the validity of any remaining
portion, which remaining provisions shall remain in full force and effect as if
this Agreement had been executed with the invalid portion thereof eliminated,
and it is hereby declared the intention of the parties that they would have
executed the remaining portions of this Agreement without including any such
part, parts or portions which may, for any reason, be hereafter declared
invalid.
19. Guarantee. In order to induce Employee to execute and
deliver this Agreement, Parent hereby irrevocably and unconditionally guarantees
the full, prompt and complete performance of each and every obligation and
liability of Employer under this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this agreement
as of the day and year first above written.
LEW MAGRAM LTD.
By:____________________________________
Jonathan Rosenberg, Vice President
____________________________________
Irving Magram
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As to Section 19.
DIPLOMAT CORPORATION
By:________________________________
Jonathan Rosenberg, President
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EXHIBIT 8(a)-2
DIPLOMAT CORPORATION
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this ___ day of _______, 1998 by
and between DIPLOMAT CORPORATION, a Delaware corporation (hereinafter referred
to as "Employer") and LEW MAGRAM LTD., a New York corporation and wholly owned
subsidiary of Employer (hereinafter referred to as "Magram"), and WARREN GOLDEN,
(hereinafter referred to as "Employee");
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as its Executive
Vice President and Chief Operating Officer and Magram wishes to employ Employee
as its Executive Vice President; and
WHEREAS, Employee is willing to be employed in the manner
provided for herein, and to perform the duties provided for herein upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein set forth it is agreed as follows:
1. Employment of Employee. Employer hereby employs Employee
as Executive Vice President and Chief Operating Officer and Magram hereby
employs Employee as Executive Vice President.
2. Term. The term of this Agreement shall commence on the
execution hereof (the "Commencement Date") and expire three (3) years from such
date (which, with renewals, if any, the "Term"). Each 12 month period from the
Commencement Date forward during the Term shall be referred to as an "Annual
Period." After three years from the Commencement Date, this Agreement shall
automatically renew annually unless either Employer or Employee gives notice not
to renew at least one hundred eighty (180) days prior to the end of the
applicable Annual Period. During the Term, Employee shall devote substantially
all of his business time and efforts to Employer and its subsidiaries and
affiliates.
3. Duties. Employee hereby agrees that, throughout the period
of his employment hereunder, he shall devote his business time, attention,
knowledge and skills, diligently in furtherance of the business of Employer and
Magram, shall perform the duties assigned to him by the President and Board of
Directors of Employer and Magram consistent with his executive positions with
Employer and Magram, respectively, and shall observe and carry out such rules
and regulations, policies and directions as Employer and Magram may from time to
time establish to the
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extent consistent herewith. During the term of this Agreement, Employee shall do
such traveling as may be reasonably required of him in the performance of his
duties on behalf of Employer consistent with travel during periods prior to the
date hereof. Employee shall be available to confer and consult with and advise
the officers and directors of Employer and Magram at such times during business
hours that may be reasonably required by Employer and Magram. Employee, in his
capacity as an employee of Employer shall report directly and solely to the
President of Employer, and, in his capacity as an employee of Magram shall
report directly and solely to the President of Magram.
4. Compensation.
(a) Employee shall be paid a minimum of $200,000 for
each Annual Period such amount to be increased, if Employer is profitable for
the fiscal year ending September 30, 1998, in an amount determined by the
majority of the noninterested members of the Board of Employer excluding
Employee at the Board's discretion. Employee shall be paid periodically in
accordance with the policies of the Employer during the term of this Agreement,
but not less frequently than monthly. As an executive officer of Employer,
Employee is eligible for an annual bonus, if any, which will be determined and
paid in accordance with policies set from time to time by the Board of Employer.
As an executive officer of Magram, Employee is eligible for an annual bonus, if
any, which will be determined and paid in accordance with policies set from time
to time by the majority of the non interested members of the Board of Magram,
excluding Employee. Such bonuses are in addition to amounts received from the
Total Bonus Pool pursuant to Section 10 hereof.
(b) Employee shall be entitled to participate in and
receive the benefits of all pension, profit-sharing, deferred compensation,
retirement, hospitalization, insurance, medical or dental or other benefit plan
or arrangement generally available to executive employees of Employer as may now
or hereafter exist; provided that Employer shall provide Employee medical
benefits consistent with Lew Magram Ltd.'s former practices. Employee shall also
be entitled to participate in or receive all other benefits and perquisites
generally available to senior executives of Employer that may be in effect from
time to time during the Employee's employment hereunder. Employer shall be under
no obligation to institute or continue the existence of any such employee plan,
benefit or perquisite. Employer shall consider adopting a deferred
compensation/retirement benefits plan, in which, upon adoption, Employee will be
permitted to participate.
5. Expenses. Employer shall reimburse Employee, promptly upon
presentation of receipts or vouchers thereof, for all expenses reasonably
incurred by him in connection with the performance of his duties hereunder and
the business of Employer, in accordance with policies of Employer from time to
time in effect. Until expiration of the current automobile lease, Employer shall
furnish Employee a luxury automobile for so long as Employee shall remain in the
employ of Employer for his exclusive use in connection with the business of
Employer by paying the existing lease payments, insurance and all costs incident
to the maintenance and operation of such automobile. After the current lease
expires, Employee will be entitled to a
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similar automobile procedurally consistent with Parent's policies. Employer
shall pay all expenses incident to the maintenance and operation of such
automobile, including, without limitation, insurance, gasoline, oil, and
repairs, the costs of furnishing such automobile and of such maintenance and
operation not to exceed $20,000 per Annual Period. Employer shall also pay the
cost of a parking space for Employee's automobile in a facility as proximate to
Employer's New York office as is practicable, where needed. Employer shall also
provide Employee with a cellular phone.
6. Vacation. Employee shall be entitled to receive three (3)
weeks paid vacation time after each year of employment upon dates agreed upon by
Employer. Upon separation of employment, for any reason, vacation time accrued
and not used shall be paid at the salary rate of Employee in effect at the time
of employment separation.
7. Employee's Representations. Employee is free to enter into
this Employment Agreement and to perform each of the provisions contained
herein. Employee represents and warrants that Employee is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Employment Agreement, and that Employee's execution and performance of this
Employment Agreement is not a violation or breach of any agreement between
Employee and any other person or entity.
8. Nondisclosure of Confidential Information; Ownership of
Intellectual Property Rights; Non Competition; Covenant Not to Compete.
(a) Nondisclosure of Confidential Information. During
the term of this Employment Agreement and at all times thereafter, Employee will
keep confidential and will not directly or indirectly divulge to anyone nor use
or otherwise appropriate for Employee's own benefit, or on behalf of any other
person, firm, partnership or corporation by whom Employee might subsequently be
employed or otherwise associated or affiliated with, any Confidential
Information (as defined herein). For this purpose, "Confidential Information"
means any and all trade secrets or other confidential information of any kind,
nature or description relating to the business of Employer provided that such
information is not and does not in the future become known or available to third
parties or general economic trade information known to the industry, both of
which does not arise as a result of a disclosure by Employee or his agents.
(b) Employer Materials. All reports and analysis,
designs, drawings, contracts, contractual arrangements, specifications, computer
software, computer hardware and other equipment, computer printouts, computer
disks, documents, memoranda, notebooks, correspondence, files, lists and other
records, and the like, and all photocopies or other reproductions thereof,
relating to the business of Employer which Employee shall prepare, use,
construct, observe, possess or control, except Employee copies of all such
documents which pertain to Employee ("Employee Materials"), shall be and remain
the sole property of Employer. Upon termination of this Employment Agreement,
Employee shall deliver promptly to Employer all such Employer Materials.
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(c) Certain Restrictions on Business Activities. During
the term of this Employment Agreement, Employee agrees that:
(i) Business Activities. He will not, directly
or indirectly, own an interest in, operate, join, control or participate in, or
be connected as an officer, employee, agent, independent contractor, partner,
shareholder or principal of any corporation, partnership, proprietorship, firm,
association, person or other entity providing services and/or products or a
combination thereof which directly or indirectly compete with Employer's
business, and he will not undertake planning for or organization of any business
activity directly competitive with Employer's business, except for the period
after notice of non-renewal of Employee's employment, or combine or conspire
with other employees or representatives of Employer's business for the purpose
of organizing any such competitive business activity, except the purchase of
less than four percent (4%) of the stock of a publicly traded company which is
not affiliated with Employer.
(ii) Solicitation of Employees, Etc. During the
term of this Agreement and six (6) months thereafter, he will not, directly or
indirectly or by action in concert with others, induce or influence (or seek to
induce or influence) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Employer to terminate his or her
employment or engagement.
(d) Covenant Not to Compete. Employee covenants and
agrees that, if Employee's employment with Employer is terminated other than by
Employer without Cause (as defined herein) at any time, for a period of six (6)
months after the date of such termination, Employee will not engage or be
engaged, in any capacity, directly or indirectly, including but not limited as
employee, agent, consultant, manager, executive, owner or stockholder (except as
a passive investor holding less than a four percent (4%) equity interest in any
enterprise the securities of which are publicly traded) in any business entity
doing business in the United States engaged in direct competition with the
business conducted by Employer on the date of termination. This Covenant Not to
Compete shall survive the termination or expiration of the other provisions of
this Employment Agreement. If any court determines that this Covenant Not to
Compete, or any part thereof, is unenforceable because of the duration or
geographic scope of such provision, such court shall have the power to reduce
the duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
(e) Severability. Employee agrees, in the event that
any provision of this Section 8 or any word, phrase, clause, sentence or other
portion thereof shall be held to be unenforceable or invalid for any reason,
such provision or portion thereof shall be modified or deleted in such a manner
so as to make this Section 8 as modified legal and enforceable to the fullest
extent permitted under applicable laws. The validity and enforceability of the
remaining provisions or portions thereof shall not be affected thereby and shall
remain valid and enforceable to the fullest extent permitted under applicable
laws. A waiver of any breach of the provisions of this Section 8 shall not be
construed as a waiver of any subsequent breach of the same or any other
provision.
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9. Termination.
(a) Termination by Employer.
(i) Employer may terminate this Agreement upon
written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging
by the Employee in conduct that constitutes activity in direct competition with
Employer's businesses; (B) the conviction of Employee for the commission of a
felony; (C) the habitual abuse of alcohol or controlled substances; (D)
deliberate actions taken by Employee to the material detriment of Employer;
and/or (E) material breach of this Agreement. Notwithstanding anything to the
contrary in this Section 9(a)(i), Employer may not terminate Employee's
employment under this Agreement for Cause unless Employee shall have first
received notice from the Board advising Employee of the specific acts or
omissions alleged to constitute Cause, and such acts or omissions continue after
Employee shall have had a reasonable opportunity (at least 20 days from the date
Employee receives the notice from the Board) to correct the acts or omissions so
complained of.
(ii) In the event that during the term of his
employment with Employer, Employee shall become Disabled (as that term is
defined herein), Employer may terminate this Agreement and Employee's employment
hereunder at any time upon 10 days' written notice to Employee and Employee
shall be entitled to receive disability payments during the succeeding 12-month
period at a rate equal to one-half of the rate of the base salary as provided in
Section 4(a) to which he was theretofore entitled, payable in equal installments
no less frequently than monthly. For the purposes of this Agreement, Employee
shall be deemed to have become Disabled when by reason of his physical or mental
incapacity, Employee shall not perform his duties hereunder for a period of four
consecutive months or for an aggregate of 120 days in any consecutive period of
six months. Any proceeds of disability insurance policies or plans maintained by
Employer, in addition to the contributory state mandated minimum coverage
policy, for the benefit of Employee shall be paid to Employee and shall reduce
on a dollar for dollar basis the obligations of Employer under this Section 9.
(iii) This Employment Agreement and Employer's
obligations hereunder shall terminate upon Employee's death. Upon termination
for death, Employer shall continue to pay the compensation payments pursuant to
Section 4(a) to the surviving spouse of Employee (or if there is none to
Employee's estate) for the succeeding six (6) months.
(b) Termination by Employee. Employee shall have the
right to terminate his employment under this Agreement upon 30 days' notice to
Employer given within 90 days following the occurrence of any of the following
events:
(A) Employer acts to materially reduce
Employee's duties and responsibilities hereunder.
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(B) A reduction in Employee's rate of base
compensation, the failure to pay Employee a bonus due under Section 10 hereof,
or material reduction in Employee's other benefits; or
(C) A material breach of this Agreement by
Employer, which is not cured within thirty (30) days of written notice of such
breach by Employer.
If Employer shall terminate Employee's employment other than due to his death or
disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if
Employee shall terminate this Agreement under Section 9(b), Employee shall
continue to be entitled to receive all amounts provided for by Section 4 and all
additional employee benefits under Section 4 regardless of the amount of
compensation he may earn with respect to any other employment he may obtain for
the remainder of the Term as it may be extended from time to time.
10. Bonus. Each of Employee, Irving Magram and Stephanie Sobel
(collectively the "Total Bonus Pool Participants") shall be entitled to a
portion of an amount equal to ten percent (10%) of Employer's earnings before
income taxes up to a maximum of $150,000 per Annual Period ("Total Bonus Pool").
The allocation of the Total Bonus Pool to each Total Bonus Pool Participant
shall be as follows: Employee - 40%; Irving Magram - 40%; Stephanie Sobel - 20%.
