<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Quarter Ended June 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Transition Period from _______to_______
Commission File Number 0-22432
DIPLOMAT DIRECT MARKETING CORPORATION
(Formerly)
DIPLOMAT CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3727399
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Kay Fries Drive, Stony Point, New York 10980
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914 786-5552
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: August 12, 1998, 11,049,872
Common Shares outstanding
Transitional Small Business Disclosure (check One):
Yes [ ] No [ X ]
<PAGE>
DIPLOMAT DIRECT MARKETING CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheet - June 30, 1998......................................................3
Consolidated Statements of Operations - For the three months and nine months ended June
30, 1998 and June 30, 1997......................................................................4
Consolidated Statements of Cash Flows - For the nine months ended June 30, 1998 and June
30, 1997........................................................................................5
Notes to Financial Statements................................................................6-11
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations...............................................................12-15
PART II - OTHER INFORMATION
Item 2 - Changes in Securities...................................................................................16
Item 4 - Submission of Matters to a Vote of Security Holders.....................................................16
Item 6 - Exhibits and Reports on Form 8-K........................................................................16
SIGNATURES.......................................................................................................18
</TABLE>
2
<PAGE>
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
JUNE 30,1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 171,384
Accounts receivable 2,255,315
Inventories 10,557,482
Prepaid expenses 7,851,379
Other current assets 2,273,155
-----------
TOTAL CURRENT ASSETS 23,108,715
NOTES RECEIVABLE 600,000
PROPERTY AND EQUIPMENT
less accumulated depreciation 3,406,761
INTANGIBLE ASSETS 20,533,250
OTHER ASSETS 607,938
-----------
$48,256,664
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 6,490,573
Loans payable-officers 225,000
Loans payable-bank 2,846,125
Accrued expenses 14,159,299
Current maturities of long term debt 703,430
-----------
TOTAL CURRENT LIABILITIES 24,424,427
LONG TERM DEBT, less current maturities 6,048,936
-----------
STOCKHOLDERS' EQUITY:
Preferred stock 16,113,107
Common stock 1,100
Paid-in capital 9,930,314
Accumulated deficit 8,261,220
-----------
TOTAL SHAREHOLDERS' EQUITY 17,783,301
$48,256,664
See notes to financial statements.
3
<PAGE>
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
Jun 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
<S> <C> <C> <C> <C>
NET SALES $ 57,118,755 $ 5,846,461 $ 20,603,127 $ 2,227,429
COST OF SALES 26,029,624 2,943,273 9,000,300 1,306,494
--------------- --------------- --------------- ---------------
GROSS PROFIT 31,089,131 2,903,188 11,602,827 920,935
SELLING, GENERAL AND ADMINISTRATIVE 28,018,326 1,346,355 10,947,665 491,817
--------------- --------------- --------------- ---------------
OPERATING INCOME 3,070,805 1,556,833 655,162 429,118
INTEREST EXPENSE (958,501) (353,912) (316,252) (93,563)
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 2,112,304 1,202,921 338,910 335,555
INCOME TAXES 0 276,000 0 78,000
--------------- --------------- --------------- ---------------
INCOME FROM CONTINUING OPERATIONS 2,112,304 926,921 338,910 257,555
INCOME(LOSS) FROM DISCONTINUED OPERATIONS (2,311,691) 132,358 (239,593) (164,484)
--------------- --------------- --------------- ---------------
NET INCOME(LOSS) (199,387) 1,059,279 99,317 93,071
PREFERRED STOCK DIVIDENDS 236,250 162,000 78,750 79,500
--------------- --------------- --------------- ---------------
NET INCOME(LOSS) TO COMMON
SHAREHOLDERS $ (435,637) $ 897,279 $ 20,567 $ 13,571
NET INCOME(LOSS) PER COMMON SHARE
CONTINUING OPERATION 0.18 0.17 0.02 0.04
DISCONTINUED OPERATIONS (0.22) 0.02 (0.02) (0.02)
--------------- --------------- --------------- ---------------
NET INCOME(LOSS) PER COMMON SHARE-BASIC (0.04) 0.19 0.00 0.02
NET INCOME(LOSS) PER COMMON SHARE-DILIATED (0.01) 0.14 0.01 0.01
AVERAGE NUMBER OF SHARES USED IN COMPUTATION-
BASIC 10,596,513 5,458,525 11,049,872 5,843,525
DILUTED 15,886,916 7,474,173 15,693,317 7,474,173
</TABLE>
See notes to financial statements.
4
<PAGE>
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30, 1998 June 30, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continued operations 2,112,306 926,920
Income (loss) from discontinued operations (2,311,691) 132,358
-------------- --------------
Net income (Loss) (199,385) 1,059,278
Adjustments to reconcile net income to net cash provided by operating
activities:
Change in operating assets & liabilities (3,143,235)
Writeoff of goodwill from subsidiary sold 3,659,245
Depreciation and amortization 1,408,064 305,177
-------------- --------------
1,724,689 1,364,455
CHANGES IN ASSETS AND LIABILITIES
(Increase)decrease in accounts receivable (532,484) (132,871)
(Increase) decrease in inventories (4,202,862) (1,811,135)
(Increase)decrease in prepaid expenses (6,218,799) (411,318)
(Increase)decrease in other current assets 478,311 749,324
(Increase)decrease in other assets (6,076,819) (18,047)
Increase(decrease) in accounts payable 1,272,328 (89,098)
Increase(decrease) in accrued expenses 8,458,309 (683,574)
-------------- --------------
(5,097,328) (1,032,264)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net (741,853) (194,032)
Sale of Biobottoms assets 1,000,000 0
Acquisition of subsidiaries (5,181,596) 0
-------------- --------------
(4,923,449) (194,032)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common & preferred stock 5,893,794 591,380
Preferred stock dividend (284,140) (162,000)
Proceeds from loans payable 5,000,000 0
Repayments of loans payable (236,197) (66,326)
Revolving credit agreement (233,173) 804,971
-------------- --------------
10,140,284 1,168,025
-------------- --------------
NET INCREASE(DECREASE) IN CASH 119,507 (58,271)
CASH AND CASH EQUIVALENTS-beginning of period 51,877 69,258
-------------- --------------
CASH AND CASH EQUIVALENTS-end of period 171,384 10,987
</TABLE>
5
<PAGE>
DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
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. The accompanying financial statements reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented. Except as otherwise disclosed, all such adjustments are of a
normal and recurring nature. The results of operations for any interim period
are not necessarily indicative of the results attainable for a full fiscal year.
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 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.
6
<PAGE>
I. The Company accounts for stock transactions in accordance with APB
No. 25 "Accounting for Stock to Employees". In accordance with SFAS No. 123,
"Accounting for Stock based Compensation", the Company has adopted the pro-forma
disclosure requirements contained therein.
J. Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period
during which the benefits are expected.
K. Revenue is recognized at the time merchandise is shipped to
customers. Proceeds received from merchandise not shipped are reflected as
"customers' unshipped orders", a current liability.
L. The term "the Company" shall include Diplomat Direct Marketing
Corporation and its wholly-owned subsidiaries, Diplomat Holdings, Inc. (formerly
known as Biobottoms, Inc. ("Biobottoms"), Brownstone Holdings, Inc.
("Brownstone"), Ecology Kids, Inc. ("Ecology Kids") and Lew Magram, Ltd.
("Magram"), unless otherwise indicated. The term "Diplomat" shall refer to the
operations of the Diplomat Corporation exclusive of its subsidiaries.
M. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
No. 128"), which became effective for both interim and annual financial
statements for periods ending after December 15, 1997. FAS No. 123 requires a
presentation of "Basic" and (where applicable) "Diluted" earnings per share.
Generally, Basic earnings per share are computed on only the weighted average
number of common shares actually outstanding during the period, and the Diluted
computation considers potential shares issuable upon exercise or conversion of
other outstanding instruments where dilution would result. Furthermore, FAS No.
128 requires the restatement of prior period reported earnings per share to
conform to the new standard.
The following is a reconciliation of the numerator and denominator underlying
the earnings per share computations:
<TABLE>
<CAPTION>
For the Nine Months ended June 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Income from continuing operations $ 2,112,304
Preferred stock dividends (236,250)
Basic EPS:
Income available to common
shareholders $ 1,876,054 10,596,513 $ 0.18
Effective of Dilutive Securities:
Options, warrants and conversions 236,250 5,290,403
----------- -----------
Diluted EPS:
Income (loss) available to common stockholders
and assumed conversions $ 2,112,304 15,886,916 $ 0.13
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months ended June 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Income from continuing operations $ 926,921
Preferred stock dividends (162,000)
-----------
Basic EPS:
Income available to common
shareholders $ 764,921 5,458,525 $.14
Effect of Dilutive Securities:
Options, warrants and conversions 162,000 2,015,648
----------- ---------
Diluted EPS:
Income available to common shareholders
and assumed conversions $ 926,921 7,474,173 $.12
<CAPTION>
For the Three months ended June 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Income from continuing operations $ 338,910
Preferred stock dividends (78,750)
-----------
Basic EPS:
Income available to common
shareholders $ 260,160 11,049,872 $.02
Effect of Dilutive Securities:
Options, warrants and conversions 78,750 4,643,445
---------- -----------
Diluted EPS:
Income available to common shareholders
and assumed conversions $ 338,910 15,693,317 $.02
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the Three Months ended June 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Income from continuing operations $257,555
Preferred stock dividends (79,500)
Basic EPS:
Income available to common
shareholders $178,055 5,843,525 $.03
Effect of Dilutive Securities:
Options, warrants and conversions 79,500 1,630,648
-------- ---------
Diluted EPS:
Income available to common shareholders
and assumed conversions $257,555 7,474,173 $.03
</TABLE>
2. ACQUISITION OF LEW MAGRAM, LTD.
On February 19, 1998 the Company completed the acquisition of 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 catalog 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 95,000 shares of the Company's $.10 par value,
Series D convertible preferred stock and 250,000 shares of the Company's common
stock. The Series D preferred stock is convertible into 3,166,667 shares of the
Company's common stock. 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 value of the 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 and preferred stock dividends.
Nine months
ended
June 30,
-----------
1997
(Unaudited)
9
<PAGE>
Net sales $58,653,691
Net income to
common shareholders $ 537,008
Net income per common
share $ .10
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.
On October 30, 1997, the Company acquired out of bankruptcy all 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. Brownstone has moved from its Secaucus, NJ.
3. DISCONTINUED OPERATIONS
On April 17, 1998, the Company entered into an Asset Purchase Agreement
(the "Agreement") with Genesis Direct Thirty-Four, LLC ("Buyer") in which the
Buyer purchased substantially all of the assets and assumed certain of the
liabilities of Biobottoms. The Buyer paid $2,270,000 in cash and a note and
assumed $5,749,000 in liabilities. The note is subject to reduction depending on
the net assets acquired as determined in a Closing Date Balance Sheet. If the
amount of the Net Value of Acquired Assets is less than negative $778,000 or the
accrued expenses and customer liabilities included in the Assumed Liabilities
exceed $828,877, the greater of such deficiencies will reduce the amount of the
note.
The Company shall retain all claims for tax refunds, tax loss carry
forwards or carrybacks of tax credits of any kind applicable to the business of
Biobottoms prior to the closing of the Asset Sale. The Agreement further
specifies that certain intercompany and affiliated person liabilities will not
be assumed by the Buyer.
The following is a summary of the loss on the disposition of
Biobottom's operations:
Property and equipment written off: $(1,702,887)
Cost 1,378,348
-----------
Less: Accumulated depreciation (324,539)
Net property written off
Other assets written off:
Accounts receivable (430,743)
Inventory (1,973,998)
Prepaid expenses (972,433)
Other assets (46,993)
Goodwill (3,659,245)
-----------
Total Assets written off (7,407,951)
Liabilities to be assumed: -----------
10
<PAGE>
Accounts payable 3,425,782
Accrued liabilities 566,908
Loans payable-bank 1,430,000
Obligations under capital leases 116,765
Other 51,645
-----------
Total Liabilities written off 5,591,100
-----------
Proceeds to be received 2,270,000
-----------
Gain on disposal of assets 453,149
Loss to measurement date 11/30/97 (449,444)
Loss through disposal date (2,315,396)
-----------
Loss From discontinued operations $(2,311,391)
===========
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical matters contained herein, the matters discussed
herein are forward-looking statements and are made pursuant to the safe harbor
provisions of The Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect assumptions and involve risks and
uncertainties which may affect the Company's business and prospectus and cause
actual results to differ materially from these forward-looking statements.
RESULTS OF OPERATIONS
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997
NET SALES
Consolidated net sales for the Nine Month Period ended June 30, 1998
("1998 Period") increased approximately $51,300,000 from the Nine Month Period
ended June 30, 1997 ("1997 Period"), primarily as a result of the sales
attributable to the Magram and Brownstone operations in the 1998 period. The
sales of Diplomat for the 1998 Period were $5,586,000 as compared to $5,846,000
for the 1997 Period.
Consolidated cost of sales were 46% of net sales in the 1998 Period and
50% in the 1997 Period. The increase in cost of sales of $23,100,000 in the 1998
Period was primarily from Magram and Brownstone.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses increased approximately
$26,700,000 from the 1997 Period to the 1998 Period, primarily as a result of
the purchase of Magram and Brownstone in 1997. Operating expenses of Diplomat
for the 1998 Period were $1,972,000 as compared to $1,346,000 in the 1997
Period. Consolidated operating expenses were 49% of net sales in the 1998 Period
and 23% in the 1997 Period because of the restructuring at the end of 1996 which
took effect in 1997.
Interest expense increased $605,000 from 1997 to 1998 as a result of
borrowings of Magram and Brownstone in 1997.
Income from continuing operations increased from $927,000 for the 1997
Period to $2,112,000 for the 1998 Period. On April 17, 1998, substantially all
the assets of Biobottoms were sold resulting in a loss from discontinued
operations of $(2,112,304).
The net loss for the 1998 Period was $(199,387) as compared to net
income of $1,059,279 for the 1997 Period.
At June 30, 1998, 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 period's operations, such realization would
take approximately three years.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
12
<PAGE>
NET SALES
Consolidated net sales for the Three Month Period ended June 30, 1998
("1998 Period") increased approximately $18,400,000 from the Three Month Period
ended June 30, 1997 ("1997 Period"), primarily as a result of the sales
attributable to the Magram and Brownstone operations in the 1998 Period. The
sales of Diplomat for the 1998 Period were $1,580,000 as compared to $2,227,000
for the 1997 Period.
Consolidated cost of sales were 44% of net sales in the 1998 Period and
59% in the 1997 Period. The increase in cost of sales of $7,700,000 in the 1998
Period was primarily from Magram and Brownstone.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses increased approximately
$10,500,000 from the 1997 Period to the 1998 Period, primarily as a result of
the purchase of Magram and Brownstone in 1997. Operating expenses of Diplomat
for the 1998 Period were $692,000 as compared to $492,000 in the 1997 Period.
Consolidated operating expenses were 53% of net sales in the 1998 Period and 22%
in the 1997 Period because of the restructuring at the end of 1996 which took
effect in 1997.
Interest expense increased $223,000 from 1997 to 1998 as a result of
borrowings of Magram and Brownstone in 1997.
Income from continuing operations increased from $257,555 for the 1997
Period to $338,910 for the 1998 Period. On April 17, 1998, substantially all the
assets of Biobottoms were sold resulting in a loss from discontinued operations
of $(2,311,691) of which $(239,593) is reported in the current quarter.
The net income for the 1998 Period was $99,317 as compared to net
income of $93,071 for the 1997 Period.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed an initial public offering on November 13, 1993
and received net proceeds of approximately $4,454,000. Proceeds of the offering
were used for purchases of inventory, marketing and promotion, product
development, reduction of accounts payable and repayment of loans from a
principal stockholder and executive officer. The Company has relied upon the
proceeds of its initial public offering, borrowings from an institutional
lender, a principal stockholder and director of the Company, and proceeds from
the exercise of warrants in 1995, 1996 and 1997 in order to fund its operations,
including financing the approximately $5,100,000 decrease in cash flow from
operations for the nine months ended June 30, 1998, which was primarily used in
the operations of Magram and Brownstone. At June 30, 1998, there was a working
capital deficiency of approximately $2,000,000. The Company is currently
investigating potential sources of capital through long term debt or equity
financing.
The Company's principal working capital credit facility is provided by
Congress Financial Corporation ("Congress").
13
<PAGE>
In April 1994, the Company entered into an agreement with Congress
providing the Company with a maximum $3 million secured line of credit to be
used for loans and trade letters of credit. The loans are secured by
substantially all of the Company's personal property, including without
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) percent above the prime rate announced by Core States Bank.
The credit agreement contains restrictions relating to the payment of dividends.
Additionally, prior to amendment, the Company was required to maintain a minimum
of $3,500,000 in stockholders' equity and a minimum of $4,500,000 of working
capital (excluding the Congress loan and certain subordinated debt). At
September 30, 1996, the Company was not in compliance with these financial
covenants, however Congress continued to extend the Company credit under the
terms of the original agreement. On February 25, 1997, the violations were
waived by Congress, and the Company and Congress agreed on revised financial
covenants. Under the revised agreement, the stockholders' equity and working
capital minimums (excluding the Congress loan and certain subordinated debt)
were reduced to $(750,000) and $500,000, respectively, and shall be increased
during the fiscal year ending September 30, 1997 to $(250,000) and $1,500,000,
respectively. The Company is currently negotiating revised financial covenats to
reflect the current corporate structure.
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.
As of October 30, 1997, Brownstone entered into a loan agreement with
Congress providing Brownstone with a maximum $5.5 million secured line of credit
to be used for loans and trade letters of credit. The line of credit is secured
by all of the assets of Brownstone and guaranteed by the Company and Magram. The
interest rate is two percent (2%) above the prime rate announced by Core States
Bank. The loan agreement provides for certain restrictive covenants, including
restrictions on Brownstone's debt financing, dividends and distributions, and
transactions with the Company and its subsidiaries. The loan agreement also
requires Brownstone maintain a net worth (excluding debt subordinated to the
Congress loan) of $300,000 until June 30, 1998, and $500,000 thereafter.
Prior to the acquisition of Magram, Magram had entered into a loan
agreement, dated as of August 13, 1996, with Congress providing Magram with a
maximum $5.0 million secured line of credit to be used for loans and trade
letters of credit. The line of credit is secured by all of the assets of Magram
and guaranteed by the Company and Brownstone. The interest rate is one and
one-half percent (1 1/2%) above the prime rate announced by Core States Bank.
The loan agreement provides for certain restrictive covenants, including
restrictions on Magram's debt financing, dividends and distributions and
transactions with the Company and its subsidiaries. The loan agreement also
requires Magram maintain working capital of at least $1,500,000 and net worth
(excluding debt subordinated to the Congress loan) of $1,600,000. Upon the
acquisition of Lew Magram, these covenants were waived by Congress, and the
Company and Congress are currently negotiating revised contracts.
The lines of credit between Congress and each of the Company,
Brownstone and Magram are each guaranteed by Robert M. Rubin up to an aggregate
maximum amount of $1,500,000.
The Company has also financed its operations and acquisitions through
loans from Mr. Rubin, including approximately $2,900,000 in connection with the
acquisition of Biobottoms in February 1996, a $600,000 working capital loan in
November 1996, a $200,000 working capital loan in February 1997, and, with Jay
Kaplowitz, a $2,205,000 loan for the financing of Jean Grayson's Brownstone
Studio, Inc. prior to the asset acquisition by Brownstone and working capital
for Biobottoms and the company. Except for the $200,000 working capital loan,
each of the above mentioned loans have been converted into the Company's stock.
14
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A significant source of financing for the Company was the sale of
equity and debt securities.
In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C D Warrants,
each exercisable for 500,000 shares of common stock, at $.137, $2.50 and $3.00
per share, respectively. All of the Class B Warrants were exercised during 1995
providing the Company with net proceeds of $628,000. The Class D Warrants
expired in July, 1996. The Class C Warrants were exercised in April 1997
providing the Company with proceeds of $500,000.
In August 1996, the Company, in connection with the 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 and in May 1997 issued an additional 150,000 options at an exercise price
of $2.375 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.
In October 1997, in part to raise capital for the Company's acquisition
out of bankruptcy of substantially all of the assets of Jean Grayson's
Brownstone Studio, Inc., the Company completed a private placement of its
securities which raised $3,345,000 from accredited investors. The private
placement consisted of units, each unit consisting of ten shares of Series E
Preferred Stock and 7,500 shares of Common Stock at a purchase price of $10,000
per unit.