The Total Bonus Pool shall be payable within 90 days after the end of Employer's
fiscal year commencing with the fiscal year ended September 30, 1998. So long as
any Total Bonus Pool Participant is an employee of Magram, the full amount of
the Total Bonus Pool shall be dispersed to the Total Bonus Pool Participants
annually.
11. Excise Tax. In the event that any payment or benefit
received or to be received by Employee in connection with a termination of his
employment with Employer would constitute a "parachute payment" within the
meaning of Code Section 280G or any similar or successor provision to 280G
and/or would be subject to any excise tax imposed by Code Section 4999 or any
similar or successor provision then Employer shall assume all liability for the
payment of any such tax and Employer shall immediately reimburse Employee on a
"grossed-up" basis for any income taxes attributable to Employee by reason of
such Employer payment and reimbursements.
12. Arbitration. Any controversies between Employer and
Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement, save and except for any breaches
arising out of Sections 7 and 8 hereof, shall on the written request of either
party served on the other be submitted to arbitration. Such arbitration shall
comply with and be governed by the rules of the American Arbitration
Association. An arbitration demand must be made within one (1) year of the date
on which the party demanding arbitration first had notice of the existence of
the claim to be arbitrated, or the right to arbitration along with such claim
shall be considered to have been waived. An arbitrator shall be selected
according to the procedures of the American Arbitration Association. The cost of
arbitration shall be born by the losing party or in such proportions as the
arbitrator shall decide. The arbitrator shall have no authority to add to,
subtract
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from or otherwise modify the provisions of this Agreement, or to award
punitive damages to either party.
13. Attorneys' Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which he may be
entitled.
14. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
herein and supersedes, effective as of the date hereof any prior agreement or
understanding between Employer and Employee with respect to Employee's
employment by Employer. The unenforceability of any provision of this Agreement
shall not effect the enforceability of any other provision. This Agreement may
not be amended except by an agreement in writing signed by the Employee and the
Employer, or any waiver, change, discharge or modification as sought. Waiver of
or failure to exercise any rights provided by this Agreement and in any respect
shall not be deemed a waiver of any further or future rights.
15. Assignment. This Agreement shall not be assigned to other
parties.
16. Governing Law. This Agreement and all the amendments
hereof, and waivers and consents with respect thereto shall be governed by the
internal laws of the State of New York.
17. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed to
have been given when (a) delivered by hand; (b) sent be telex or telefax, (with
receipt confirmed), provided that a copy is mailed by registered or certified
mail, return receipt requested; or (c) received by the addressee as sent be
express delivery service (receipt requested) in each case to the appropriate
addresses, telex numbers and telefax numbers as the party may designate to
itself by notice to the other parties:
(i) if to the Employer:
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: Jonathan Rosenberg
Telefax: (914) 786-8727
Telephone: (914) 786-5552
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
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New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Telefax: (212) 980-5192
Telephone: (212) 752-9700
(ii) if to the Employee:
Warren Golden
703 Hollywood Avenue
Bronx, New York 10465
Telefax: (718) 792-2423
Telephone: (718) 828-6991
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
Telefax: (212) 940-8776
Telephone: (212) 940-8800
18. Severability of Agreement. Should any part of this
Agreement for any reason be declared invalid by a court of competent
jurisdiction, such decision shall not affect the validity of any remaining
portion, which remaining provisions shall remain in full force and effect as if
this Agreement had been executed with the invalid portion thereof eliminated,
and it is hereby declared the intention of the parties that they would have
executed the remaining portions of this Agreement without including any such
part, parts or portions which may, for any reason, be hereafter declared
invalid.
IN WITNESS WHEREOF, the undersigned have executed this agreement
as of the day and year first above written.
DIPLOMAT CORPORATION
By:____________________________________
Jonathan Rosenberg, President
LEW MAGRAM LTD.
<PAGE>
By:______________________________________
Jonathan Rosenberg, Vice President
______________________________________
Warren Golden
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EXHIBIT 8(a)-3
LEW MAGRAM LTD.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this ___ day of _______, 1998 by
and between LEW MAGRAM LTD., a New York corporation (hereinafter referred to as
"Employer"), a wholly-owned subsidiary of Diplomat Corporation, a Delaware
corporation ("Parent") and STEPHANIE SOBEL, (hereinafter referred to as
"Employee");
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as Senior Vice
President of Merchandising; and
WHEREAS, Employee is willing to be employed as Senior Vice
President of Merchandising in the manner provided for herein, and to perform the
duties of Senior Vice President of Merchandising of Employer upon the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein set forth it is agreed as follows:
1. Employment of Employee. Employer hereby employs Employee
as Senior Vice President of Merchandising.
2. Term. The term of this Agreement shall commence on the
execution hereof (the "Commencement Date") and expire three (3) years from such
date (which, with renewals, if any, the "Term"). Each 12 month period from the
Commencement Date forward during the Term shall be referred to as an "Annual
Period." After three years from the Commencement Date, this Agreement shall
automatically renew annually unless either Employer or Employee gives notice not
to renew at least one hundred eighty (180) days prior to the end of the
applicable annual period. During the Term, Employee shall devote substantially
all of her business time and efforts to Employer and its subsidiaries and
affiliates.
3. Duties. Employee hereby agrees that, throughout the period
of her employment hereunder, she shall devote her business time, attention,
knowledge and skills, diligently in furtherance of the business of Employer,
shall perform the duties assigned to her by the Board of Directors of Employer
(the "Board") consistent with her executive position at Lew Magram, Ltd.
immediately prior to the date hereof, and shall observe and carry out such rules
and regulations, policies and directions as Employer may from time to time
establish. During the term of this Agreement, Employee shall do such traveling
as may be reasonably required of her in the performance of her duties on behalf
of Employer consistent with travel during periods prior to the
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date hereof. Employee shall be available to confer and consult with and advise
the officers and directors of Employer at such times during business hours that
may be reasonably required by Employer. Employee shall report directly and
solely to the President of Employer.
4. Compensation.
(a) Employee shall be paid a minimum of $172,500 for
each Annual Period such amount to be increased, if Parent is profitable for the
fiscal year ending September 30, 1998, in an amount determined by the majority
of the noninterested members of the Board excluding Employee Board of Directors
at the Board's discretion. Employee shall be paid periodically in accordance
with the policies of the Employer during the term of this Agreement, but not
less frequently than monthly. Employee is eligible for an annual bonus, if any,
which will be determined and paid in accordance with policies set from time to
time by the Board in addition to amounts received from the Total Bonus Pool
pursuant to Section 10 hereof.
(b) Employee shall be entitled to participate in and
receive the benefits of all pension, profit-sharing, deferred compensation,
retirement, hospitalization, insurance, medical or dental or other benefit plan
or arrangement generally available to executive employees of Parent or Employer
as may now or hereafter exist; provided that Employer shall provide Employee
medical benefits consistent with Lew Magram Ltd.'s former policies. Employee
shall also be entitled to participate in or receive all other benefits and
perquisites generally available to senior executives of Employer or Parent that
may be in effect from time to time during the Employee's employment hereunder.
Employer shall be under no obligation to institute or continue the existence of
any such employee plan, benefit or perquisite. Parent shall consider adopting a
deferred compensation/retirement benefits plan, in which, upon adoption,
Employee shall be permitted to participate.
5. Expenses. Employer shall reimburse Employee, promptly upon
presentation of receipts or vouchers thereof, for all expenses reasonably
incurred by her in connection with the performance of her duties hereunder and
the business of Employer, in accordance with policies of Employer from time to
time in effect. Until expiration of the current automobile lease, Employer shall
furnish Employee a standard size automobile or minivan automobile for so long as
Employee shall remain in the employ of Employer for her exclusive use in
connection with the business of Employer by paying the existing lease payments,
insurance and all costs incident to the maintenance and operation of such
automobile. After the current lease expires, Employee will be entitled to an
automobile procedurally consistent with Parent's policies. Employer shall pay
lease payments, insurance and maintenance not to exceed $8,000 per Annual
Period.
6. Vacation. Employee shall be entitled to receive three (3)
weeks paid vacation time after each year of employment upon dates agreed upon by
Employer. Upon separation of employment, for any reason, vacation time accrued
and not used shall be paid at the salary rate of Employee in effect at the time
of employment separation.
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7. Employee's Representations. Employee is free to enter into
this Employment Agreement and to perform each of the provisions contained
herein. Employee represents and warrants that Employee is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Employment Agreement, and that Employee's execution and performance of this
Employment Agreement is not a violation or breach of any agreement between
Employee and any other person or entity.
8. Nondisclosure of Confidential Information; Ownership of
Intellectual Property Rights; Non Competition; Covenant Not to Compete.
(a) Nondisclosure of Confidential Information. During
the term of this Employment Agreement and at all times thereafter, Employee will
keep confidential and will not directly or indirectly divulge to anyone nor use
or otherwise appropriate for Employee's own benefit, or on behalf of any other
person, firm, partnership or corporation by whom Employee might subsequently be
employed or otherwise associated or affiliated with, any Confidential
Information (as defined herein). For this purpose, "Confidential Information"
means any and all trade secrets or other confidential information of any kind,
nature or description relating to the business of Employer, provided that such
information is not and does not in the future become known or available to third
parties or general economic trade information known to the industry generally,
both of which does not arise as a result of a disclosure by Employee or her
agents.
(b) Employer Materials. All reports and analysis,
designs, drawings, contracts, contractual arrangements, specifications, computer
software, computer hardware and other equipment, computer printouts, computer
disks, documents, memoranda, notebooks, correspondence, files, lists and other
records, and the like, and all photocopies or other reproductions thereof,
relating to the business of Employer which Employee shall prepare, use,
construct, observe, possess or control, except Employee copies of all such
documents which pertain to Employee ("Employee Materials"), shall be and remain
the sole property of Employer. Upon termination of this Employment Agreement,
Employee shall deliver promptly to Employer all such Employer Materials.
(c) Certain Restrictions on Business Activities. During
the term of this Employment Agreement, Employee agrees that:
(i) Business Activities. She will not, directly
or indirectly, own an interest in, operate, join, control or participate in, or
be connected as an officer, employee, agent, independent contractor, partner,
shareholder or principal of any corporation, partnership, proprietorship, firm,
association, person or other entity providing services and/or products or a
combination thereof which directly or indirectly compete with Employer's
business, and she will not undertake planning for or organization of any
business activity directly competitive with Employer's business, except for the
period after notice of non-renewal of Employee's employment, or combine or
conspire with other employees or representatives of Employer's business for the
purpose of
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organizing any such competitive business activity, except the purchase of less
than four percent (4%) of the stock of a publicly traded company which is not
affiliated with Employer.
(ii) Solicitation of Employees, Etc. During the
form of this Agreement and six (6) months thereafter, she will not, directly or
indirectly or by action in concert with others, induce or influence (or seek to
induce or influence) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Employer to terminate his or her
employment or engagement.
(d) Covenant Not to Compete. Employee covenants and
agrees that, if Employee's employment with Employer is terminated other than by
Employer without Cause (as defined herein) at any time, for a period of six (6)
months after the date of such termination, Employee will not engage or be
engaged, in any capacity, directly or indirectly, including but not limited as
employee, agent, consultant, manager, executive, owner or stockholder (except as
a passive investor holding less than a four percent (4%) equity interest in any
enterprise the securities of which are publicly traded) in any business entity
doing business in the United States engaged in direct competition with the
business conducted by Employer on the date of termination. This Covenant Not to
Compete shall survive the termination or expiration of the other provisions of
this Employment Agreement. If any court determines that this Covenant Not to
Compete, or any part thereof, is unenforceable because of the duration or
geographic scope of such provision, such court shall have the power to reduce
the duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
(e) Severability. Employee agrees, in the event that
any provision of this Section 8 or any word, phrase, clause, sentence or other
portion thereof shall be held to be unenforceable or invalid for any reason,
such provision or portion thereof shall be modified or deleted in such a manner
so as to make this Section 8 as modified legal and enforceable to the fullest
extent permitted under applicable laws. The validity and enforceability of the
remaining provisions or portions thereof shall not be affected thereby and shall
remain valid and enforceable to the fullest extent permitted under applicable
laws. A waiver of any breach of the provisions of this Section 8 shall not be
construed as a waiver of any subsequent breach of the same or any other
provision.
9. Termination.
(a) Termination by Employer.
(i) Employer may terminate this Agreement upon
written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging
by the Employee in conduct that constitutes activity in direct competition with
Employer's businesses; (B) the conviction of Employee for the commission of a
felony; (C) the habitual abuse of alcohol or controlled substances; (D)
deliberate actions taken by Employee to the material detriment of Employer;
and/or (E) material breach of this Agreement. Notwithstanding anything to the
contrary in this Section 9(a)(i), Employer may not terminate Employee's
employment under this Agreement for Cause unless Employee shall
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have first received notice from the Board advising Employee of the specific acts
or omissions alleged to constitute Cause, and such acts or omissions continue
after Employee shall have had a reasonable opportunity (at least 20 days from
the date Employee receives the notice from the Board) to correct the acts or
omissions so complained of.