On June 29, 1998, the Company completed the sale of Subordinated
Debentures to Tandem Capital in the amount of $5,000,000 to be used for working
capital. In connection with the transaction, the Company issued warrants to
purchase 208,300 shares of Common Stock.
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.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On June 29, 1998, the Company completed the sale of $5,000,000
principal amount 12% Subordinated Debentures to Sirrom Capital Corporation d/b/a
Tandem Capital ("Tandem"). The Debentures, which are due June 28, 2003, are
secured by all of the assets of the Company and its subsidiaries, but junior to
existing liens. The Company issued Tandem 208,300 common stock purchase warrants
exercisable at approximately $2.50 for five years. The Company is obligated
to issue Tandem up to an additional 416,600 warrants at the market price upon
issuance, subject to certain adjustments, if the Debentures are not redeemed
prior to February 28, 1999, and an additional 200,000 warrants exercisable at
the market price upon issuance, subject to certain adjustments, for each year
thereafter as long as the Debentures are outstanding until the Debentures are
due. The issuance was exempt from registration by virtue of Section 4(2) under
the Securities Act of 1933, as amended (the "Act").
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 19, 1998.
The purpose of the meeting was to vote for the election of directors ("Proposal
1"), to amend the Company's Certificate of Incorporation to change the name of
the Company to Diplomat Direct Marketing Corporation ("Proposal 2") to amend the
Company's Certificate of Incorporation to increase the authorized number of
directors to seven ("Proposal 3"), to approve the Company's 1998 Stock Option
Plan ("Proposal 4") and to ratify the appointment of Feldman, Sherb, Ehrlich &
Company as the Company's independent certified public accountants ("Proposal
5").
Proposal 1 - The following persons were elected to serve as
directors of the corporation for the ensuing year: Jonathan Rosenberg, Robert M.
Rubin, Stuart Leiderman, Warren H. Golden, Wesley C. Fredericks, Jr., Howard B.
Katz and David Abel. There were 11,211,762 votes cast in favor, 22,400 votes
against and 13,640 votes withheld for each of the above named directors.
Proposal 2 - The proposal to amend the Company's Certificate of
Incorporation to change the Company's name to Diplomat Direct Marketing
Corporation was approved. There were 11,197,892 votes cast in favor, 24,270
votes against and 25,640 votes withheld for the proposal.
Proposal 3 - The proposal to amend the Company's Certificate of
Incorporation to increase the number of authorize directors to seven was
approved. There were 11,178,262 votes cast in favor, 61,300 votes against and
8,240 votes withheld for the proposal.
Proposal 4 - The proposal to approve the Company's 1998 Stock Option
Plan was approved. There were 11,137,172 votes cast in favor, 82,390 votes
against and 28,240 votes withheld for the proposal.
Proposal 5 - The proposal to ratify Feldman Sherb Ehrlich & Co., P.C.
as the Company's independent certified public accountants for the ensuing year
was approved. There were 11,225,212 votes cast in favor, 14,950 votes against
and 7,640 votes withheld for the proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
21.1 List of Subsidiaries
16
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27.1 Financial Data Schedule
99.1 Form of Debenture Purchase Agreement between Sirrom Capital
Corporation and Diplomat Direct Marketing Corporation, et al
99.2 Form of 12% Subordinated Debenture
99.3 Form of Initial Stock Purchase Warrant
99.4 Form of Additional Stock Purchase Warrant
99.5 Form of Contingent Stock Purchase Warrant
99.6 Form of Security Agreement
(b) Reports on Form 8-K
On May 11, 1998, the Company filed a report dated April 24, 1998 on
Form 8-K, Item 2, covering the sale of substantially all of the assets of its
wholly-owned subsidiary, Biobottoms, Inc.
On June 15, 1998, the Company filed a report dated June 9, 1998 on Form
8-K Item 5, covering the amendment to the Company's Certificate of
Incorporation, as amended, to provide for the change in the Company's name to
Diplomat Direct Marketing Corporation and to increase the authorized number of
directors from six to seven.
17
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIPLOMAT DIRECT MARKETING
CORPORATION
August 15, 1998 By:/s/ Jonathan Rosenberg
----------------------
Jonathan Rosenberg
Chief Executive Officer
August 15, 1998 By:/s/ Irwin Oringer
----------------------
Irwin Oringer
Principal Accounting Officer and
Controller
18
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EXHIBIT INDEX
21.1 List of Subsidiaries
27.1 Financial Data Schedule
99.1 Form of Debenture Purchase Agreement between Sirrom Capital
Corporation and Diplomat Direct Marketing Corporation, et al
99.2 Form of Debenture
99.3 Form of Initial Stock Purchase Warrant
99.4 Form of Additional Stock Purchase Warrant
99.5 Form of Contingent Stock Purchase Warrant
99.6 Form of Security Agreement
19
<PAGE>
EXHIBIT 21 - List of Subsidiaries
Lew Magram Ltd., a New York corporation
Brownstone Holdings, Inc., a Delaware corporation
Diplomat Holdings, Inc., a California corporation
Ecology Kids, Inc., a Delaware corporation
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
DIPLOMAT DIRECT MARKETING CORPORATION
ECOLOGY KIDS, INC.
BROWNSTONE HOLDINGS, INC.
LEW MAGRAM LTD.
DIPLOMAT HOLDINGS, INC.
12.00% Subordinated Debenture Due June ______, 2003
$5,000,000.00 ____________, ____ 1998
FOR VALUE RECEIVED, DIPLOMAT DIRECT MARKETING CORPORATION, a Delaware
corporation (the "Company"), DIPLOMAT HOLDINGS, INC., a California corporation
(a "Co-Maker"), BROWNSTONE HOLDINGS, INC., a Delaware corporation (a"Co-Maker"),
ECOLOGY KIDS, INC., a Delaware corporation (a "Co-Maker") and LEW MAGRAM LTD., a
New York corporation (a" Co-Maker"), collectively the "Borrowers," jointly and
severally promise to pay to the order of SIRROM CAPITAL CORPORATION d/b/a TANDEM
CAPITAL, a Tennessee corporation ("Purchaser"), pursuant to the Debenture
Purchase Agreement (as hereinafter defined) at such place as Purchaser may from
time to time designate in writing, in lawful money of the United States of
America and in immediately available funds, the principal sum of Five Million
Dollars ($5,000,000.00) and any accrued but unpaid interest thereon.
This Debenture is referred to in and is executed and delivered pursuant
to, a Debenture Purchase Agreement dated of even date herewith between the
Borrowers and Purchaser (the "Debenture Purchase Agreement"), to which reference
is hereby made for a statement of the terms and conditions under which this
Debenture may be repaid and accelerated. Capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Debenture Purchase
Agreement.
Interest shall accrue from the date of issue of this Debenture at the
rate of 12.00% per annum, payable quarterly by automatic debit on the first day
of each March, June, September and December, commencing September 1, 1998, and
ending at maturity, to mature on June _____, 2003.
<PAGE>
Interest shall be computed on the basis of a 360-day year and the
actual number of days elapsed.
Any principal payment due under this Debenture not paid when due,
whether at stated maturity, by notice of repayment, by acceleration or
otherwise, and any accrued but unpaid interest not paid when due, shall, to the
extent permitted by applicable law, thereafter bear interest (compounded monthly
and payable upon demand) at an annual rate of 17.00% in respect of such
principal and such unpaid interest until such unpaid amounts have been paid in
full (whether before or after judgment).
This Debenture is subject to prepayment or optional redemption by the
Borrowers as provided by the Debenture Purchase Agreement. All payments made
hereunder shall be applied first to interest and then to outstanding principal.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
other day on which banks in Tennessee or New York are authorized to close, the
due date thereof shall be extended to the next succeeding business day.
Demand, presentment, protest, diligence, notice of dishonor, and any
other formality are hereby expressly waived by the Borrowers and any endorser or
guarantor.
If there is any default under this Debenture, and this Debenture is
placed in the hands of an attorney for collection, or is collected through any
court, including any bankruptcy court, each Borrower promises to pay to the
order of the holder hereof such holder's reasonable attorneys' fees and court
costs actually incurred in collecting or attempting to collect or securing or
attempting to secure this Debenture or enforcing the holder's rights with
respect to the Collateral, to the extent allowed by the laws of the State of New
York or any state in which any Collateral is situated. The Borrowers hereby
consent to jurisdiction, service of process, and venue in the federal and state
courts having jurisdiction in the State of Tennessee or in the State of New
York, for the purpose of any action arising out of any obligations hereunder,
and expressly waive jury trial and any and all objections as to jurisdiction,
service of process, and venue in such courts.
THIS DEBENTURE HAS BEEN DELIVERED IN, AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF, THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF
LAW PROVISIONS THEREOF.
The holder of this Debenture may, with or without notice to any party,
and without affecting the obligations of any maker, surety, guarantor, endorser,
accommodation party, or any other party to this Debenture (i) extend the time
for payment of either principal or interest from time to time, (ii) release or
discharge any one or more parties liable on this Debenture, (iii) suspend the
right to enforce this Debenture with respect to any persons, (iv) change,
exchange, or release any property in which the holder has any interest securing
this Debenture, (v) justifiably or otherwise, impair any
2
<PAGE>
of the Collateral or suspend the right to enforce against any such Collateral,
and (vi) at any time it deems it necessary or proper, call for and, should it be
made available, accept, as additional security, the signature or signatures of
additional parties or a security interest in property of any kind or description
or both.
This Debenture is subordinated to certain other indebtedness to the
extent and with the effect set forth in the Debenture Purchase Agreement.
This Debenture is registered on the books of the Borrowers and is
transferable only by surrender thereof at the principal office of the Company or
such other address as the Company shall have advised the holder of the Debenture
in writing, duly endorsed or accompanied by a written instrument of transfer
duly executed by the registered holder of this Debenture or its attorney duly
authorized in writing. Payment of or on account of principal, premium, if any,
and interest on this Debenture shall be made only to or upon the order in
writing of the registered holder thereof.
Any provision herein, or in the Debenture Purchase Agreement, or any
other document executed or delivered in connection herewith or therewith, or in
any other agreement or commitment, whether written or oral, expressed or
implied, to the contrary notwithstanding, neither the Purchaser nor any holder
hereof shall in any event be entitled to receive or collect, nor shall any
amounts received hereunder be credited, so that Purchaser or any holder hereof
shall be paid, as interest, a sum greater than the maximum amount permitted by
applicable law to be charged to the person primarily obligated to pay this
Debenture at the time in question. If any construction of this Debenture or the
Debenture Purchase Agreement, or any and all other papers, agreements or
commitments, indicate a different right given to Purchaser or any holder hereof
to ask for, demand, or receive any larger sum as interest, such is a mistake in
calculation or wording which this clause shall override and control, it being
the intention of the parties that this Debenture, the Debenture Purchase
Agreement, and all other documents executed or delivered in connection herewith
shall in all ways comply with applicable law and proper adjustments shall
automatically be made accordingly. If Purchaser or any holder hereof ever
receives, collects, or applies as interest, any sum in excess of the maximum
amount permitted by applicable law, if any, such excess amount shall be applied
to the reduction of the unpaid principal balance of this Debenture, and if this
Debenture is paid in full, any remaining excess shall be paid to the Borrowers.
In determining whether or not the interest paid or payable, under any specific
contingency, exceeds the maximum amount permitted by applicable law, if any, the
Borrowers and any holder hereof shall, to the maximum extent permitted under
applicable law; (i) characterize any non-principal payment as an expense or fee
rather than as interest, and (ii) "spread" the total amount of interest
throughout the entire term of this Debenture.
[rest of page intentionally left blank]
3
<PAGE>
IN WITNESS WHEREOF, each Borrower has caused this Debenture to be
executed in its corporate name by the undersigned officer, thereunto duly
authorized.
DIPLOMAT DIRECT MARKETING ECOLOGY KIDS, INC.
CORPORATION
By: ___________________________ By:______________________________
Title:_________________________ Title:___________________________
BROWNSTONE HOLDINGS, INC. LEW MAGRAM LTD.
By:____________________________ By:______________________________
Title:_________________________ Title:___________________________
DIPLOMAT HOLDINGS, INC.
By:____________________________
Title:_________________________
4
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
STOCK PURCHASE WARRANT
[Initial Warrant]
This Warrant is issued this __________ day of June, 1998, by DIPLOMAT
DIRECT MARKETING CORPORATION, a Delaware corporation (the "Company"), to SIRROM
CAPITAL CORPORATION d/b/a TANDEM CAPITAL, a Tennessee corporation (SIRROM
CAPITAL CORPORATION and any subsequent assignee or transferee hereof are
hereinafter referred to collectively as "Holder" or "Holders"). Capitalized
terms not defined herein shall have the meanings assigned by the Debenture
Purchase Agreement referred to in Section 1.
Agreement:
1. Issuance of Warrant; Term. For and in consideration of Sirrom
Capital Corporation d/b/a Tandem Capital purchasing from the Company and other
Borrowers a Subordinated Debenture in the original principal amount of Five
Million Dollars ($5,000,000.00) (the "Debenture") pursuant to the terms of a
Debenture Purchase Agreement dated June ______, 1998 (the "Debenture Purchase
Agreement"), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase at any time and from time to time, in whole or in
part, on or after December ______, 1998, up to 208,300 shares of the Company's
common stock, $.0001 par value (the "Common Stock"). The shares of Common Stock
issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares." This Warrant shall be exercisable at any time and from time to time
from December ______, 1998, until 5:00 p.m., Nashville time, December _______,
2003.
2. Exercise Price. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased shall be equal to the
average closing bid price of the Company's Common Stock for the 10 consecutive
trading days immediately preceding the Closing Date, and shall be further
adjusted as provided herein. If on June ______, 1999, the average closing bid
price of the Common Stock for the 20 consecutive trading days immediately prior
to June _____, 1999, is less than the Exercise Price, then the Exercise Price
shall automatically be reset on June ______, 1999, at the greater of (i) $2.00,
or (ii) 80% of the average closing bid price of the Company's Common Stock for
the 20 consecutive trading days immediately preceding June ______, 1999,
provided that no adjustment shall be made which increases the then effective
Exercise Price.
3. Exercise. This Warrant may be exercised by the Holder hereof as to
all or any increment or increments of 100 Shares (or the balance of the Shares
if less than such number), upon delivery of written notice of intent to exercise
to the Company at the address set forth in the Debenture Purchase Agreement, or
such other address as the Company shall designate in a written
<PAGE>
notice to the Holder hereof, together with this Warrant and payment to the
Company of the aggregate Exercise Price of the Shares so purchased. The Exercise
Price shall be payable, at the option of the Holder, (i) by certified or bank
check, (ii) by the surrender of the Debenture or portion thereof having an
outstanding principal balance equal to the aggregate Exercise Price, or (iii) by
the surrender of a portion of this Warrant where the excess of (A) the Fair
Market Value of the Shares subject to the portion of this Warrant that is
surrendered (the "Surrendered Shares"), over (B) the aggregate Exercise Price of
the Surrendered Shares, is equal to the aggregate Exercise Price for the Shares
to be issued. Upon payment of the Exercise Price, the Holder shall be deemed to
be the holder of record of the Shares, notwithstanding that the stock transfer
books of the Company may then be closed or that certificates representing such
Shares may not then be actually delivered to the Holder. The Company shall as
promptly as practicable thereafter, and in any event within 15 days thereafter,
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Shares for which this Warrant is being exercised
in such names and denominations as are requested by such Holder. If this Warrant
shall be exercised with respect to less than all of the Shares, the Holder shall
be entitled upon surrender of the old Warrant to receive a new Warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it will pay when due any and all
state and federal issue taxes which may be payable in respect of the issuance of
this Warrant or the issuance of any Shares upon exercise of this Warrant.
4. Covenants and Conditions. The above provisions are subject to the
following:
4.1 Restrictive Legend. Each certificate representing Shares shall
bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
4.2 Validity; Reservation of Shares. The Company covenants and
agrees that all Shares which may be issued upon exercise of this Warrant will,
upon issuance and payment therefor pursuant to this Warrant, be validly issued
and outstanding, fully paid and nonassessable, free from all taxes, liens,
charges and preemptive rights, if any, with respect thereto or to the issuance
thereof. The Company shall at all times reserve and keep available for issuance
upon the exercise of this Warrant such number of authorized but unissued shares
of Common Stock as will be sufficient to permit the exercise in full of this
Warrant.
5. Transfer and Replacement of Warrant. Subject to the provisions of
Section 4, this Warrant may be transferred, in whole or in part, but only in
multiples of 10,000 Shares, to any person or business entity, by presentation of
the Warrant to the Company with written instructions for such
-2-
<PAGE>
transfer; provided that the transferee is an accredited investor as defined in
Regulation D of the Securities Act of 1933, and such transfer is in compliance
with all applicable federal and state securities laws. Upon such presentation
for transfer, the Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the transferee or transferees and in
the denominations specified in such instructions. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft or destruction of this
Warrant, and of indemnity or security reasonably satisfactory to it, or upon
surrender of this Warrant if mutilated, the Company will make and deliver a new
Warrant of like tenor, bearing the restrictive legend set forth above, in lieu
of this Warrant. This Warrant shall be promptly canceled by the Company upon the
surrender hereof in connection with any transfer or replacement. The Company
shall pay all expenses incurred by it in connection with the preparation,
issuance and delivery of Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock that are then issuable upon exercise of this Warrant
shall be deemed to be outstanding and owned by the Holder and the Holder shall
be entitled to participate in such rights offering. The Company shall not grant
any preemptive rights with respect to any of its Common Stock without the prior
written consent of the Holder.
7. Adjustment of Number of Shares and Exercise Price.
7.1 Recapitalizations -- Adjustment of Number of Shares. If all or
any portion of this Warrant shall be exercised subsequent to any transaction in
which the Company shall (i) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock payable in shares of
its capital stock (whether payable in shares of its Common Stock or of capital
stock of any other class), (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, (iii) combine outstanding shares of Common Stock
into a smaller number of shares, (iv) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, or (v) otherwise change
its capital structure, occurring after the date hereof, as a result of which
shares of Common Stock shall be changed into the same or a different number of
shares of the same or another class or classes of securities of the Company,
then the Holder exercising this Warrant shall receive, for the aggregate price
paid upon such exercise, the aggregate number and class of shares and such other
securities which such Holder would have received if this Warrant had been
exercised immediately prior to the record date for such transaction.
7.2 Mergers, Etc. -- Adjustment of Number of Shares. If all or
any portion of this Warrant shall be exercised subsequent to any merger,
consolidation, exchange of shares, separation, reorganization, or liquidation of
the Company, or other similar event, occurring after the date hereof, as a
result of which Shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of securities
of the Company or another entity, or the holders of Common Stock are entitled to
receive cash or other property, then the Holder
-3-
<PAGE>
exercising this Warrant shall receive, for the aggregate price paid
upon such exercise, the aggregate number and class of shares, cash or other
property which such Holder would have received if this Warrant had been
exercised immediately prior to such merger, consolidation, exchange of shares,
separation, reorganization or liquidation, or other similar event.
7.3 Adjustment of Exercise Price Upon Issuance of Shares, Warrants,
Rights, Etc.
(a) Initial Exercise Price. The initial Exercise Price shall be
equal to the average closing bid price of the Company's Common Stock for the 10
consecutive trading days immediately preceding the Closing Date, and shall be
further adjusted as provided herein. If on June ______, 1999, the average
closing bid price of the Common Stock for the 20 consecutive trading days
immediately prior to June _____, 1999, is less than the Exercise Price, then the
Exercise Price shall automatically be reset on June ______, 1999, at the greater
of (i) $2.00, or (ii) 80% of the average closing bid price of the Company's
Common Stock for the 20 consecutive trading days immediately preceding June
______, 1999, provided that no adjustment shall be made which increases the then
effective Exercise Price.