(ii) In the event that during the term of her
employment with Employer, Employee shall become Disabled (as that term is
defined herein), Employer may terminate this Agreement and Employee's employment
hereunder at any time upon 10 days' written notice to Employee and Employee
shall be entitled to receive disability payments during the succeeding 12-month
period at a rate equal to one-half of the rate of the base salary as provided in
Section 4(a) to which she was theretofore entitled, payable in equal
installments no less frequently than monthly. For the purposes of this
Agreement, Employee shall be deemed to have become Disabled when by reason of
his physical or mental incapacity, Employee shall not perform his duties
hereunder for a period of four consecutive months or for an aggregate of 120
days in any consecutive period of six months. Any proceeds of disability
insurance policies or plans maintained by Employer, in addition to the
contributory state mandated minimum coverage policy, for the benefit of Employee
shall be paid to Employee and shall reduce on a dollar for dollar basis the
obligations of Employer under this Section 9.
(iii) This Employment Agreement and Employer's
obligations hereunder shall terminate upon Employee's death. Upon termination
for death, Employer shall continue to pay the compensation payments pursuant to
Section 4(a) to the surviving spouse of Employee (or if there is none to
Employee's estate) for the succeeding six (6) months.
(b) Termination by Employee. Employee shall have the
right to terminate her employment under this Agreement upon 30 days' notice to
Employer given within 90 days following the occurrence of any of the following
events:
(A) Employer acts to materially reduce
Employee's duties and responsibilities hereunder.
(B) A reduction in Employee's rate of base
compensation, the failure to pay Employee a bonus due under Section 10 hereof,
or material reduction Employee's other benefits; or
(C) A material breach of this Agreement by
Employer, which is not cured within thirty (30) days of written notice of such
breach by Employer.
If Employer shall terminate Employee's employment other than due to his death or
disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if
Employee shall terminate this Agreement under Section 9(b), Employee shall
continue to be entitled to receive all amounts provided for by Section 4 and all
additional employee benefits under Section 4 regardless of the
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amount of compensation he may earn with respect to any other employment she may
obtain for the remainder of the Term as it may be extended from time to time.
10. Bonus. Each of Employee, Warren Golden and Irving Magram
(collectively the "Total Bonus Pool Participants") shall be entitled to a
portion of an amount equal to ten percent (10%) of Employer's earnings before
income taxes up to a maximum of $150,000 per Annual Period ("Total Bonus Pool").
The allocation of the Total Bonus Pool to each Total Bonus Pool Participant
shall be as follows: Employee - 20%; Warren Golden - 40%; Irving Magram - 40%.
The Total Bonus Pool shall be payable within 90 days after the end of Employer's
fiscal year commencing with the fiscal year ended September 30, 1998. So long as
any Total Bonus Pool Participant is an employee of Employer, the full amount of
the Total Bonus Pool shall be dispersed to the Total Bonus Pool Participants
annually.
11. Excise Tax. In the event that any payment or benefit
received or to be received by Employee in connection with a termination of his
employment with Employer would constitute a "parachute payment" within the
meaning of Code Section 280G or any similar or successor provision to 280G
and/or would be subject to any excise tax imposed by Code Section 4999 or any
similar or successor provision then Employer shall assume all liability for the
payment of any such tax and Employer shall immediately reimburse Employee on a
"grossed-up" basis for any income taxes attributable to Employee by reason of
such Employer payment and reimbursements.
12. Arbitration. Any controversies between Employer and
Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement, save and except for any breaches
arising out of Sections 7 and 8 hereof, shall on the written request of either
party served on the other be submitted to arbitration. Such arbitration shall
comply with and be governed by the rules of the American Arbitration
Association. An arbitration demand must be made within one (1) year of the date
on which the party demanding arbitration first had notice of the existence of
the claim to be arbitrated, or the right to arbitration along with such claim
shall be considered to have been waived. An arbitrator shall be selected
according to the procedures of the American Arbitration Association. The cost of
arbitration shall be born by the losing party or in such proportions as the
arbitrator shall decide. The arbitrator shall have no authority to add to,
subtract from or otherwise modify the provisions of this Agreement, or to award
punitive damages to either party.
13. Attorneys' Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which he may be
entitled.
14. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
herein and supersedes, effective as of the date hereof any prior agreement or
understanding between Employer and Employee with respect to
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Employee's employment by Employer. The unenforceability of any provision of this
Agreement shall not effect the enforceability of any other provision. This
Agreement may not be amended except by an agreement in writing signed by the
Employee and the Employer, or any waiver, change, discharge or modification as
sought. Waiver of or failure to exercise any rights provided by this Agreement
and in any respect shall not be deemed a waiver of any further or future rights.
15. Assignment. This Agreement shall not be assigned to other
parties.
16. Governing Law. This Agreement and all the amendments hereof,
and waivers and consents with respect thereto shall be governed by the internal
laws of the State of New York.
17. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed to
have been given when (a) delivered by hand; (b) sent be telex or telefax, (with
receipt confirmed), provided that a copy is mailed by registered or certified
mail, return receipt requested; or (c) received by the addressee as sent be
express delivery service (receipt requested) in each case to the appropriate
addresses, telex numbers and telefax numbers as the party may designate to
itself by notice to the other parties:
(i) if to the Employer:
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: Jonathan Rosenberg
Telefax: (914) 786-8727
Telephone: (914) 786-5552
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Telefax: (212) 980-5192
Telephone: (212) 752-9700
(ii) if to the Employee:
Stephanie Sobel
21 Alice Avenue
Merrick, New York 11566
Telefax:
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Telephone:
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
Telefax: (212) 940-8776
Telephone: (212) 940-8800
18. Severability of Agreement. Should any part of this
Agreement for any reason be declared invalid by a court of competent
jurisdiction, such decision shall not affect the validity of any remaining
portion, which remaining provisions shall remain in full force and effect as if
this Agreement had been executed with the invalid portion thereof eliminated,
and it is hereby declared the intention of the parties that they would have
executed the remaining portions of this Agreement without including any such
part, parts or portions which may, for any reason, be hereafter declared
invalid.
19. Guarantee. In order to induce Employee to execute and
deliver this Agreement, Parent hereby irrevocably and unconditionally guarantees
the full, prompt and complete performance of each and every obligation and
liability of Employer under this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this agreement as of
the day and year first above written.
LEW MAGRAM LTD.
By:__________________________________
Jonathan Rosenberg, Vice President
__________________________________
Stephanie Sobel
AS TO SECTION 19
DIPLOMAT CORPORATION
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By:_______________________________
Jonathan Rosenberg, President
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EXHIBIT 8(b)
REGISTRATION RIGHTS AND TRANSFER AGREEMENT
THIS REGISTRATION RIGHTS AND TRANSFER AGREEMENT, dated as of
________, 1998 by and between DIPLOMAT CORPORATION, a Delaware corporation (the
"Company"), and Irving Magram, Warren Golden and Stephanie Sobel (individually a
"Holder", and together with the holders of other Registrable Securities
hereinafter described, the "Holders").
WHEREAS, pursuant to the Agreement and Plan of Merger ("Merger
Agreement") effective simultaneously herewith, the Company has issued to the
Holders, exempt from the registration requirements of the Securities Act of
1933, as amended (the "1933 Act"), shares of Series D Preferred Stock
("Preferred Stock") which are convertible into shares of the Company's common
stock, $.0001 par value (the "Common Stock") and Additional Common Stock (as
defined in the Merger Agreement);
WHEREAS, pursuant to the terms of and in order to induce the
Holders to enter into the Agreement and Plan of Merger, the Company and the
Holders have agreed to enter into this Agreement; and
WHEREAS, it is intended by the Company and the Holders that this
Agreement shall become effective immediately upon the acquisition by the Holder
of the Preferred Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and in the Agreement and Plan of Merger, the Company
and the Holder hereby agree as follows:
1. Registration Rights.
(a) Definitions. As used herein, the following terms
have the following meanings.
(i) "Register", "registered" and
"registration" shall refer to a registration effected by filing a registration
statement in compliance with the 1933 Act and the declaration or ordering by the
Commission of the effectiveness of such registration statement.
(ii) "Registrable Securities" shall mean (i) (A)
all shares of Common Stock issuable upon conversion of the Preferred Stock and
(B) the Additional Common Stock and (ii) any shares of Common Stock of the
Company issued as a dividend or other distribution with respect to, exchange for
or in replacement of, the shares of Common Stock, referenced in (i) above,
excluding in all cases, however, any Registrable Securities held by a person to
whom registration rights have not been transferred pursuant to the provisions of
Section 6.
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(b) Required Registration.
(i) The Company shall file a registration
statement as soon as practicable upon execution of the Agreement and Plan of
Merger and shall effect promptly the registration of [pro rata share of 666,667
or 444,444] shares of the Registrable Securities, such shares to be allocated
among the Holders in accordance with the Allocation Formula (defined below). If
all of the Registrable Securities have not yet been sold by the Holders and the
Company registers less than all of the Registrable Securities under this Section
1(b)(i), then the shares of Registrable Securities to be registered shall be
allocated among the Holders as follows (the "Allocation Formula"): (i) the first
222,222 shares of Registrable Securities shall be allocated to Irving Magram;
(ii) the next 100,000 shares of Registrable Securities shall be allocated 66.67%
to Warren Golden and 33.33% to Stephanie Sobel; (iii) the next 122,222 shares of
Registrable Securities shall be allocated 75% to Irving Magram; 16.67% to Warren
Golden and 8.33% to Stephanie Sobel; and (iv) any remaining shares of
Registrable Securities shall be allocated to the Holders in proportion to the
Registrable Securities requested to be registered by each such Holder. In the
event that a Holder does not request that his or her Registrable Securities be
included in a registration statement, then the securities allocable to such
Holder shall be allocated to the other Holders in accordance with the Allocation
Formula.
(ii) The amount of Registrable Securities sold by
the Holders under this Section 1(b) for any month shall not exceed 75,000 in the
aggregate, allocated among the Holders in accordance with the Allocation Formula
or as the Holders may agree. Each Holder shall give the Company fifteen trading
days' prior written notice of any sale of Registrable Securities under this
Section 1(b)(ii). The Company or its assignee(s), shall have the right to call
50% of the Registrable Securities to be sold by a Holder under this Section
1(b)(ii) at 75% of the fair market value of the shares. For purposes of this
paragraph, fair market value shall mean the average closing price of the
Company's common stock for the three trading days immediately prior to the date
of the Holder's notice above. The closing of the purchase of the shares upon
exercise of a call shall be five business days after notice of exercise such
call.
(iii) At any time from the date hereof to the
earlier of (A) ______________, 1998 [90 days from the date of the Agreement and
Plan of Merger] or (B) five business days after the effective date of the
registration statement described in this Section 1(b), assuming in both cases
that the transaction contemplated in the Agreement and Plan of Merger has closed
prior thereto, the Company, or its assignee(s) shall have the right to call the
[pro rata share of 666,667 or 444,444] shares registered under this Section 1(b)
at the price of the greater of (A) 75% of the fair market value of the shares or
(B) $3.00 per share. For purposes of this paragraph, fair market value shall
mean the average closing price of the Company's common stock for the three
trading days immediately prior to the notice exercising the call. The closing of
the purchase of the shares upon exercise of the call shall be five business days
after notice of exercise of the call.
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(c) "Piggyback" Registration. If at any time after the
date hereof, the Company proposes to register any of its securities other than
in connection with a merger or pursuant to Form S-8 or other comparable form,
the Company shall request that the managing underwriter (if any) of such
underwritten offering include the Registrable Securities. If such managing
underwriter agrees to include the Registrable Securities in the underwritten
offering, the Company shall at such time give prompt written notice to all
Holders of its intention to effect such registration and of such Holders' right
under such proposed registration, and upon the request of any such Holder
delivered to the Company within twenty (20) days after giving such notice (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder and the intended method of disposition thereof), the Company shall
include such Registrable Securities held by such Holder requested to be included
in such registration; provided, however, that:
(i) If, at any time after giving such written
notice of the Company's intention to register any of the Holders' Registrable
Securities and prior to the effective date of the registration statement filed
in connection with such registration, the Company shall determine for any reason
not to register or to delay the registration of such Registrable Securities, at
its sole election, the Company may give written notice of such determination to
each Holder and thereupon shall be relieved of its obligation to register any
Registrable Securities issued or issuable in connection with such registration
(but not from its obligation to pay registration expenses in connection
therewith or to register the Registrable Securities in a subsequent
registration); and in the case of a determination to delay a registration shall
thereupon be permitted to delay registering any Registrable Securities for the
same period as the delay in respect of securities being registered for the
Company's own account.
(ii) If the managing underwriter in such
underwritten offering shall advise the Company that it declines to include a
portion or all of the Registrable Securities requested by the Holders to be
included in the registration statement, then registration of all or a specified
portion of the Registrable Securities shall be excluded from such registration
statement (in case of an exclusion as to a portion of the Registrable
Securities, such portion to be excluded shall be allocated among such Holders
and any affiliates and other selling shareholders of the Company including
securities to be registered in such underwritten offering in proportion to the
respective number of Registrable Securities and other securities requested to be
registered by each such Holder and affiliate). In such event the Company shall
give the applicable Holders prompt notice of the number of Registrable
Securities excluded from such registration at the request of the managing
underwriter. No such exclusion shall reduce the securities being offered by the
Company for its own account to be included in such registration statement.