(b) Recapitalizations. If the Company, at any time prior to the
expiration of this Warrant, shall (i) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock payable in shares of
its capital stock (whether payable in shares of its Common Stock or of capital
stock of any class), (ii) subdivide outstanding shares of Common Stock into a
larger number of shares, (iii) combine outstanding shares of Common Stock into a
smaller number of shares, (iv) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, or (v) otherwise change its
capital structure, then the Exercise Price then in effect shall be multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock
of the Company outstanding before such event and of which the denominator shall
be the number of shares of Common Stock outstanding after such event. Such
adjustment shall become effective immediately after the record date in the case
of a dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c) Distributions of Warrants or Rights, Issuance of Stock or
Warrants at Less Than Fair Market Value or Exercise Price. If the Company, at
any time prior to the expiration of this Warrant, shall (i) issue rights or
warrants to all holders of Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the lesser of the
Fair Market Value of Common Stock or the Exercise Price then in effect at the
record date mentioned below, or (ii) issue additional Common Stock, or warrants,
options, or other securities convertible into Common Stock, at a price or
exercise or conversion price per share less than the lesser of the Fair Market
Value of the Common Stock or the Exercise Price then in effect at the date of
issuance or grant, the Exercise Price then in effect shall be adjusted to equal
(x) the sum of (A) the total number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such issuance or grant, multiplied
by the Exercise Price then in effect, plus (B) the aggregate consideration
to be paid for such Common Stock or other securities (upon issuance and/or
exercise or conversion),
-4-
<PAGE>
divided by (y) the sum of (C) the total number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such issuance or
grant, plus (D) the number of shares of Common Stock or common stock equivalents
issued or granted. Provided, that no such adjustment shall be made which has the
effect of increasing the Exercise Price. Further provided, that the adjustment
provided by this Section 7.3(c) shall not apply to issuance of (i) securities
pursuant to options, warrants, or conversion rights outstanding on the date this
Warrant is issued, (ii) up to a maximum of 100,000 shares of Common Stock
pursuant to the Company's 1992 Stock Option Plan, August 1996 Stock Option Plan,
November 1996 Stock Option Plan and the 1998 Stock Option Plan, and (iii) up to
a maximum of 475,000 shares of Common Stock in settlement of Russo v. Diplomat
Corporation, New York Supreme Court, No. 98/601194. Such adjustment shall be
made whenever such rights, warrants, Common Stock, or securities are issued, and
shall become effective immediately after (i) the record date for the
determination of stockholders entitled to receive such rights or warrants, or
(ii) the issuance of such Common Stock or common stock equivalents. Provided,
that upon the expiration of any right or warrant to purchase or convert into
Common Stock the issuance of which resulted in an adjustment in the Exercise
Price pursuant to this Section 7.3(c), if such right or warrant shall expire and
shall not have been exercised, the Exercise Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Exercise Price made pursuant to the provisions of this
Section 7 after the issuance of such rights or warrants) had the adjustment of
the Exercise Price made upon the issuance of such rights or warrants been made
on the basis of offering for subscription or purchase only that number of shares
of Common Stock actually purchased or obtained upon the exercise of such rights
or warrants actually exercised.
(d) [Reserved]
(e) Distributions of Other Property. If the Company, at any
time prior to the expiration of this Warrant, shall distribute to all holders of
Common Stock (and not to holders of Warrants on an as-exercised basis) evidences
of its indebtedness, or any of its assets, or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Section 7.3(c) or
Section 7.3(d) above), the Exercise Price at which this Warrant shall thereafter
be exercisable shall be determined by multiplying the Exercise Price in effect
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which (x) the denominator shall be
the per share Fair Market Value of Common Stock determined as of the record date
mentioned above, and of which (y) the numerator shall be such per share Fair
Market Value of the Common Stock on such record date less the then fair market
value at such record date of the portion of such evidence of indebtedness,
assets, or rights or warrants so distributed applicable to one outstanding share
of Common Stock, as determined by the Board of Directors of the Company in good
faith; provided, however that in the event of a distribution exceeding ten
percent of the net assets of the Company, then such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "Appraiser") selected in good faith by the Holders of majority in
interest of the
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Warrants, at the Holders' sole expense; and provided, further, that the Company,
after receipt of the determination by such Appraiser shall have the right to
select an additional Appraiser, at the Company's sole expense, in which case the
fair market value shall be equal to the average of the determination by each
such Appraiser. Provided, that no such adjustment shall be made which has the
effect of increasing the Exercise Price. In either case the adjustments shall be
described in a statement provided to all Holders of Warrants. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
7.4 Other Adjustments, Etc.
(a) Rounding. All calculations under this Section 7 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(b) Notice of Adjustments. Whenever the Exercise Price is
adjusted pursuant to this Section 7, the Company shall promptly mail to each
holder of Warrants, a notice setting forth the Exercise Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(c) Exercise After Reclassification, Merger, Share Exchange,
or Sale of Assets. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange pursuant to which share exchange the Common Stock is
converted into other securities, cash or property, then the holders of Warrants
shall have the right thereafter to purchase upon exercise of such Warrants only
the kind and amount of shares of stock and other securities and property
receivable upon or deemed to be held following such reclassification,
consolidation, merger, sale, transfer, or share exchange by a holder of the
number of shares of the Common Stock which the holder of this Warrant would have
received upon exercise of this Warrant immediately prior to such
reclassification, consolidation, merger, sale, transfer, or share exchange. The
terms of any such consolidation, merger, sale transfer or share exchange shall
include such terms so as to continue to give to the holder of this Warrant the
right to receive the securities or property set forth in this Section 7.4(c)
upon any exercise following such consolidation, merger, sale, transfer, or share
exchange. This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers, or share exchanges.
(d) Procedure for Other Adjustments. In case at any time
conditions shall arise by reason of action taken by the Company which in the
opinion of the Board of Directors of the Company are not adequately covered by
the other provisions hereof and which might materially and adversely affect the
rights of the holders of Warrants (different than or distinguished from the
effect generally on the rights of holders of any securities of the Company) or
in case at any time any such conditions are expected to arise in the opinion of
the Board of Directors of the Company by reason of any action contemplated by
the Company, an Appraiser selected by the Holders of more than 50% of the
Warrants, at the Holders' sole expense, shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 7), of the Exercise Price
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(including, if necessary, any adjustment as to the securities which may be
acquired upon exercise) and any distribution which is or would be required to
preserve without diluting the rights of the holders of the Warrants; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an additional Appraiser, at the Company's sole
expense, in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Board of Directors of the
Company shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the case
may be; provided, however, that no such adjustment of the Exercise Price shall
be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or
opinions would result in an increase of the Exercise Price then in effect.
(e) No Double Counting. Notwithstanding anything to the
contrary contained in this Warrant, to the extent that any adjustment is made
under the terms of this Section 7 to the Exercise Price or the number of shares
issuable hereunder, no further adjustment shall be made with respect to the
recapitalization, issuance of securities, or distribution requiring adjustment.
No adjustment shall be made with respect to the issuance of Common Stock upon
the exercise of rights for which an adjustment was made under Section 7.4(d), or
for any securities issued in connection with the Debenture Purchase Agreement or
the exercise of any such securities.
(f) Definition of Fair Market Value. "Fair Market Value" per
share of common stock means (i) in the case of a security listed or admitted to
trading on any national securities exchange, the last reported sale price,
regular way (as determined in accordance with the practices of such exchange),
on each day, or if no sale takes place on any day, the last reported sale price,
regular way) as determined in accordance with the practices of such exchange) on
the immediately preceding trading day (and in the case of a security traded on
more than one national securities exchange, at such price upon the exchange on
which the volume of trading during the last calendar year was the greatest),
(ii) in the case of a security not then listed or admitted to trading on any
national securities exchange, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation service designated by the
Company, (iii) in the case of a security not then listed or admitted to trading
on any securities exchange and as to which no such reported sale price or bid
and asked prices are available, the average of the reported high bid and low
asked prices on such day, as reported by a reputable quotation service, or The
Wall Street Journal, or if there are no bids and asked prices on such day, the
average of the high bid and low asked prices, as so reported, on the most recent
day (not more than 30 days prior to the date in question) for which prices have
been so
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<PAGE>
reported, and (iv) in the case of a security determined by the Company's Board
of Directors as not having an active quoted market or in the case of other
property, if the Common Stock is no longer publicly traded the fair market value
of a share of Common Stock or other property as determined by an Appraiser (as
defined in Section 7.3(e) above) selected in good faith by the Holders of more
than 50% of the Warrants, at the Holders' sole expense; provided, however, that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, at the Company's sole expense, in
which case, the fair market value shall be equal to the average of the
determinations by each such Appraiser.
8. Certain Notices. If at any time the Company shall propose to (i)
declare any cash dividend upon its Common Stock; (ii) declare any dividend upon
its Common Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock; (iii) offer for subscription to
the holders of any of its Common Stock any additional shares of stock in any
class or other rights; (iv) reorganize, or reclassify the capital stock of the
Company, or consolidate, merge or otherwise combine with, or sell all or
substantially all of its assets to another corporation; (v) voluntarily or
involuntarily dissolve, liquidate or wind up the affairs of the Company; or (vi)
redeem or purchase any shares of its capital stock or securities convertible
into its capital stock, then the Company shall give to the Holder of this
Warrant, by certified or registered mail, (i) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least 15
days' prior written notice of the date when the same shall take place. Any
notice required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and any notice required by clause (ii)
shall specify the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
9. Article and Section Headings. Numbered and titled article and
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service, to the other party at the address set forth below,
or at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery or telecopy; or the
date two business days after the date of mailing, or the date of the next
business day after delivery to a courier service, as the case may be, shall be
deemed to be the date of such notice, election or demand.
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To the Holder: Sirrom Capital Corporation d/b/a Tandem Capital
500 Church Street
Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Facsimile No.: (615) 242-0842
with a copy to: C. Christopher Trower, Esq.
3159 Rilman Road, N.W.
Atlanta, Georgia 30327-1503
Facsimile No.: (404) 816-6854
To the Company: Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: President
Facsimile No.: (914) 786-8727
with a copy to: Jay Kaplowitz, Esq.
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Facsimile No.: (212) 980-5192
11. Severability. If any provision of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
enforced under the laws of the State of New York applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
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<PAGE>
15. Jurisdiction and Venue. The Company hereby consents to
jurisdiction, service of process, and venue in the courts of the State of
Tennessee or the State of New York, for the purpose of any action arising out of
any of its obligations under this Warrant, and expressly waives jury trial and
any and all objections it may have as to jurisdiction, service of process, and
venue in such courts.