(iii) The Holders, subject to the provisions of
Section 1, shall have the option to include their Registrable Securities in the
Company's underwritten offering. The Company shall not be required to include
any of the Holders' Registrable Securities in an underwritten offering of the
Company's securities unless such Holders accept the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it (provided
such terms are usual and customary for selling stockholders) and the Holders
agree to execute such
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documents in connection with such registration as the Company or the managing
underwriter may reasonably request.
(iv) A managing underwriter of the Company's
securities may, at such managing underwriters discretion, delay a registration
of the Registrable Securities under this Section 1(c), provided, however, that
if such managing underwriter does delay such registration, then the Company
shall, at the request of any Holder within 120 days of the effectiveness of the
Company's registration statement, effect the registration of at least 400,000
shares of Registrable Securities (such shares to be allocated among the Holders
in accordance with the Allocation Formula).
(d) Demand Registration. In the event the Holders
have not sold all of their Registrable Securities within one year from the date
hereof, if the Holder or Holders of an aggregate of at least 50% of the
Registrable Securities then outstanding propose to dispose of at least 20% of
the then Registrable Securities (such Holder or Holders being herein called the
"Initiating Holders"), the Initiating Holders may request, on one occasion, the
Company, in writing, to effect such registration, stating the number of shares
of Registrable Securities to be disposed of by such Initiating Holders (which
shall be not less than 20% of the then Registrable Securities) and the intended
method of disposition. Upon receipt of such request, the Company will give
prompt written notice thereof to all other Holders whereupon such other Holders
shall give written notice to the Company within twenty (20) days after the date
of the Company's notice (the "Notice Period") if they propose to dispose of any
shares of the Registrable Securities pursuant to such registration, stating the
number of shares of the Registrable Securities to be disposed of by such Holder
or Holders and intended method of disposition. The Company shall effect promptly
after the Notice Period the registration under the 1933 Act of all shares of the
Registrable Securities specified in the requests of the Initiating Holders and
the requests of the other Holders; provided, however, that such period may be
delayed by the Company for up to ninety (90) days in total if, (A) upon the
advice of counsel, at the time the Company is required to exercise its best
efforts to cause such registration statement to become effective, such delay is
advisable and in the best interests of the Company because of the existence of
non-public material information, or (B) to allow the Company to complete any
pending audit of its financial statements.
(e) Cooperation with Company. The Holder will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
(f) Termination of Rights. The Company's obligations
under this Section 1 shall terminate upon the date upon which all Registrable
Securities are eligible for resale without registration.
2. Registration Procedures. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under
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the 1933 Act, the Company shall (except as otherwise provided in this
Agreement), as expeditiously as possible:
(a) prepare and file with the Securities and
Exchange Commission (the "Commission") a registration statement and shall use
its best efforts to cause such registration statement to become effective and
remain effective until all the Registrable Securities are sold or become capable
of being publicly sold without registration under the 1933 Act;
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the 1933 Act with
respect to the sale or other disposition of all securities covered by such
registration statement whenever the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same until the earlier of (i) nine
months from the effectiveness of the registration statement; or (ii) all the
shares owned by Holder are eligible for sale under Rule 144;
(c) furnish to the Holder such numbers of copies of a
summary prospectus or other prospectus, including a preliminary prospectus or
any amendment or supplement to any prospectus, in conformity with the
requirements of the 1933 Act, and such other documents, as the Holder may
reasonably request in order to facilitate the public sale or other disposition
of the securities owned by the Holder;
(d) register and qualify the securities covered by such
registration statement under such other securities or blue sky laws of such
jurisdictions as the Holder shall reasonably request, and do any and all other
acts and things which may be necessary or advisable to enable such Holder to
consummate the public sale or other disposition in such jurisdictions of the
securities owned by such Holder, except that the Company shall not for any such
purpose be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
(e) use its best efforts to list such securities on any
securities exchange on which any securities of the Company is then listed, if
the listing of such securities is then permitted under the rules of such
exchange;
(f) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(g) notify the Holder of Registrable Securities covered
by such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be
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stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(h) furnish, at the request of the Holder on the date
such Registrable Securities are delivered to the underwriters for sale pursuant
to such registration or, if such Registrable Securities are not being sold
through underwriters, on the date the registration statement with respect to
such Registrable Securities becomes effective, (i) an opinion, dated such date,
of the counsel representing the Company for the purpose of such registration
addressed to the underwriters, if any, and to the Holder making such request,
covering such legal matters with respect to the registration in respect of which
such opinion is being given as the Holder of such Registrable Securities may
reasonably request and are customarily included in such an opinion and (ii)
letters, dated, respectively, (1) the effective date of the registration
statement and (2) the date such Registrable Securities are delivered to the
underwriters, if any, for sale pursuant to such registration, from a firm of
independent certified public accountants of recognized standing selected by the
Company, addressed to the underwriters, if any, and to the Holder making such
request, covering such financial, statistical and accounting matters with
respect to the registration in respect of which such letters are being given as
the Holder of such Registrable Securities may reasonably request and are
customarily included in such letters; and
(i) take such other actions as shall be reasonably
requested by any Holder to facilitate the registration and sale of the
Registrable Securities; provided, however, that the Company shall not be
obligated to take any actions not specifically required elsewhere herein which
in the aggregate would cost in excess of $5,000.
3. Resale of Registrable Securities. Six months after the
date hereof, the Holders may sell (in accordance with the Allocation Formula)
Registrable Securities in a private placement or block trade in which the
Company will cooperate with the Holders, or be sold through a sale that the
Holder undertakes independently, in which case the Company's underwriter or
principal market maker will have a right of first refusal to purchase the
Registrable Securities on the same terms as offered to a third party, which
right of first refusal the underwriter has thirty days after notice thereof to
exercise, provided, however, any such sale must comply with, or be exempt from,
registration under the 1933 Act and applicable blue sky laws as stated in a
legal opinion of counsel acceptable to the Company. The offering price in said
private placement shall have a maximum discount of fifty percent (50%) from the
then current market price of the Company's Common Stock, but no less than $2.25
per share.
4. Expenses. All expenses incurred in any registration of the
Holder's Registrable Securities under this Agreement shall be paid by the
Company, including, without limitation, printing expenses, fees and
disbursements of counsel for the Company, expenses of any audits to which the
Company shall agree or which shall be necessary to comply with governmental
requirements in connection with any such registration, all registration and
filing fees for the Holders' Registrable Securities under federal and state
securities laws, and expenses of complying with the securities or blue sky laws
of any jurisdictions pursuant to Section 2(d); provided, however, the
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Company shall not be liable for (a) any discounts or commissions to any
underwriter, (b) any stock transfer taxes incurred with respect to Registrable
Securities sold in the offering or (c) the fees and expenses of counsel for any
Holder, provided that the Company will pay the costs and expenses of Company
counsel when the Company's counsel is representing any or all selling security
holders.
5. Indemnification. In the event any Registrable Securities
are included in a registration statement pursuant to this Agreement:
(a) Company Indemnity. Without limitation of any
other indemnity provided to any Holder, either in connection with the offering
or otherwise, to the extent permitted by law, the Company shall indemnify and
hold harmless each Holder, the affiliates, officers, directors and partners of
each Holder, any underwriter (as defined in the 1933 Act) for such Holder, and
each person, if any, who controls such Holder or underwriter (within the meaning
of the 1933 Act or the Securities Exchange Act of 1934 (the "Exchange Act"),
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the 1933 Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statements including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements, thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, (iii) any violation or alleged violation
by the Company of the 1933 Act, the Exchange Act, or any state securities law or
any rule or regulation promulgated under the 1933 Act, the Exchange Act or any
state securities law, and in each case, the Company shall reimburse the Holder,
affiliate, officer or director or partner, underwriter or controlling person for
any legal or other expenses incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable to any Holder in any such case for any such
loss, claim, damage, liability or action to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by the Holder or any other officer, director or controlling person
thereof.
(b) Holder Indemnity. The Holder shall indemnify and
hold harmless the Company, its affiliates, its counsel, officers, directors,
shareholders and representatives, any underwriter (as defined in the 1933 Act)
and each person, if any, who controls the Company or the underwriter (within the
meaning of the 1933 Act or the Exchange Act), against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the 1933 Act, the Exchange Act or any state securities law, and the Holder
shall reimburse the Company, affiliate, officer or director or partner,
underwriter or controlling person for any legal or other expenses incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; insofar as such losses, claims, damages or liabilities (or
actions and respect thereof) arise out of or are based upon a Violation which
occurs in reliance upon and in conformity
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with written information furnished expressly for use in connection with such
registration by the Holder. Notwithstanding the above, the Holder's
indemnification shall be limited to the dollar value of the securities being
registered for the account of the Holder.
(c) Notice; Right to Defend. Promptly after receipt by
an indemnified party under this Section 5 of notice of the commencement of any
action (including any government action) such indemnified party shall, if a
claim in respect thereof made against any indemnifying party under this Section
5, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in and if
the indemnifying party agrees in writing that it will be responsible for any
costs, expenses, judgments, damages and losses incurred by the indemnified party
with respect to such claim, jointly with any other indemnifying party similarly
noticed, to assume the defense thereof with counsel mutually satisfactory to the
parties; provided, however, that an indemnified party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if the indemnified party reasonably believes that representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential interests between such indemnified
party and any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within reasonable
time of the commencement of any such action shall relieve such indemnifying
party of any liability to the indemnified party under this Agreement only if and
to the extent that such failure is prejudicial to its ability to defend such
action, and the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Agreement.
(d) Contribution. If the indemnification provided
for in this Agreement is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss, liability, claim,
damage or expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss, liability,
claim, damage or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other hand in connection with the statements or omissions which
resulted in such loss, claim, damage or expense as well as any other relevant
equitable considerations. The relevant fault of the indemnifying party and the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact information supplied by the indemnifying party
or by the indemnified party and the parties' relative intent, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount the Holder shall be obligated to
contribute pursuant to the Agreement shall be limited to an amount equal to the
proceeds to the Holder of the Registrable Securities sold pursuant to the
registration statement which gives rise to such obligation to contribute (less
the aggregate amount of any damages which the Holder has otherwise been required
to pay in respect of such loss, claim, damage, liability or action or any
substantially similar loss, claim, damage, liability or action arising from the
sale of such Registrable Securities).
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(e) Survival of Indemnity. The indemnification provided
by this Agreement shall be a continuing right to indemnification and shall
survive the registration and sale of any Registrable Securities by any person
entitled to indemnification hereunder and the expiration or termination of this
Agreement.
6. Assignment of Registration Rights. The rights of the
Holder under this Agreement, including the rights to cause the Company to
register Registrable Securities, may not be assigned without the prior written
consent of the Company which consent shall not be unreasonably withheld.
7. Limitations on Other Registration Rights. Except as
otherwise set forth in this Agreement, the Company shall not, without the prior
written consent of the Holder of Registrable Securities, file any registration
statement filed on behalf of any person (including the Company) other than the
Holder to become effective during any period when the Company is not in
compliance with this Agreement.
8. Remedies.
(a) Time is of the Essence. The Company agrees that
time is of the essence of each of the covenants contained herein and that, in
the event of a dispute hereunder, this Agreement is to be interpreted and
construed in a manner that will enable the Holders to sell their Registrable
Securities as quickly as possible after such Holders have indicated to the
Company that they desire their Registrable Securities to be registered. Any
delay on the part of the Company not expressly permitted under this Agreement,
whether material or not, shall be deemed a material breach of this Agreement.
(b) Remedies Upon Default or Delay. The Company
acknowledges the breach of any part of this Agreement may cause irreparable
harm to the Holder and that monetary damages alone may be inadequate. The
Company therefore agrees that the Holder shall be entitled to injunctive relief
or such other applicable remedy as a court of competent jurisdiction may
provide. Nothing contained herein will be construed to limit a Holder's right to
any remedies at law, including recovery of damages for breach of any part of
this Agreement.
9. Notices.
(a) All communications under this Agreement shall be
in writing and shall be mailed by first class mail, postage prepaid, or
telegraphed or telexed with confirmation of receipt or delivered by hand or by
overnight delivery service,
(i) If to the Company, at:
Diplomat Corporation
25 Kay Fries Drive
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Stony Point, New York 10980
Attention: Jonathan Rosenberg, President
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, Jr.
101 East 52nd Street
New York, New York 10022
Attention: Wesley C. Fredericks, Jr.
or at such other address as it may have furnished in writing to the Holder
of Registrable Securities at the time outstanding, or
(ii) if to the Holder of any Registrable
Securities, to the address of such Holder as it appears in the stock ledger of
the Company.
With a copy to:
Rosenman & Colin
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
(b) Any notice so addressed, when mailed by registered
or certified mail shall be deemed to be given three days after so mailed, when
telegraphed or telexed shall be deemed to be given when transmitted, or when
delivered by hand or overnight shall be deemed to be given when delivered.
10. Successors and Assigns. Except as otherwise expressly
provided herein, this Agreement shall inure to the benefit of and be binding
upon the successors and permitted assigns of the Company and the Holders.
11. Amendment and Waiver. This Agreement may be amended, and
the observance of any term of this Agreement may be waived, but only with the
written consent of the Company and the Holders; provided, however, that no such
amendment or waiver shall take away any registration right of the Holders of
Registrable Securities or reduce the amount of reimbursable costs to the Holders
of Registrable Securities in connection with any registration hereunder without
the consent of the Holders. No delay on the part of any party in the exercise of
any right, power or remedy shall operate as a waiver thereof, nor shall any
single or partial exercise by any party of any right, power or remedy preclude
any other or further exercise thereof, or the exercise of any other right, power
or remedy.
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12. Counterparts. One or more counterparts of this Agreement
may be signed by the parties, each of which shall be an original but all of
which together shall constitute one and the same instrument.
13. Governing Law. This Agreement shall be construed in
accordance with and governed by the internal laws of the State of New York,
without giving effect to conflicts of law principles.
14. Invalidity of Provisions. If any provision of this
Agreement is or becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
15. Headings. The headings in this Agreement are for
convenience of reference only and shall not be deemed to alter affect the
meaning or interpretation of any provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first set forth above.
DIPLOMAT CORPORATION
By:
---------------------------
- ------------------------------
Irving Magram
- ------------------------------
Stephanie Sobel
- ------------------------------
Warren Golden
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EXHIBIT 8(c)
ASSIGNMENT OF RIGHTS AGREEMENT
This Agreement is entered as of _____________, 1998 by and between
Robert M. Rubin ("Rubin"), Jay M. Kaplowitz ("Kaplowitz"), Lew Magram Ltd., a
New York corporation ("Magram"), Diplomat Corporation, a Delaware corporation
("Diplomat"), Irving Magram, Warren Golden, and Stephanie Sobel. Irving Magram,
Warren Golden, and Stephanie Sobel are colectively referred to herein as the
"Magram Stockholders".
WHEREAS, Rubin, Kaplowitz, Magram and the Magram Stockholders entered
into a Stock Purchase Agreement dated May 16, 1997 (the "Magram Agreement")
which provided that, as an inducement to acquire Senior Convertible Preferred
Stock from Magram, Magram and the Magram Stockholders made certain
representations and warranties which were to survive the closing of the Magram
Agreement; and
WHEREAS, as an inducement to enter into the Agreement and Plan of Merger
between Diplomat and Magram, et al., dated ____________, 1997 (the "Merger
Agreement"), Rubin and Kaplowitz desire to assign certain rights under the
Magram Agreement to Diplomat.
NOW, THEREFORE, the parties, intending to be bound, and for good and
valuable consideration, hereby agree as follows:
1. Assignment of Rights. Rubin and Kaplowitz assign to Diplomat
(i) all of their rights either or both have to assert any breach or
misrepresentation of any and all representations and/or warranties in Section 3
of the Magram Agreement and (ii) any and all remedies available to either or
both of them from such breach or misrepresentation against Magram and/or the
Magram Stockholders.
2. Waiver. As consideration for the assignment as provided in
Section 1 herein, Diplomat, on behalf of itself and its officers, directors,
subsidiaries (including Magram Acquisition Corp. and, following consummation of
the merger, Magram), affiliates, successors and assigns, hereby waives any and
all rights and remedies, if any, that Diplomat or any of the foregoing may have
in the future against Rubin and/or Kaplowitz for any breach or misrepresentation
of any representation or warranty contained in Section 3 of the Merger
Agreement. Such waiver shall not constitute a waiver or diminution of any rights
Diplomat has or may have against any other party making representations and
warranties under Section 3 of the Merger Agreement.
3. Consent to Assignment. Each of Magram and the Magram
Stockholders consent to the assignment or rights as provided in Section 1
herein.
1
<PAGE>
4. Survival. This Agreement shall survive the closing of the
Merger Agreement and the closing of the Magram Agreement. The Magram Agreement
shall remain in full force and effect in accordance with its terms.
-----------------------------
Robert Rubin
-----------------------------
Jay Kaplowitz
DIPLOMAT CORPORATION
By:
--------------------------
Name:
Title:
LEW MAGRAM, LTD.
By:
--------------------------
Name:
Title:
-----------------------------
Irving Magram
-----------------------------
Warren Golden
-----------------------------
Stephanie Sobel
<PAGE>
LEW MAGRAM LTD.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 13th day of January, 1998
by and between LEW MAGRAM LTD., a New York corporation (hereinafter referred to
as "Employer"), a wholly-owned subsidiary of Diplomat Corporation, a Delaware
corporation ("Parent") and IRVING MAGRAM, (hereinafter referred to as
"Employee");
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as President; and
WHEREAS, Employee is willing to be employed as President in
the manner provided for herein, and to perform the duties of President of
Employer upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein set forth it is agreed as follows:
1. Employment of Employee. Employer hereby employs Employee as
President.
2. Term. The term of this Agreement shall commence on the
execution hereof (the "Commencement Date") and expire three (3) years from such
date (which, with renewals, if any, the "Term"). Each 12 month period from the
Commencement Date forward during the Term shall be referred to as an "Annual
Period." After three years from the Commencement Date, this Agreement shall
automatically renew annually unless either Employer or Employee gives notice not
to renew at least one hundred eighty (180) days prior to the end of the
applicable Annual Period. During the Term, Employee shall devote substantially
all of his business time and efforts to Employer and its subsidiaries and
affiliates.
3. Duties. Employee hereby agrees that, throughout the period
of his employment hereunder, he shall devote his business time, attention,
knowledge and skills, diligently in furtherance of the business of Employer,
shall perform the duties assigned to him by the Board of Directors of Employer
(the "Board") consistent with his executive position at Lew Magram Ltd.
immediately prior to the date hereof, and shall observe and carry out such rules
and regulations, policies and directions as Employer may from time to time
establish to the extent consistent herewith. During the term of this Agreement,
Employee shall do such traveling as may be reasonably required of him in the
performance of his duties on behalf of Employer consistent with travel during
periods prior to the date hereof. Employee shall be available to confer and
consult with and advise the officers and directors of Employer at such times
during business hours that may be required reasonably by Employer. Employee
shall report directly and solely to the Board of Directors of Employer.
<PAGE>
4. Compensation.
(a) Employee shall be paid a minimum of $200,000 for
each Annual Period such amount to be increased, if Parent is profitable for the
fiscal year ending September 30, 1998, in an amount determined by the majority
of the noninterested members of the Board excluding Employee at the Board's
discretion. Employee shall be paid periodically in accordance with the policies
of the Employer during the term of this Agreement, but not less frequently than
monthly. Employee is eligible for an annual bonus, if any, which will be
determined and paid in accordance with policies set from time to time by the
Board in addition to amounts received from the Total Bonus Pool pursuant to
Section 10 hereof.
(b) Employee shall be entitled to participate in and
receive the benefits of all pension, profit-sharing, deferred compensation,
retirement, hospitalization, insurance, medical or dental or other benefit plan
or arrangement generally available to executive employees of Parent or Employer
as may now or hereafter exist; provided that Employer shall provide Employee
medical benefits consistent with Lew Magram Ltd.'s former practices. Employee
shall also be entitled to participate in or receive all other benefits and
perquisites generally available to senior executives of Employer or Parent that
may be in effect from time to time during the Employee's employment hereunder.
Employer shall be under no obligation to institute or continue the existence of
any such employee plan, benefit or perquisite. Parent shall consider adopting a
deferred compensation/retirement benefits plan, in which, upon adoption,
Employee will be permitted to participate.
5. Expenses. Employer shall reimburse Employee, promptly upon
presentation of receipts or vouchers thereof, for all expenses reasonably
incurred by him in connection with the performance of his duties hereunder and
the business of Employer, in accordance with policies of Employer from time to
time in effect. Until expiration of the current automobile lease, Employer shall
furnish Employee a luxury automobile for so long as Employee shall remain in the
employ of Employer for his exclusive use in connection with the business of
Employer by paying the existing lease payments, insurance, and all costs
incident to the maintenance and operation of such automobile. After the current
lease expires, Employee will be entitled to a similar automobile procedurally
consistent with Parent's policies. Employer shall pay all expenses incident to
the maintenance and operation of such automobile, including, without limitation,
insurance, gasoline, oil, and repairs, the costs of furnishing such automobile
and of such maintenance and operation not to exceed $20,000 per Annual Period.
Employer shall also pay the cost of a parking space for Employee's automobile in
a facility as proximate to Employer's New York office as is practicable, where
needed. Employer shall also provide Employee with a cellular phone.
6. Vacation. Employee shall be entitled to receive three (3)
weeks paid vacation time after each year of employment upon dates agreed upon by
Employer. Upon separation of employment, for any reason, vacation time accrued
and not used shall be paid at the salary rate of Employee in effect at the time
of employment separation.
2
<PAGE>
7. Employee's Representations. Employee is free to enter into
this Employment Agreement and to perform each of the provisions contained
herein. Employee represents and warrants that Employee is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Employment Agreement, and that Employee's execution and performance of this
Employment Agreement is not a violation or breach of any agreement between
Employee and any other person or entity.
8. Nondisclosure of Confidential Information; Ownership of
Intellectual Property Rights; Non Competition; Covenant Not to Compete.
(a) Nondisclosure of Confidential Information. During
the term of this Employment Agreement and at all times thereafter, Employee will
keep confidential and will not directly or indirectly divulge to anyone nor use
or otherwise appropriate for Employee's own benefit, or on behalf of any other
person, firm, partnership or corporation by whom Employee might subsequently be
employed or otherwise associated or affiliated with, any Confidential
Information (as defined herein). For this purpose, "Confidential Information"
means any and all trade secrets or other confidential information of any kind,
nature or description relating to the business of Employer, provided that such
information is not and does not in the future become known or available to third
parties or general economic trade information known to the industry generally,
both of which does not arise as a result of a disclosure by Employee or his
agents.
(b) Employer Materials. All reports and analysis,
designs, drawings, contracts, contractual arrangements, specifications, computer
software, computer hardware and other equipment, computer printouts, computer
disks, documents, memoranda, notebooks, correspondence, files, lists and other
records, and the like, and all photocopies or other reproductions thereof,
relating to the business of Employer which Employee shall prepare, use,
construct, observe, possess or control, except Employee copies of all such
documents which pertain to Employee ("Employee Materials"), shall be and remain
the sole property of Employer. Upon termination of this Employment Agreement,
Employee shall deliver promptly to Employer all such Employer Materials.
(c) Certain Restrictions on Business Activities.
During the term of this Employment Agreement, Employee agrees that:
(i) Business Activities. He will not,
directly or indirectly, own an interest in, operate, join, control or
participate in, or be connected as an officer, employee, agent, independent
contractor, partner, shareholder or principal of any corporation, partnership,
proprietorship, firm, association, person or other entity providing services
and/or products or a combination thereof which directly or indirectly compete
with Employer's business, and he will not undertake planning for or organization
of any business activity directly competitive with Employer's business, except
for the period after notice of non-renewal of Employee's employment, or combine
or conspire with other employees or representatives of Employer's business for
the purpose of
3
<PAGE>
organizing any such competitive business activity, except the purchase of less
than four percent (4%) of the stock of a publicly traded company which is not
affiliated with Employer.
(ii) Solicitation of Employees, Etc. During
the term of this Agreement and six (6) months thereafter, he will not, directly
or indirectly or by action in concert with others, induce or influence (or seek
to induce or influence) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Employer to terminate his or her
employment or engagement.
(d) Covenant Not to Compete. Employee covenants and
agrees that, if Employee's employment with Employer is terminated other than by
Employer without Cause (as defined herein) at any time, for a period of six (6)
months after the date of such termination, Employee will not engage or be
engaged, in any capacity, directly or indirectly, including but not limited as
employee, agent, consultant, manager, executive, owner or stockholder (except as
a passive investor holding less than a four percent (4%) equity interest in any
enterprise the securities of which are publicly traded) in any business entity
doing business in the United States engaged in direct competition with the
business conducted by Employer on the date of termination. This Covenant Not to
Compete shall survive the termination or expiration of the other provisions of
this Employment Agreement. If any court determines that this Covenant Not to
Compete, or any part thereof, is unenforceable because of the duration or
geographic scope of such provision, such court shall have the power to reduce
the duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
(e) Severability. Employee agrees, in the event that
any provision of this Section 8 or any word, phrase, clause, sentence or other
portion thereof shall be held to be unenforceable or invalid for any reason,
such provision or portion thereof shall be modified or deleted in such a manner
so as to make this Section 8 as modified legal and enforceable to the fullest
extent permitted under applicable laws. The validity and enforceability of the
remaining provisions or portions thereof shall not be affected thereby and shall
remain valid and enforceable to the fullest extent permitted under applicable
laws. A waiver of any breach of the provisions of this Section 8 shall not be
construed as a waiver of any subsequent breach of the same or any other
provision.
9. Termination.
(a) Termination by Employer.
(i) Employer may terminate this Agreement
upon written notice for Cause. For purposes hereof, "Cause" shall mean (A)
engaging by the Employee in conduct that constitutes activity in direct
competition with Employer's businesses; (B) the conviction of Employee for the
commission of a felony; (C) the habitual abuse of alcohol or controlled
substances; (D) deliberate actions taken by Employee to the material detriment
of Employer; and/or (E) material breach of this Agreement. Notwithstanding
anything to the contrary in this Section 9(a)(i), Employer may not terminate
Employee's employment under this Agreement for Cause unless Employee shall
4
<PAGE>
have first received notice from the Board advising Employee of the specific acts
or omissions alleged to constitute Cause, and such acts or omissions continue
after Employee shall have had a reasonable opportunity (at least 20 days from
the date Employee receives the notice from the Board) to correct the acts or
omissions so complained of.