16. Equity Participation. This Warrant is issued in connection with the
Debenture Purchase Agreement. It is intended that this Warrant constitute an
equity participation under and pursuant to T.C.A. ss.47-24-101, et. seq. and
that equity participation be permitted under said statutes and not constitute
interest on the Debenture. If under any circumstances whatsoever, fulfillment of
any obligation of this Warrant, the Debenture Purchase Agreement, or any other
agreement or document executed in connection with the Debenture Purchase
Agreement, shall violate the lawful limit of any applicable usury statute or any
other applicable law with regard to obligations of like character and amount,
then the obligation to be fulfilled shall be reduced to such lawful limit, such
that in no event shall there occur, under this Warrant, the Debenture Purchase
Agreement, or any other document or instrument executed in connection with the
Debenture Purchase Agreement, any violation of such lawful limit, but such
obligation shall be fulfilled to the lawful limit. If any sum is collected in
excess of the lawful limit, such excess shall be applied to reduce the principal
amount of the Debenture.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Warrant this ____________ day of _______________, ____.
COMPANY: DIPLOMAT DIRECT MARKETING CORPORATION
By: _____________________________________
Title: _____________________________________
HOLDER: SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By: _____________________________________
Title: _____________________________________
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<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
STOCK PURCHASE WARRANT
[Additional Warrant]
This Warrant is issued this __________ day of __________, _____, by
DIPLOMAT DIRECT MARKETING CORPORATION, a Delaware corporation (the "Company"),
to SIRROM CAPITAL CORPORATION d/b/a TANDEM CAPITAL, a Tennessee corporation
(SIRROM CAPITAL CORPORATION and any subsequent assignee or transferee hereof are
hereinafter referred to collectively as "Holder" or "Holders"). Capitalized
terms not defined herein shall have the meanings assigned by the Debenture
Purchase Agreement referred to in Section 1.
Agreement:
1. Issuance of Warrant; Term. For and in consideration of Sirrom
Capital Corporation d/b/a Tandem Capital purchasing from the Company and other
Borrowers a Subordinated Debenture in the original principal amount of Five
Million Dollars ($5,000,000.00) (the "Debenture") pursuant to the terms of a
Debenture Purchase Agreement dated June ____, 1998 (the "Debenture Purchase
Agreement"), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase at any time and from time to time, in whole or in
part, on or after ___________ ___, ____ the earlier of (i) February 28, 1999, or
(ii) five Business Days after the closing of an offering of securities by the
Company following the Closing Date realizing gross proceeds of at least
$5,000,000, up to the number of Shares of the Company's Common Stock $.0001 par
value (the "Common Stock") equal to (A) 416,600, multiplied by (B) the quotient
of (x) the principal amount of Debentures outstanding as of such date, divided
by (y) $5,000,000. The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Shares." This Warrant shall be
exercisable at any time and from time to time from _____________, 19 ____, [date
of issue] until ___________ ____, 20___ [five years from date of issue].
2. Exercise Price. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased shall be equal to 80% of the
average closing bid price of the Company's Common Stock for the 20 consecutive
trading days preceding the date of issuance, and shall be further adjusted as
provided herein. If on June ______, 1999, the average closing bid price of the
Common Stock for the 20 consecutive trading days immediately prior to June
_____, 1999, is less than the Exercise Price, then the Exercise Price shall
automatically be reset on June ______, 1999, at the greater of (i) $2.00, or
(ii) 80% of the average closing bid price of the Company's Common Stock for the
20 consecutive trading days immediately preceding June ______, 1999, provided
that no adjustment shall be made which increases the then effective Exercise
Price.
<PAGE>
3. Exercise. This Warrant may be exercised by the Holder hereof as to
all or any increment or increments of 100 Shares (or the balance of the Shares
if less than such number), upon delivery of written notice of intent to exercise
to the Company at the address set forth in the Debenture Purchase Agreement, or
such other address as the Company shall designate in a written notice to the
Holder hereof, together with this Warrant and payment to the Company of the
aggregate Exercise Price of the Shares so purchased. The Exercise Price shall be
payable, at the option of the Holder, (i) by certified or bank check, (ii) by
the surrender of the Debenture or portion thereof having an outstanding
principal balance equal to the aggregate Exercise Price, or (iii) by the
surrender of a portion of this Warrant where the excess of (A) the Fair Market
Value of the Shares subject to the portion of this Warrant that is surrendered
(the "Surrendered Shares"), over (B) the aggregate Exercise Price of the
Surrendered Shares, is equal to the aggregate Exercise Price for the Shares to
be issued. Upon payment of the Exercise Price, the Holder shall be deemed to be
the holder of record of the Shares, notwithstanding that the stock transfer
books of the Company may then be closed or that certificates representing such
Shares may not then be actually delivered to the Holder. The Company shall as
promptly as practicable thereafter, and in any event within 15 days thereafter,
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Shares for which this Warrant is being exercised
in such names and denominations as are requested by such Holder. If this Warrant
shall be exercised with respect to less than all of the Shares, the Holder shall
be entitled upon surrender of the old Warrant to receive a new Warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it will pay when due any and all
state and federal issue taxes which may be payable in respect of the issuance of
this Warrant or the issuance of any Shares upon exercise of this Warrant.
4. Covenants and Conditions. The above provisions are subject to the
following:
4.1 Restrictive Legend. Each certificate representing Shares
shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
4.2 Validity; Reservation of Shares. The Company covenants and
agrees that all Shares which may be issued upon exercise of this Warrant will,
upon issuance and payment therefor pursuant to this Warrant, be validly issued
and outstanding, fully paid and nonassessable, free from all taxes, liens,
charges and preemptive rights, if any, with respect thereto or to the issuance
thereof. The Company shall at all times reserve and keep available for issuance
upon the exercise of this Warrant such number of authorized but unissued shares
of Common Stock as will be sufficient to permit the exercise in full of this
Warrant.
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<PAGE>
5. Transfer and Replacement of Warrant. Subject to the provisions of
Section 4, this Warrant may be transferred, in whole or in part, but only in
multiples of 10,000 Shares, to any person or business entity, by presentation of
the Warrant to the Company with written instructions for such transfer; provided
that the transferee is an accredited investor as defined in Regulation D of the
Securities Act of 1933, and such transfer is in compliance with all applicable
federal and state securities laws, provided that no transfer may be made to a
competitor of the Company without the Company's prior written consent. Upon such
presentation for transfer, the Company shall promptly execute and deliver a new
Warrant or Warrants in the form hereof in the name of the transferee or
transferees and in the denominations specified in such instructions. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft or destruction of this Warrant, and of indemnity or security reasonably
satisfactory to it, or upon surrender of this Warrant if mutilated, the Company
will make and deliver a new Warrant of like tenor, bearing the restrictive
legend set forth above, in lieu of this Warrant. This Warrant shall be promptly
canceled by the Company upon the surrender hereof in connection with any
transfer or replacement. The Company shall pay all expenses incurred by it in
connection with the preparation, issuance and delivery of Warrants under this
Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock that are then issuable upon exercise of this Warrant
shall be deemed to be outstanding and owned by the Holder and the Holder shall
be entitled to participate in such rights offering. The Company shall not grant
any preemptive rights with respect to any of its Common Stock without the prior
written consent of the Holder.
7. Adjustment of Number of Shares and Exercise Price.
7.1 Recapitalizations -- Adjustment of Number of Shares. If
all or any portion of this Warrant shall be exercised subsequent to any
transaction in which the Company shall (i) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Common Stock payable in
shares of its capital stock (whether payable in shares of its Common Stock or of
capital stock of any other class), (ii) subdivide outstanding shares of Common
Stock into a larger number of shares, (iii) combine outstanding shares of Common
Stock into a smaller number of shares, (iv) issue by reclassification of shares
of Common Stock any shares of capital stock of the Company, or (v) otherwise
change its capital structure, occurring after the date hereof, as a result of
which shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of securities of the
Company, then the Holder exercising this Warrant shall receive, for the
aggregate price paid upon such exercise, the aggregate number and class of
shares and such other securities which such Holder would have received if this
Warrant had been exercised immediately prior to the record date for such
transaction.
7.2 Mergers, Etc. -- Adjustment of Number of Shares. If all or
any portion of this
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<PAGE>
Warrant shall be exercised subsequent to any merger, consolidation, exchange of
shares, separation, reorganization, or liquidation of the Company, or other
similar event, occurring after the date hereof, as a result of which Shares of
Common Stock shall be changed into the same or a different number of shares of
the same or another class or classes of securities of the Company or another
entity, or the holders of Common Stock are entitled to receive cash or other
property, then the Holder exercising this Warrant shall receive, for the
aggregate price paid upon such exercise, the aggregate number and class of
shares, cash or other property which such Holder would have received if this
Warrant had been exercised immediately prior to such merger, consolidation,
exchange of shares, separation, reorganization or liquidation, or other similar
event.
7.3 Adjustment of Exercise Price Upon Issuance of Shares,
Warrants, Rights, Etc.
(a) Initial Exercise Price. The initial Exercise Price shall
be equal to 80% of the average closing bid price of the Company's Common Stock
for the 20 consecutive trading days preceding the date of issuance. If on June
______, 1999, the average closing bid price of the Common Stock for the 20
consecutive trading days immediately prior to June _____, 1999, is less than the
Exercise Price, then the Exercise Price shall automatically be reset on June
______, 1999, at the greater of (i) $2.00, or (ii) 80% of the average closing
bid price of the Company's Common Stock for the 20 consecutive trading days
immediately preceding June ______, 1999, provided that no adjustment shall be
made which increases the then effective Exercise Price.