(ii) In the event that during the term of
his employment with Employer, Employee shall become Disabled (as that term is
defined herein), Employer may terminate this Agreement and Employee's employment
hereunder at any time upon 10 days' written notice to Employee and Employee
shall be entitled to receive disability payments during the succeeding 12-month
period at a rate equal to one-half of the rate of the base salary as provided in
Section 4(a) to which he was theretofore entitled, payable in equal installments
no less frequently than monthly. For the purposes of this Agreement, Employee
shall be deemed to have become Disabled when by reason of his physical or mental
incapacity, Employee shall not perform his duties hereunder for a period of four
consecutive months or for an aggregate of 120 days in any consecutive period of
six months. Any proceeds of disability insurance policies or plans maintained by
Employer, in addition to the contributory state mandated minimum coverage
policy, for the benefit of Employee shall be paid to Employee and shall reduce
on a dollar for dollar basis the obligations of Employer under this Section 9.
(iii) This Employment Agreement and
Employer's obligations hereunder shall terminate upon Employee's death. Upon
termination for death, Employer shall continue to pay the compensation payments
pursuant to Section 4(a) to the surviving spouse of Employee (or if there is
none to Employee's estate) for the succeeding six (6) months.
(b) Termination by Employee. Employee shall have the
right to terminate his employment under this Agreement upon 30 days' notice to
Employer given within 90 days following the occurrence of any of the following
events:
(A) Employer acts to materially reduce
Employee's duties and responsibilities hereunder.
(B) A reduction in Employee's rate of base
compensation, the failure to pay Employee a bonus due under Section 10 hereof,
or material reduction in Employee's other benefits; or
(C) A material breach of this Agreement by
Employer, which is not cured within thirty (30) days of written notice of such
breach by Employer.
If Employer shall terminate Employee's employment other than due to his death or
disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if
Employee shall terminate this Agreement under Section 9(b), Employee shall
continue to be entitled to receive all amounts provided for by Section 4 and all
additional employee benefits under Section 4 regardless of the
5
<PAGE>
amount of compensation he may earn with respect to any other employment he may
obtain for the remainder of the Term as it may be extended from time to time.
10. Bonus. Each of Employee, Warren Golden and Stephanie Sobel
(collectively the "Total Bonus Pool Participants") shall be entitled to a
portion of an amount equal to ten percent (10%) of Employer's earnings before
income taxes up to a maximum of $150,000 per Annual Period ("Total Bonus Pool").
The allocation of the Total Bonus Pool to each Total Bonus Pool Participant
shall be as follows: Employee - 40%; Warren Golden-40%; Stephanie Sobel-20%. The
Total Bonus Pool shall be payable within 90 days after the end of Employer's
fiscal year commencing with the fiscal year ended September 30, 1998. So long as
any Total Bonus Pool Participant is an employee of Employer, the full amount of
the Total Bonus Pool shall be dispersed to the Total Bonus Pool Participants
annually.
11. Excise Tax. In the event that any payment or benefit
received or to be received by Employee in connection with a termination of his
employment with Employer would constitute a "parachute payment" within the
meaning of Code Section 280G or any similar or successor provision to 280G
and/or would be subject to any excise tax imposed by Code Section 4999 or any
similar or successor provision then Employer shall assume all liability for the
payment of any such tax and Employer shall immediately reimburse Employee on a
"grossed-up" basis for any income taxes attributable to Employee by reason of
such Employer payment and reimbursements.
12. Arbitration. Any controversies between Employer and
Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement, save and except for any breaches
arising out of Sections 7 and 8 hereof, shall on the written request of either
party served on the other be submitted to arbitration. Such arbitration shall
comply with and be governed by the rules of the American Arbitration
Association. An arbitration demand must be made within one (1) year of the date
on which the party demanding arbitration first had notice of the existence of
the claim to be arbitrated, or the right to arbitration along with such claim
shall be considered to have been waived. An arbitrator shall be selected
according to the procedures of the American Arbitration Association. The cost of
arbitration shall be born by the losing party or in such proportions as the
arbitrator shall decide. The arbitrator shall have no authority to add to,
subtract from or otherwise modify the provisions of this Agreement, or to award
punitive damages to either party.
13. Attorneys' Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which he may be
entitled.
14. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
herein and supersedes, effective as of the date hereof any prior agreement or
understanding between Employer and Employee with respect to
6
<PAGE>
Employee's employment by Employer. The unenforceability of any provision of this
Agreement shall not effect the enforceability of any other provision. This
Agreement may not be amended except by an agreement in writing signed by the
Employee and the Employer, or any waiver, change, discharge or modification as
sought. Waiver of or failure to exercise any rights provided by this Agreement
and in any respect shall not be deemed a waiver of any further or future rights.
15. Assignment. This Agreement shall not be assigned to other
parties.
16. Governing Law. This Agreement and all the amendments
hereof, and waivers and consents with respect thereto shall be governed by the
internal laws of the State of New York.
17. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed to
have been given when (a) delivered by hand; (b) sent be telex or telefax, (with
receipt confirmed), provided that a copy is mailed by registered or certified
mail, return receipt requested; or (c) received by the addressee as sent be
express delivery service (receipt requested) in each case to the appropriate
addresses, telex numbers and telefax numbers as the party may designate to
itself by notice to the other parties:
(i) if to the Employer:
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: Jonathan Rosenberg
Telefax: (914) 786-8727
Telephone: (914) 786-5552
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Telefax: (212) 980-5192
Telephone: (212) 752-9700
7
<PAGE>
(ii) if to the Employee:
Irving Magram
56 Huyler Landing
Cresskill, New Jersey 07626
Telefax:
Telephone:
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
Telefax: (212) 940-8776
Telephone: (212) 940-8800
18. Severability of Agreement. Should any part of this
Agreement for any reason be declared invalid by a court of competent
jurisdiction, such decision shall not affect the validity of any remaining
portion, which remaining provisions shall remain in full force and effect as if
this Agreement had been executed with the invalid portion thereof eliminated,
and it is hereby declared the intention of the parties that they would have
executed the remaining portions of this Agreement without including any such
part, parts or portions which may, for any reason, be hereafter declared
invalid.
19. Guarantee. In order to induce Employee to execute and
deliver this Agreement, Parent hereby irrevocably and unconditionally guarantees
the full, prompt and complete performance of each and every obligation and
liability of Employer under this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this
agreement as of the day and year first above written.
LEW MAGRAM LTD.
By: /s/
--------------------------------------
Jonathan Rosenberg, Vice President
/s/
---------------------------------------
Irving Magram
8
<PAGE>
As to Section 19.
DIPLOMAT CORPORATION
By: /s/
---------------------------------------
Jonathan Rosenberg, President
9
<PAGE>
DIPLOMAT CORPORATION
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT made as of this 13th day of January, 1998
by and between DIPLOMAT CORPORATION, a Delaware corporation (hereinafter
referred to as "Employer") and LEW MAGRAM LTD., a New York corporation and
wholly owned subsidiary of Employer (hereinafter referred to as "Magram"), and
WARREN GOLDEN, (hereinafter referred to as "Employee");
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as its Executive
Vice President and Chief Operating Officer and Magram wishes to employ Employee
as its Executive Vice President; and
WHEREAS, Employee is willing to be employed in the manner
provided for herein, and to perform the duties provided for herein upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein set forth it is agreed as follows:
1. Employment of Employee. Employer hereby employs Employee as
Executive Vice President and Chief Operating Officer and Magram hereby employs
Employee as Executive Vice President.
2. Term. The term of this Agreement shall commence on
the execution hereof (the "Commencement Date") and expire three (3) years from
such date (which, with renewals, if any, the "Term"). Each 12 month period from
the Commencement Date forward during the Term shall be referred to as an "Annual
Period." After three years from the Commencement Date, this Agreement shall
automatically renew annually unless either Employer or Employee gives notice not
to renew at least one hundred eighty (180) days prior to the end of the
applicable Annual Period. During the Term, Employee shall devote substantially
all of his business time and efforts to Employer and its subsidiaries and
affiliates.
3. Duties. Employee hereby agrees that, throughout the
period of his employment hereunder, he shall devote his business time,
attention, knowledge and skills, diligently in furtherance of the business of
Employer and Magram, shall perform the duties assigned to him by the President
and Board of Directors of Employer and Magram consistent with his executive
positions with Employer and Magram, respectively, and shall observe and carry
out such rules and regulations, policies and directions as Employer and Magram
may from time to time establish to the extent consistent herewith. During the
term of this Agreement, Employee shall do such traveling as may be reasonably
required of him in the performance of his duties on behalf of Employer
consistent with travel during periods prior to the date hereof. Employee shall
be available to confer and consult with and advise the officers and directors of
Employer and Magram at such times during
<PAGE>
business hours that may be reasonably required by Employer and Magram. Employee,
in his capacity as an employee of Employer shall report directly and solely to
the President of Employer, and, in his capacity as an employee of Magram shall
report directly and solely to the President of Magram.
4. Compensation.
(a) Employee shall be paid a minimum of $200,000 for each
Annual Period such amount to be increased, if Employer is profitable for the
fiscal year ending September 30, 1998, in an amount determined by the majority
of the noninterested members of the Board of Employer excluding Employee at the
Board's discretion. Employee shall be paid periodically in accordance with the
policies of the Employer during the term of this Agreement, but not less
frequently than monthly. As an executive officer of Employer, Employee is
eligible for an annual bonus, if any, which will be determined and paid in
accordance with policies set from time to time by the Board of Employer. As an
executive officer of Magram, Employee is eligible for an annual bonus, if any,
which will be determined and paid in accordance with policies set from time to
time by the majority of the non interested members of the Board of Magram,
excluding Employee. Such bonuses are in addition to amounts received from the
Total Bonus Pool pursuant to Section 10 hereof.
(b) Employee shall be entitled to participate in and
receive the benefits of all pension, profit-sharing, deferred compensation,
retirement, hospitalization, insurance, medical or dental or other benefit plan
or arrangement generally available to executive employees of Employer as may now
or hereafter exist; provided that Employer shall provide Employee medical
benefits consistent with Lew Magram Ltd.'s former practices. Employee shall also
be entitled to participate in or receive all other benefits and perquisites
generally available to senior executives of Employer that may be in effect from
time to time during the Employee's employment hereunder. Employer shall be under
no obligation to institute or continue the existence of any such employee plan,
benefit or perquisite. Employer shall consider adopting a deferred
compensation/retirement benefits plan, in which, upon adoption, Employee will be
permitted to participate.
5. Expenses. Employer shall reimburse Employee, promptly
upon presentation of receipts or vouchers thereof, for all expenses
reasonably incurred by him in connection with the performance of his duties
hereunder and the business of Employer, in accordance with policies of Employer
from time to time in effect. Until expiration of the current automobile lease,
Employer shall furnish Employee a luxury automobile for so long as Employee
shall remain in the employ of Employer for his exclusive use in connection with
the business of Employer by paying the existing lease payments, insurance and
all costs incident to the maintenance and operation of such automobile. After
the current lease expires, Employee will be entitled to a similar automobile
procedurally consistent with Parent's policies. Employer shall pay all expenses
incident to the maintenance and operation of such automobile, including, without
limitation, insurance, gasoline, oil, and repairs, the costs of furnishing such
automobile and of such maintenance and operation not to exceed $20,000 per
Annual Period. Employer shall also pay the cost of a
2
<PAGE>
parking space for Employee's automobile in a facility as proximate to Employer's
New York office as is practicable, where needed. Employer shall also provide
Employee with a cellular phone.
6. Vacation. Employee shall be entitled to receive
three (3) weeks paid vacation time after each year of employment upon dates
agreed upon by Employer. Upon separation of employment, for any reason, vacation
time accrued and not used shall be paid at the salary rate of Employee in effect
at the time of employment separation.
7. Employee's Representations. Employee is free to
enter into this Employment Agreement and to perform each of the provisions
contained herein. Employee represents and warrants that Employee is not
restricted or prohibited, contractually or otherwise, from entering into and
performing this Employment Agreement, and that Employee's execution and
performance of this Employment Agreement is not a violation or breach of any
agreement between Employee and any other person or entity.
8. Nondisclosure of Confidential Information; Ownership of
Intellectual Property Rights; Non Competition; Covenant Not to Compete.
(a) Nondisclosure of Confidential Information. During the
term of this Employment Agreement and at all times thereafter, Employee will
keep confidential and will not directly or indirectly divulge to anyone nor use
or otherwise appropriate for Employee's own benefit, or on behalf of any other
person, firm, partnership or corporation by whom Employee might subsequently be
employed or otherwise associated or affiliated with, any Confidential
Information (as defined herein). For this purpose, "Confidential Information"
means any and all trade secrets or other confidential information of any kind,
nature or description relating to the business of Employer provided that such
information is not and does not in the future become known or available to third
parties or general economic trade information known to the industry, both of
which does not arise as a result of a disclosure by Employee or his agents.
(b) Employer Materials. All reports and analysis, designs,
drawings, contracts, contractual arrangements, specifications, computer
software, computer hardware and other equipment, computer printouts, computer
disks, documents, memoranda, notebooks, correspondence, files, lists and other
records, and the like, and all photocopies or other reproductions thereof,
relating to the business of Employer which Employee shall prepare, use,
construct, observe, possess or control, except Employee copies of all such
documents which pertain to Employee ("Employee Materials"), shall be and remain
the sole property of Employer. Upon termination of this Employment Agreement,
Employee shall deliver promptly to Employer all such Employer Materials.
(c) Certain Restrictions on Business Activities. During
the term of this Employment Agreement, Employee agrees that:
3
<PAGE>
(i) Business Activities. He will not, directly or
indirectly, own an interest in, operate, join, control or participate in, or be
connected as an officer, employee, agent, independent contractor, partner,
shareholder or principal of any corporation, partnership, proprietorship, firm,
association, person or other entity providing services and/or products or a
combination thereof which directly or indirectly compete with Employer's
business, and he will not undertake planning for or organization of any business
activity directly competitive with Employer's business, except for the period
after notice of non-renewal of Employee's employment, or combine or conspire
with other employees or representatives of Employer's business for the purpose
of organizing any such competitive business activity, except the purchase of
less than four percent (4%) of the stock of a publicly traded company which is
not affiliated with Employer.
(ii) Solicitation of Employees, Etc. During the term
of this Agreement and six (6) months thereafter, he will not, directly or
indirectly or by action in concert with others, induce or influence (or seek to
induce or influence) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Employer to terminate his or her
employment or engagement.
(d) Covenant Not to Compete. Employee covenants and agrees
that, if Employee's employment with Employer is terminated other than by
Employer without Cause (as defined herein) at any time, for a period of six (6)
months after the date of such termination, Employee will not engage or be
engaged, in any capacity, directly or indirectly, including but not limited as
employee, agent, consultant, manager, executive, owner or stockholder (except as
a passive investor holding less than a four percent (4%) equity interest in any
enterprise the securities of which are publicly traded) in any business entity
doing business in the United States engaged in direct competition with the
business conducted by Employer on the date of termination. This Covenant Not to
Compete shall survive the termination or expiration of the other provisions of
this Employment Agreement. If any court determines that this Covenant Not to
Compete, or any part thereof, is unenforceable because of the duration or
geographic scope of such provision, such court shall have the power to reduce
the duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
(e) Severability. Employee agrees, in the event that any
provision of this Section 8 or any word, phrase, clause, sentence or other
portion thereof shall be held to be unenforceable or invalid for any reason,
such provision or portion thereof shall be modified or deleted in such a manner
so as to make this Section 8 as modified legal and enforceable to the fullest
extent permitted under applicable laws. The validity and enforceability of the
remaining provisions or portions thereof shall not be affected thereby and shall
remain valid and enforceable to the fullest extent permitted under applicable
laws. A waiver of any breach of the provisions of this Section 8 shall not be
construed as a waiver of any subsequent breach of the same or any other
provision.
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9. Termination.
(a) Termination by Employer.
(i) Employer may terminate this Agreement
upon written notice for Cause. For purposes hereof, "Cause" shall mean (A)
engaging by the Employee in conduct that constitutes ctivity in direct
competition with Employer's businesses; (B) the conviction of Employee for the
commission of a felony; (C) the habitual abuse of alcohol or controlled
substances; (D) deliberate actions taken by Employee to the material detriment
of Employer; and/or (E) material breach of this Agreement. Notwithstanding
anything to the contrary in this Section 9(a)(i), Employer may not terminate
Employee's employment under this Agreement for Cause unless Employee shall have
first received notice from the Board advising Employee of the specific acts or
omissions alleged to constitute Cause, and such acts or omissions continue after
Employee shall have had a reasonable opportunity (at least 20 days from the date
Employee receives the notice from the Board) to correct the acts or omissions so
complained of.
(ii) In the event that during the term of
his employment with Employer, Employee shall become Disabled (as that term is
defined herein), Employer may terminate this Agreement and Employee's employment
hereunder at any time upon 10 days' written notice to Employee and Employee
shall be entitled to receive disability payments during the succeeding 12-month
period at a rate equal to one-half of the rate of the base salary as provided in
Section 4(a) to which he was theretofore entitled, payable in equal installments
no less frequently than monthly. For the purposes of this Agreement, Employee
shall be deemed to have become Disabled when by reason of his physical or mental
incapacity, Employee shall not perform his duties hereunder for a period of four
consecutive months or for an aggregate of 120 days in any consecutive period of
six months. Any proceeds of disability insurance policies or plans maintained by
Employer, in addition to the contributory state mandated minimum coverage
policy, for the benefit of Employee shall be paid to Employee and shall reduce
on a dollar for dollar basis the obligations of Employer under this Section 9.
(iii) This Employment Agreement and
Employer's obligations hereunder shall terminate upon Employee's death. Upon
termination for death, Employer shall continue to pay the compensation payments
pursuant to Section 4(a) to the surviving spouse of Employee (or if there is
none to Employee's estate) for the succeeding six (6) months.
(b) Termination by Employee. Employee shall have the
right to terminate his employment under this Agreement upon 30 days' notice to
Employer given within 90 days following the occurrence of any of the following
events:
(A) Employer acts to materially reduc
Employee's duties and responsibilities hereunder.
5
<PAGE>
(B) A reduction in Employee's rate of base
compensation, the failure to pay Employee a bonus due under Section 10 hereof,
or material reduction in Employee's other benefits; or
(C) A material breach of this Agreement by
Employer, which is not cured within thirty (30) days of written notice of such
breach by Employer.
If Employer shall terminate Employee's employment other than due to his death or
disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if
Employee shall terminate this Agreement under Section 9(b), Employee shall
continue to be entitled to receive all amounts provided for by Section 4 and all
additional employee benefits under Section 4 regardless of the amount of
compensation he may earn with respect to any other employment he may obtain for
the remainder of the Term as it may be extended from time to time.
10. Bonus. Each of Employee, Irving Magram and
Stephanie Sobel (collectively the "Total Bonus Pool Participants") shall be
entitled to a portion of an amount equal to ten percent (10%) of Magram's
earnings before income taxes up to a maximum of $150,000 per Annual Period
("Total Bonus Pool"). The allocation of the Total Bonus Pool to each Total Bonus
Pool Participant shall be as follows: Employee - 40%; Irving Magram - 40%;
Stephanie Sobel - 20%. The Total Bonus Pool shall be payable within 90 days
after the end of Magram's fiscal year commencing with the fiscal year ended
September 30, 1998. So long as any Total Bonus Pool Participant is an employee
of Magram, the full amount of the Total Bonus Pool shall be dispersed to the
Total Bonus Pool Participants annually.
11. Excise Tax. In the event that any payment or benefit
received or to be received by Employee in connection with a termination
of his employment with Employer would constitute a "parachute payment" within
the meaning of Code Section 280G or any similar or successor provision to 280G
and/or would be subject to any excise tax imposed by Code Section 4999 or any
similar or successor provision then Employer shall assume all liability for the
payment of any such tax and Employer shall immediately reimburse Employee on a
"grossed-up" basis for any income taxes attributable to Employee by reason of
such Employer payment and reimbursements.
12. Arbitration. Any controversies between Employer and
Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement, save and except for any breaches
arising out of Sections 7 and 8 hereof, shall on the written request of either
party served on the other be submitted to arbitration. Such arbitration shall
comply with and be governed by the rules of the American Arbitration
Association. An arbitration demand must be made within one (1) year of the date
on which the party demanding arbitration first had notice of the existence of
the claim to be arbitrated, or the right to arbitration along with such claim
shall be considered to have been waived. An arbitrator shall be selected
according to the procedures of the American Arbitration Association. The cost of
arbitration shall be born by the losing party or in such proportions as the
arbitrator shall decide. The arbitrator shall have no authority to add to,
subtract
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from or otherwise modify the provisions of this Agreement, or to award punitive
damages to either party.
13. Attorneys' Fees and Costs. If any action at law or
in equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which he may be
entitled.
14. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the transactions
contemplated herein and supersedes, effective as of the date hereof any prior
agreement or understanding between Employer and Employee with respect to
Employee's employment by Employer. The unenforceability of any provision of this
Agreement shall not effect the enforceability of any other provision. This
Agreement may not be amended except by an agreement in writing signed by the
Employee and the Employer, or any waiver, change, discharge or modification as
sought. Waiver of or failure to exercise any rights provided by this Agreement
and in any respect shall not be deemed a waiver of any further or future rights.
15. Assignment. This Agreement shall not be assigned to
other parties.
16. Governing Law. This Agreement and all the
amendments hereof, and waivers and consents with respect thereto shall be
governed by the internal laws of the State of New York.
17. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed to
have been given when (a) delivered by hand; (b) sent be telex or telefax, (with
receipt confirmed), provided that a copy is mailed by registered or certified
mail, return receipt requested; or (c) received by the addressee as sent be
express delivery service (receipt requested) in each case to the appropriate
addresses, telex numbers and telefax numbers as the party may designate to
itself by notice to the other parties:
(i) if to the Employer:
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: Jonathan Rosenberg
Telefax: (914) 786-8727
Telephone: (914) 786-5552
7
<PAGE>
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Telefax: (212) 980-5192
Telephone: (212) 752-9700
(ii) if to the Employee:
Warren Golden
703 Hollywood Avenue
Bronx, New York 10465
Telefax: (718) 792-2423
Telephone: (718) 828-6991
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
Telefax: (212) 940-8776
Telephone: (212) 940-8800
18. Severability of Agreement. Should any part of this
Agreement for any reason be declared invalid by a court of competent
jurisdiction, such decision shall not affect the validity of any remaining
portion, which remaining provisions shall remain in full force and effect as if
this Agreement had been executed with the invalid portion thereof eliminated,
and it is hereby declared the intention of the parties that they would have
executed the remaining portions of this Agreement without including any such
part, parts or portions which may, for any reason, be hereafter declared
invalid.
IN WITNESS WHEREOF, the undersigned have executed this
agreement as of the day and year first above written.
DIPLOMAT CORPORATION
By: /s/
--------------------------------
Jonathan Rosenberg, President
8
<PAGE>
LEW MAGRAM LTD.
By: /s/
------------------------------------
Jonathan Rosenberg, Vice President
/s/
-----------------------------------
Warren Golden
9
<PAGE>
LEW MAGRAM LTD.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 13th day of January, 1998
by and between LEW MAGRAM LTD., a New York corporation (hereinafter referred to
as "Employer"), a wholly-owned subsidiary of Diplomat Corporation, a Delaware
corporation ("Parent") and STEPHANIE SOBEL, (hereinafter referred to as
"Employee");
W I T N E S S E T H:
WHEREAS, Employer desires to employ Employee as Senior Vice
President of Merchandising; and
WHEREAS, Employee is willing to be employed as Senior Vice
President of Merchandising in the manner provided for herein, and to perform the
duties of Senior Vice President of Merchandising of Employer upon the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein set forth it is agreed as follows:
1. Employment of Employee. Employer hereby employs Employee as
Senior Vice President of Merchandising.
2. Term. The term of this Agreement shall commence on the
execution hereof (the "Commencement Date") and expire three (3) years from such
date (which, with renewals, if any, the "Term"). Each 12 month period from the
Commencement Date forward during the Term shall be referred to as an "Annual
Period." After three years from the Commencement Date, this Agreement shall
automatically renew annually unless either Employer or Employee gives notice not
to renew at least one hundred eighty (180) days prior to the end of the
applicable annual period. During the Term, Employee shall devote substantially
all of her business time and efforts to Employer and its subsidiaries and
affiliates.
3. Duties. Employee hereby agrees that, throughout the period
of her employment hereunder, she shall devote her business time, attention,
knowledge and skills, diligently in furtherance of the business of Employer,
shall perform the duties assigned to her by the Board of Directors of Employer
(the "Board") consistent with her executive position at Lew Magram, Ltd.
immediately prior to the date hereof, and shall observe and carry out such rules
and regulations, policies and directions as Employer may from time to time
establish. During the term of this Agreement, Employee shall do such traveling
as may be reasonably required of her in the performance of her duties on behalf
of Employer consistent with travel during periods prior to the date hereof.
Employee shall be available to confer and consult with and advise the officers
and directors of Employer at such times during business hours that may be
reasonably required by Employer. Employee shall report directly and solely to
the President of Employer.
<PAGE>
4. Compensation.
(a) Employee shall be paid a minimum of $172,500 for
each Annual Period such amount to be increased, if Parent is profitable for the
fiscal year ending September 30, 1998, in an amount determined by the majority
of the noninterested members of the Board excluding Employee Board of Directors
at the Board's discretion. Employee shall be paid periodically in accordance
with the policies of the Employer during the term of this Agreement, but not
less frequently than monthly. Employee is eligible for an annual bonus, if any,
which will be determined and paid in accordance with policies set from time to
time by the Board in addition to amounts received from the Total Bonus Pool
pursuant to Section 10 hereof.
(b) Employee shall be entitled to participate in and
receive the benefits of all pension, profit-sharing, deferred compensation,
retirement, hospitalization, insurance, medical or dental or other benefit plan
or arrangement generally available to executive employees of Parent or Employer
as may now or hereafter exist; provided that Employer shall provide Employee
medical benefits consistent with Lew Magram Ltd.'s former policies. Employee
shall also be entitled to participate in or receive all other benefits and
perquisites generally available to senior executives of Employer or Parent that
may be in effect from time to time during the Employee's employment hereunder.