(b) Recapitalizations. If the Company, at any time prior to
the expiration of this Warrant, shall (i) pay a stock dividend or otherwise make
a distribution or distributions on shares of its Common Stock payable in shares
of its capital stock (whether payable in shares of its Common Stock or of
capital stock of any class), (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, (iii) combine outstanding shares of Common Stock
into a smaller number of shares, (iv) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, or (v) otherwise change
its capital structure, then the Exercise Price then in effect shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock of the Company outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after such
event. Such adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(c) Distributions of Warrants or Rights, Issuance of Stock or
Warrants at Less Than Fair Market Value or Exercise Price. If the Company, at
any time prior to the expiration of this Warrant, shall (i) issue rights or
warrants to all holders of Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the lesser of the
Fair Market Value of Common Stock or the Exercise Price then in effect at the
record date mentioned below, or (ii) issue additional Common Stock, or warrants,
options, or other securities convertible into Common Stock, at a price or
exercise or conversion price per share less than the lesser of the Fair Market
Value of the Common Stock or the Exercise Price then in effect at the date of
issuance
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<PAGE>
or grant, the Exercise Price then in effect shall be adjusted to equal (x) the
sum of (A) the total number of shares of Common Stock issuable upon exercise of
this Warrant immediately prior to such issuance or grant, multiplied by the
Exercise Price then in effect, plus (B) the aggregate consideration to be paid
for such Common Stock or other securities (upon issuance and/or exercise or
conversion), divided by (y) the sum of (C) the total number of shares of Common
Stock issuable upon exercise of this Warrant immediately prior to such issuance
or grant, plus (D) the number of shares of Common Stock or common stock
equivalents issued or granted. Provided, that no such adjustment shall be made
which has the effect of increasing the Exercise Price. Further provided, that
the adjustment provided by this Section 7.3(c) shall not apply to issuance of
(i) securities pursuant to options, warrants, or conversion rights outstanding
on the date this Warrant is issued, (ii) up to a maximum of 100,000 shares of
Common Stock pursuant to the Company's 1992 Stock Option Plan, August 1996 Stock
Option Plan, November 1996 Stock Option Plan and the 1998 Stock Option Plan, and
(iii) up to a maximum of 475,000 shares of Common Stock in settlement of Russo
v. Diplomat Corporation, New York Supreme Court, No. 98/601194. Such adjustment
shall be made whenever such rights, warrants, Common Stock, or securities are
issued, and shall become effective immediately after (i) the record date for the
determination of stockholders entitled to receive such rights or warrants, or
(ii) the issuance of such Common Stock or common stock equivalents. Provided,
that upon the expiration of any right or warrant to purchase or convert into
Common Stock the issuance of which resulted in an adjustment in the Exercise
Price pursuant to this Section 7.3(c), if such right or warrant shall expire and
shall not have been exercised, the Exercise Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Exercise Price made pursuant to the provisions of this
Section 7 after the issuance of such rights or warrants) had the adjustment of
the Exercise Price made upon the issuance of such rights or warrants been made
on the basis of offering for subscription or purchase only that number of shares
of Common Stock actually purchased or obtained upon the exercise of such rights
or warrants actually exercised.
(d) [Reserved]
(e) Distributions of Other Property. If the Company, at any
time prior to the expiration of this Warrant, shall distribute to all holders of
Common Stock (and not to holders of Warrants on an as-exercised basis) evidences
of its indebtedness, or any of its assets, or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Section 7.3(c) or
Section 7.3(d) above), the Exercise Price at which this Warrant shall thereafter
be exercisable shall be determined by multiplying the Exercise Price in effect
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which (x) the denominator shall be
the per share Fair Market Value of Common Stock determined as of the record date
mentioned above, and of which (y) the numerator shall be such per share Fair
Market Value of the Common Stock on such record date less the then fair market
value at such record date of the portion of such evidence of indebtedness,
assets, or rights or warrants so distributed applicable to one outstanding share
of Common Stock, as determined by the Board of Directors of the Company in good
faith; provided, however that in the event of a distribution exceeding ten
percent of the net
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<PAGE>
assets of the Company, then such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the Holders of majority in interest of
the Warrants, at the Holders' sole expense; and provided, further, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, at the Company's sole expense, in which
case the fair market value shall be equal to the average of the determination by
each such Appraiser. Provided, that no such adjustment shall be made which has
the effect of increasing the Exercise Price. In either case the adjustments
shall be described in a statement provided to all Holders of Warrants. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
7.4 Other Adjustments, Etc.
(a) Rounding. All calculations under this Section 7 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(b) Notice of Adjustments. Whenever the Exercise Price is
adjusted pursuant to this Section 7, the Company shall promptly mail to each
holder of Warrants, a notice setting forth the Exercise Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(c) Exercise After Reclassification, Merger, Share Exchange,
or Sale of Assets. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange pursuant to which share exchange the Common Stock is
converted into other securities, cash or property, then the holders of Warrants
shall have the right thereafter to purchase upon exercise of such Warrants only
the kind and amount of shares of stock and other securities and property
receivable upon or deemed to be held following such reclassification,
consolidation, merger, sale, transfer, or share exchange by a holder of the
number of shares of the Common Stock which the holder of this Warrant would have
received upon exercise of this Warrant immediately prior to such
reclassification, consolidation, merger, sale, transfer, or share exchange. The
terms of any such consolidation, merger, sale transfer or share exchange shall
include such terms so as to continue to give to the holder of this Warrant the
right to receive the securities or property set forth in this Section 7.4(c)
upon any exercise following such consolidation, merger, sale, transfer, or share
exchange. This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers, or share exchanges.
(d) Procedure for Other Adjustments. In case at any time
conditions shall arise by reason of action taken by the Company which in the
opinion of the Board of Directors of the Company are not adequately covered by
the other provisions hereof and which might materially and adversely affect the
rights of the holders of Warrants (different than or distinguished from the
effect generally on the rights of holders of any securities of the Company) or
in case at any time any
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<PAGE>
such conditions are expected to arise in the opinion of the Board of Directors
of the Company by reason of any action contemplated by the Company, an Appraiser
selected by the Holders of more than 50% of the Warrants, at the Holders' sole
expense, shall give its opinion as to the adjustment, if any (not inconsistent
with the standards established in this Section 7), of the Exercise Price
(including, if necessary, any adjustment as to the securities which may be
acquired upon exercise) and any distribution which is or would be required to
preserve without diluting the rights of the holders of the Warrants; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an additional Appraiser, at the Company's sole
expense, in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Board of Directors of the
Company shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the case
may be; provided, however, that no such adjustment of the Exercise Price shall
be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or
opinions would result in an increase of the Exercise Price then in effect.
(e) No Double Counting. Notwithstanding anything to the
contrary contained in this Warrant, to the extent that any adjustment is made
under the terms of this Section 7 to the Exercise Price or the number of shares
issuable hereunder, no further adjustment shall be made with respect to the
recapitalization, issuance of securities, or distribution requiring adjustment.
No adjustment shall be made with respect to the issuance of Common Stock upon
the exercise of rights for which an adjustment was made under Section 7.4(d), or
for any securities issued in connection with the Debenture Purchase Agreement or
the exercise of any such securities.
(f) Definition of Fair Market Value. "Fair Market Value" per
share of common stock means (i) in the case of a security listed or admitted to
trading on any national securities exchange, the last reported sale price,
regular way (as determined in accordance with the practices of such exchange),
on each day, or if no sale takes place on any day, the last reported sale price,
regular way) as determined in accordance with the practices of such exchange) on
the immediately preceding trading day (and in the case of a security traded on
more than one national securities exchange, at such price upon the exchange on
which the volume of trading during the last calendar year was the greatest),
(ii) in the case of a security not then listed or admitted to trading on any
national securities exchange, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation service designated by the
Company, (iii) in the case of a security not then listed or admitted to trading
on any securities exchange and as to which no such reported sale price or bid
and asked prices are available, the average of the reported high bid and low
asked prices on such day, as reported by a reputable quotation service, or The
Wall Street Journal, or if there are no bids and asked prices on such day, the
average of the high bid and low asked prices, as so reported, on the most recent
day (not more than 30 days prior to the date in question) for which prices have
been so
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<PAGE>
reported, and (iv) in the case of a security determined by the Company's Board
of Directors as not having an active quoted market or in the case of other
property, if the Common Stock is no longer publicly traded the fair market value
of a share of Common Stock or other property as determined by an Appraiser (as
defined in Section 7.3(e) above) selected in good faith by the Holders of more
than 50% of the Warrants, at the Holders' sole expense; provided, however, that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, at the Company's sole expense, in
which case, the fair market value shall be equal to the average of the
determinations by each such Appraiser.
8. Certain Notices. If at any time the Company shall propose to (i)
declare any cash dividend upon its Common Stock; (ii) declare any dividend upon
its Common Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock; (iii) offer for subscription to
the holders of any of its Common Stock any additional shares of stock in any
class or other rights; (iv) reorganize, or reclassify the capital stock of the
Company, or consolidate, merge or otherwise combine with, or sell all or
substantially all of its assets to another corporation; (v) voluntarily or
involuntarily dissolve, liquidate or wind up the affairs of the Company; or (vi)
redeem or purchase any shares of its capital stock or securities convertible
into its capital stock, then the Company shall give to the Holder of this
Warrant, by certified or registered mail, (i) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least 15
days' prior written notice of the date when the same shall take place. Any
notice required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and any notice required by clause (ii)
shall specify the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
9. Article and Section Headings. Numbered and titled article and
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service, to the other party at the address set forth below,
or at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery or telecopy; or the
date two business days after the date of mailing, or the date of the next
business day after delivery to a courier service, as the case may be, shall be
deemed to be the date of such notice, election or demand.
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<PAGE>
To the Holder: Sirrom Capital Corporation d/b/a Tandem Capital
500 Church Street
Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Facsimile No.: (615) 242-0842
with a copy to: C. Christopher Trower, Esq.
3159 Rilman Road, N.W.
Atlanta, Georgia 30327-1503
Facsimile No.: (404) 816-6854
To the Company: Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: President
Facsimile No.: (914) 786-8727
with a copy to: Jay Kaplowitz, Esq.
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Facsimile No.: (212) 980-5192
11. Severability. If any provision of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
enforced under the laws of the State of New York applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
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<PAGE>
15. Jurisdiction and Venue. The Company hereby consents to
jurisdiction, service of process, and venue in the courts of the State of
Tennessee or the State of New York, for the purpose of any action arising out of
any of its obligations under this Warrant, and expressly waives jury trial and
any and all objections it may have as to jurisdiction, service of process, and
venue in such courts.
16. Equity Participation. This Warrant is issued in connection with the
Debenture Purchase Agreement. It is intended that this Warrant constitute an
equity participation under and pursuant to T.C.A. ss.47-24-101, et. seq. and
that equity participation be permitted under said statutes and not constitute
interest on the Debenture. If under any circumstances whatsoever, fulfillment of
any obligation of this Warrant, the Debenture Purchase Agreement, or any other
agreement or document executed in connection with the Debenture Purchase
Agreement, shall violate the lawful limit of any applicable usury statute or any
other applicable law with regard to obligations of like character and amount,
then the obligation to be fulfilled shall be reduced to such lawful limit, such
that in no event shall there occur, under this Warrant, the Debenture Purchase
Agreement, or any other document or instrument executed in connection with the
Debenture Purchase Agreement, any violation of such lawful limit, but such
obligation shall be fulfilled to the lawful limit. If any sum is collected in
excess of the lawful limit, such excess shall be applied to reduce the principal
amount of the Debenture.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Warrant this ____________ day of _______________, ____.