Employer shall be under no obligation to institute or continue the existence of
any such employee plan, benefit or perquisite. Parent shall consider adopting a
deferred compensation/retirement benefits plan, in which, upon adoption,
Employee shall be permitted to participate.
5. Expenses. Employer shall reimburse Employee, promptly upon
presentation of receipts or vouchers thereof, for all expenses reasonably
incurred by her in connection with the performance of her duties hereunder and
the business of Employer, in accordance with policies of Employer from time to
time in effect. Until expiration of the current automobile lease, Employer shall
furnish Employee a standard size automobile or minivan automobile for so long as
Employee shall remain in the employ of Employer for her exclusive use in
connection with the business of Employer by paying the existing lease payments,
insurance and all costs incident to the maintenance and operation of such
automobile. After the current lease expires, Employee will be entitled to an
automobile procedurally consistent with Parent's policies. Employer shall pay
lease payments, insurance and maintenance not to exceed $8,000 per Annual
Period.
6. Vacation. Employee shall be entitled to receive three (3)
weeks paid vacation time after each year of employment upon dates agreed upon by
Employer. Upon separation of employment, for any reason, vacation time accrued
and not used shall be paid at the salary rate of Employee in effect at the time
of employment separation.
7. Employee's Representations. Employee is free to enter into
this Employment Agreement and to perform each of the provisions contained
herein. Employee represents and warrants that Employee is not restricted or
prohibited, contractually or otherwise,
2
<PAGE>
from entering into and performing this Employment Agreement, and that Employee's
execution and performance of this Employment Agreement is not a violation or
breach of any agreement between Employee and any other person or entity.
8. Nondisclosure of Confidential Information; Ownership of
Intellectual Property Rights; Non Competition; Covenant Not to Compete.
(a) Nondisclosure of Confidential Information. During
the term of this Employment Agreement and at all times thereafter, Employee will
keep confidential and will not directly or indirectly divulge to anyone nor use
or otherwise appropriate for Employee's own benefit, or on behalf of any other
person, firm, partnership or corporation by whom Employee might subsequently be
employed or otherwise associated or affiliated with, any Confidential
Information (as defined herein). For this purpose, "Confidential Information"
means any and all trade secrets or other confidential information of any kind,
nature or description relating to the business of Employer, provided that such
information is not and does not in the future become known or available to third
parties or general economic trade information known to the industry generally,
both of which does not arise as a result of a disclosure by Employee or her
agents.
(b) Employer Materials. All reports and analysis,
designs, drawings, contracts, contractual arrangements, specifications, computer
software, computer hardware and other equipment, computer printouts, computer
disks, documents, memoranda, notebooks, correspondence, files, lists and other
records, and the like, and all photocopies or other reproductions thereof,
relating to the business of Employer which Employee shall prepare, use,
construct, observe, possess or control, except Employee copies of all such
documents which pertain to Employee ("Employee Materials"), shall be and remain
the sole property of Employer. Upon termination of this Employment Agreement,
Employee shall deliver promptly to Employer all such Employer Materials.
(c) Certain Restrictions on Business Activities.
During the term of this Employment Agreement, Employee agrees that:
(i) Business Activities. She will not,
directly or indirectly, own an interest in, operate, join, control or
participate in, or be connected as an officer, employee, agent, independent
contractor, partner, shareholder or principal of any corporation, partnership,
proprietorship, firm, association, person or other entity providing services
and/or products or a combination thereof which directly or indirectly compete
with Employer's business, and she will not undertake planning for or
organization of any business activity directly competitive with Employer's
business, except for the period after notice of non-renewal of Employee's
employment, or combine or conspire with other employees or representatives of
Employer's business for the purpose of organizing any such competitive business
activity, except the purchase of less than four percent (4%) of the stock of a
publicly traded company which is not affiliated with Employer.
3
<PAGE>
(ii) Solicitation of Employees, Etc. During
the form of this Agreement and six (6) months thereafter, she will not, directly
or indirectly or by action in concert with others, induce or influence (or seek
to induce or influence) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Employer to terminate his or her
employment or engagement.
(d) Covenant Not to Compete. Employee covenants and
agrees that, if Employee's employment with Employer is terminated other than by
Employer without Cause (as defined herein) at any time, for a period of six (6)
months after the date of such termination, Employee will not engage or be
engaged, in any capacity, directly or indirectly, including but not limited as
employee, agent, consultant, manager, executive, owner or stockholder (except as
a passive investor holding less than a four percent (4%) equity interest in any
enterprise the securities of which are publicly traded) in any business entity
doing business in the United States engaged in direct competition with the
business conducted by Employer on the date of termination. This Covenant Not to
Compete shall survive the termination or expiration of the other provisions of
this Employment Agreement. If any court determines that this Covenant Not to
Compete, or any part thereof, is unenforceable because of the duration or
geographic scope of such provision, such court shall have the power to reduce
the duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
(e) Severability. Employee agrees, in the event that
any provision of this Section 8 or any word, phrase, clause, sentence or other
portion thereof shall be held to be unenforceable or invalid for any reason,
such provision or portion thereof shall be modified or deleted in such a manner
so as to make this Section 8 as modified legal and enforceable to the fullest
extent permitted under applicable laws. The validity and enforceability of the
remaining provisions or portions thereof shall not be affected thereby and shall
remain valid and enforceable to the fullest extent permitted under applicable
laws. A waiver of any breach of the provisions of this Section 8 shall not be
construed as a waiver of any subsequent breach of the same or any other
provision.
9. Termination.
(a) Termination by Employer.
(i) Employer may terminate this Agreement
upon written notice for Cause. For purposes hereof, "Cause" shall mean (A)
engaging by the Employee in conduct that constitutes activity in direct
competition with Employer's businesses; (B) the conviction of Employee for the
commission of a felony; (C) the habitual abuse of alcohol or controlled
substances; (D) deliberate actions taken by Employee to the material detriment
of Employer; and/or (E) material breach of this Agreement. Notwithstanding
anything to the contrary in this Section 9(a)(i), Employer may not terminate
Employee's employment under this Agreement for Cause unless Employee shall have
first received notice from the Board advising Employee of the specific acts or
omissions alleged to constitute Cause, and such acts or omissions continue after
Employee shall have had a reasonable
4
<PAGE>
opportunity (at least 20 days from the date Employee receives the notice from
the Board) to correct the acts or omissions so complained of.
(ii) In the event that during the term of
her employment with Employer, Employee shall become Disabled (as that term is
defined herein), Employer may terminate this Agreement and Employee's employment
hereunder at any time upon 10 days' written notice to Employee and Employee
shall be entitled to receive disability payments during the succeeding 12-month
period at a rate equal to one-half of the rate of the base salary as provided in
Section 4(a) to which she was theretofore entitled, payable in equal
installments no less frequently than monthly. For the purposes of this
Agreement, Employee shall be deemed to have become Disabled when by reason of
his physical or mental incapacity, Employee shall not perform his duties
hereunder for a period of four consecutive months or for an aggregate of 120
days in any consecutive period of six months. Any proceeds of disability
insurance policies or plans maintained by Employer, in addition to the
contributory state mandated minimum coverage policy, for the benefit of Employee
shall be paid to Employee and shall reduce on a dollar for dollar basis the
obligations of Employer under this Section 9.
(iii) This Employment Agreement and
Employer's obligations hereunder shall terminate upon Employee's death. Upon
termination for death, Employer shall continue to pay the compensation payments
pursuant to Section 4(a) to the surviving spouse of Employee (or if there is
none to Employee's estate) for the succeeding six (6) months.
(b) Termination by Employee. Employee shall have the
right to terminate her employment under this Agreement upon 30 days' notice to
Employer given within 90 days following the occurrence of any of the following
events:
(A) Employer acts to materially
reduce Employee's duties and responsibilities hereunder.
(B) A reduction in Employee's rate
of base compensation, the failure to pay Employee a bonus due under Section 10
hereof, or material reduction Employee's other benefits; or
(C) A material breach of this
Agreement by Employer, which is not cured within thirty (30) days of written
notice of such breach by Employer.
If Employer shall terminate Employee's employment other than due to his death or
disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if
Employee shall terminate this Agreement under Section 9(b), Employee shall
continue to be entitled to receive all amounts provided for by Section 4 and all
additional employee benefits under Section 4 regardless of the amount of
compensation he may earn with respect to any other employment she may obtain for
the remainder of the Term as it may be extended from time to time.
5
<PAGE>
10. Bonus. Each of Employee, Warren Golden and Irving Magram
(collectively the "Total Bonus Pool Participants") shall be entitled to a
portion of an amount equal to ten percent (10%) of Employer's earnings before
income taxes up to a maximum of $150,000 per Annual Period ("Total Bonus Pool").
The allocation of the Total Bonus Pool to each Total Bonus Pool Participant
shall be as follows: Employee - 20%; Warren Golden - 40%; Irving Magram - 40%.
The Total Bonus Pool shall be payable within 90 days after the end of Employer's
fiscal year commencing with the fiscal year ended September 30, 1998. So long as
any Total Bonus Pool Participant is an employee of Employer, the full amount of
the Total Bonus Pool shall be dispersed to the Total Bonus Pool Participants
annually.
11. Excise Tax. In the event that any payment or benefit
received or to be received by Employee in connection with a termination of his
employment with Employer would constitute a "parachute payment" within the
meaning of Code Section 280G or any similar or successor provision to 280G
and/or would be subject to any excise tax imposed by Code Section 4999 or any
similar or successor provision then Employer shall assume all liability for the
payment of any such tax and Employer shall immediately reimburse Employee on a
"grossed-up" basis for any income taxes attributable to Employee by reason of
such Employer payment and reimbursements.
12. Arbitration. Any controversies between Employer and
Employee involving the construction or application of any of the terms,
provisions or conditions of this Agreement, save and except for any breaches
arising out of Sections 7 and 8 hereof, shall on the written request of either
party served on the other be submitted to arbitration. Such arbitration shall
comply with and be governed by the rules of the American Arbitration
Association. An arbitration demand must be made within one (1) year of the date
on which the party demanding arbitration first had notice of the existence of
the claim to be arbitrated, or the right to arbitration along with such claim
shall be considered to have been waived. An arbitrator shall be selected
according to the procedures of the American Arbitration Association. The cost of
arbitration shall be born by the losing party or in such proportions as the
arbitrator shall decide. The arbitrator shall have no authority to add to,
subtract from or otherwise modify the provisions of this Agreement, or to award
punitive damages to either party.
13. Attorneys' Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which he may be
entitled.
14. Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
herein and supersedes, effective as of the date hereof any prior agreement or
understanding between Employer and Employee with respect to Employee's
employment by Employer. The unenforceability of any provision of this Agreement
shall not effect the enforceability of any other provision. This Agreement may
not be amended except by an agreement in writing signed by the Employee and the
Employer, or any waiver, change, discharge
6
<PAGE>
or modification as sought. Waiver of or failure to exercise any rights provided
by this Agreement and in any respect shall not be deemed a waiver of any further
or future rights.
15. Assignment. This Agreement shall not be assigned to other
parties.
16. Governing Law. This Agreement and all the amendments
hereof, and waivers and consents with respect thereto shall be governed by the
internal laws of the State of New York.
17. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed to
have been given when (a) delivered by hand; (b) sent be telex or telefax, (with
receipt confirmed), provided that a copy is mailed by registered or certified
mail, return receipt requested; or (c) received by the addressee as sent be
express delivery service (receipt requested) in each case to the appropriate
addresses, telex numbers and telefax numbers as the party may designate to
itself by notice to the other parties:
(i) if to the Employer:
Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: Jonathan Rosenberg
Telefax: (914) 786-8727
Telephone: (914) 786-5552
With a copy to:
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Telefax: (212) 980-5192
Telephone: (212) 752-9700
(ii) if to the Employee:
Stephanie Sobel
21 Alice Avenue
Merrick, New York 11566
Telefax:
Telephone:
7
<PAGE>
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Joel Yunis
Telefax: (212) 940-8776
Telephone: (212) 940-8800
18. Severability of Agreement. Should any part of this
Agreement for any reason be declared invalid by a court of competent
jurisdiction, such decision shall not affect the validity of any remaining
portion, which remaining provisions shall remain in full force and effect as if
this Agreement had been executed with the invalid portion thereof eliminated,
and it is hereby declared the intention of the parties that they would have
executed the remaining portions of this Agreement without including any such
part, parts or portions which may, for any reason, be hereafter declared
invalid.
19. Guarantee. In order to induce Employee to execute and
deliver this Agreement, Parent hereby irrevocably and unconditionally guarantees
the full, prompt and complete performance of each and every obligation and
liability of Employer under this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this
agreement as of the day and year first above written.
LEW MAGRAM LTD.
By: /s/
-------------------------------------
Jonathan Rosenberg, Vice President
/s/
-------------------------------------
Stephanie Sobel
AS TO SECTION 19
DIPLOMAT CORPORATION
By: /s/
-------------------------------------
8
<PAGE>
Jonathan Rosenberg, President
9
<PAGE>
Biobottoms, Inc.
Brownstone Holdings, Inc.