COMPANY: DIPLOMAT DIRECT MARKETING CORPORATION
By: _____________________________________
Title: _____________________________________
HOLDER: SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By: _____________________________________
Title: _____________________________________
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<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE TRANSFERRED
WITHOUT SUCH REGISTRATION OR EXEMPTION THEREFROM.
STOCK PURCHASE WARRANT
[Form of Contingent Warrants]
This Warrant is issued this __________ day of __________, _____, by
DIPLOMAT DIRECT MARKETING CORPORATION, a Delaware corporation (the "Company"),
to SIRROM CAPITAL CORPORATION d/b/a TANDEM CAPITAL, a Tennessee corporation
(SIRROM CAPITAL CORPORATION and any subsequent assignee or transferee hereof
are hereinafter referred to collectively as "Holder" or "Holders"). Capitalized
terms not defined herein shall have the meanings assigned by the Debenture
Purchase Agreement referred to in Section 1.
Agreement:
1. Issuance of Warrant; Term. For and in consideration of Sirrom
Capital Corporation d/b/a Tandem Capital purchasing from the Company and other
Borrowers a Subordinated Debenture in the original principal amount of Five
Million Dollars ($5,000,000.00) (the "Debenture") pursuant to the terms of a
Debenture Purchase Agreement dated June _______, 1998 (the "Debenture Purchase
Agreement"), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase at any time and from time to time, in whole or in
part, on or after [Closing Date Anniversary], [year], up to the number of
Shares of the Company's Common Stock, $.0001 par value (the "Common Stock"),
equal to (A) 200,000, multiplied by (B) the quotient of (x) the principal
amount of Debentures outstanding as of such date, divided by (y) $5,000,000.
The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable at
any time and from time to time from [issue date], 19____, until ___________
____, 20___ [five years from date of issue].
2. Exercise Price. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased shall be equal to [the
greater of (i) the Exercise Price (as reset, if applicable) of the Initial
Warrants on the first anniversary of the Closing Date, or (ii) 80% of the
average closing bid price of the Company's Common Stock for the 20 consecutive
trading days preceding [Closing Date Anniversary], [year], and shall be further
adjusted as provided herein.
3. Exercise. This Warrant may be exercised by the Holder hereof as to
all or any increment or increments of 100 Shares (or the balance of the Shares
if less than such number), upon delivery of written notice of intent to
exercise to the Company at the address set forth in the Debenture Purchase
Agreement, or such other address as the Company shall designate in a written
notice to the Holder hereof, together with this Warrant and payment to the
Company of the aggregate Exercise Price of the Shares so purchased. The
Exercise Price shall be payable, at the option of the
<PAGE>
Holder, (i) by certified or bank check, (ii) by the surrender of the Debenture
or portion thereof having an outstanding principal balance equal to the
aggregate Exercise Price, or (iii) by the surrender of a portion of this
Warrant where the excess of (A) the Fair Market Value of the Shares subject to
the portion of this Warrant that is surrendered (the "Surrendered Shares"),
over (B) the aggregate Exercise Price of the Surrendered Shares, is equal to
the aggregate Exercise Price for the Shares to be issued. Upon payment of the
Exercise Price, the Holder shall be deemed to be the holder of record of the
Shares, notwithstanding that the stock transfer books of the Company may then
be closed or that certificates representing such Shares may not then be
actually delivered to the Holder. The Company shall as promptly as practicable
thereafter, and in any event within 15 days thereafter, execute and deliver to
the Holder of this Warrant a certificate or certificates for the total number
of whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by such Holder. If this Warrant shall be
exercised with respect to less than all of the Shares, the Holder shall be
entitled upon surrender of the old Warrant to receive a new Warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it will pay when due any and all
state and federal issue taxes which may be payable in respect of the issuance
of this Warrant or the issuance of any Shares upon exercise of this Warrant.
4. Covenants and Conditions. The above provisions are subject to the
following:
4.1 Restrictive Legend. Each certificate representing
Shares shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW. THESE SECURITIES MAY NOT BE TRANSFERRED WITHOUT SUCH
REGISTRATION OR EXEMPTION THEREFROM.
4.2 Validity; Reservation of Shares. The Company covenants
and agrees that all Shares which may be issued upon exercise of this Warrant
will, upon issuance and payment therefor pursuant to this Warrant, be validly
issued and outstanding, fully paid and nonassessable, free from all taxes,
liens, charges and preemptive rights, if any, with respect thereto or to the
issuance thereof. The Company shall at all times reserve and keep available for
issuance upon the exercise of this Warrant such number of authorized but
unissued shares of Common Stock as will be sufficient to permit the exercise in
full of this Warrant.
5. Transfer and Replacement of Warrant. Subject to the provisions of
Section 4, this Warrant may be transferred, in whole or in part, but only in
multiples of 10,000 Shares, to any person or business entity, by presentation
of the Warrant to the Company with written instructions for such transfer;
provided that the transferee is an accredited investor as defined in Regulation
D of the Securities Act of 1933, and such transfer is in compliance with all
applicable federal and state
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<PAGE>
securities laws, provided that no transfer may be made to a competitor of the
Company without the Company's prior written consent. Upon such presentation for
transfer, the Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the transferee or transferees and in
the denominations specified in such instructions. Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft or destruction of
this Warrant, and of indemnity or security reasonably satisfactory to it, or
upon surrender of this Warrant if mutilated, the Company will make and deliver
a new Warrant of like tenor, bearing the restrictive legend set forth above, in
lieu of this Warrant. This Warrant shall be promptly canceled by the Company
upon the surrender hereof in connection with any transfer or replacement. The
Company shall pay all expenses incurred by it in connection with the
preparation, issuance and delivery of Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company,
then all shares of Common Stock that are then issuable upon exercise of this
Warrant shall be deemed to be outstanding and owned by the Holder and the
Holder shall be entitled to participate in such rights offering. The Company
shall not grant any preemptive rights with respect to any of its Common Stock
without the prior written consent of the Holder.
7. Adjustment of Number of Shares and Exercise Price.
7.1 Recapitalizations -- Adjustment of Number of Shares. If
all or any portion of this Warrant shall be exercised subsequent to any
transaction in which the Company shall (i) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Common Stock payable in
shares of its capital stock (whether payable in shares of its Common Stock or
of capital stock of any other class), (ii) subdivide outstanding shares of
Common Stock into a larger number of shares, (iii) combine outstanding shares
of Common Stock into a smaller number of shares, (iv) issue by reclassification
of shares of Common Stock any shares of capital stock of the Company, or (v)
otherwise change its capital structure, occurring after the date hereof, as a
result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of
securities of the Company, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate number
and class of shares and such other securities which such Holder would have
received if this Warrant had been exercised immediately prior to the record
date for such transaction.
7.2 Mergers, Etc. -- Adjustment of Number of Shares. If all
or any portion of this Warrant shall be exercised subsequent to any merger,
consolidation, exchange of shares, separation, reorganization, or liquidation
of the Company, or other similar event, occurring after the date hereof, as a
result of which Shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of
securities of the Company or another entity, or the holders of Common Stock are
entitled to receive cash or other property, then the Holder
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<PAGE>
exercising this Warrant shall receive, for the aggregate price
paid upon such exercise, the aggregate number and class of shares, cash or
other property which such Holder would have received if this Warrant had been
exercised immediately prior to such merger, consolidation, exchange of shares,
separation, reorganization or liquidation, or other similar event.
7.3 Adjustment of Exercise Price Upon Issuance of Shares,
Warrants, Rights, Etc.
(a) Initial Exercise Price. The initial Exercise
Price shall be equal to the greater of (i) the Exercise Price (as reset, if
applicable) of the Initial Warrants on the first anniversary of the Closing
Date, or (ii) 80% of the average closing bid price of the Company's Common
Stock for the 20 consecutive trading days preceding [Closing Date Anniversary],
[year], and shall be further adjusted as provided herein.
(b) Recapitalizations. If the Company, at any time
prior to the expiration of this Warrant, shall (i) pay a stock dividend or
otherwise make a distribution or distributions on shares of its Common Stock
payable in shares of its capital stock (whether payable in shares of its Common
Stock or of capital stock of any class), (ii) subdivide outstanding shares of
Common Stock into a larger number of shares, (iii) combine outstanding shares
of Common Stock into a smaller number of shares, (iv) issue by reclassification
of shares of Common Stock any shares of capital stock of the Company, or (v)
otherwise change its capital structure, then the Exercise Price then in effect
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock of the Company outstanding before such event and of
which the denominator shall be the number of shares of Common Stock outstanding
after such event. Such adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or reclassification.
(c) Distributions of Warrants or Rights, Issuance of
Stock or Warrants at Less Than Fair Market Value or Exercise Price. If the
Company, at any time prior to the expiration of this Warrant, shall (i) issue
rights or warrants to all holders of Common Stock entitling them to subscribe
for or purchase shares of Common Stock at a price per share less than the
lesser of the Fair Market Value of Common Stock or the Exercise Price then in
effect at the record date mentioned below, or (ii) issue additional Common
Stock, or warrants, options, or other securities convertible into Common Stock,
at a price or exercise or conversion price per share less than the lesser of
the Fair Market Value of the Common Stock or the Exercise Price then in effect
at the date of issuance or grant, the Exercise Price then in effect shall be
adjusted to equal (x) the sum of (A) the total number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such issuance or
grant, multiplied by the Exercise Price then in effect, plus (B) the aggregate
consideration to be paid for such Common Stock or other securities (upon
issuance and/or exercise or conversion), divided by (y) the sum of (C) the
total number of shares of Common Stock issuable upon exercise of this Warrant
immediately prior to such issuance or grant, plus (D) the number of shares of
Common Stock or common stock equivalents issued or granted. Provided, that no
such adjustment shall be made which has the effect of increasing the Exercise
Price. Further provided, that the
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<PAGE>
adjustment provided by this Section 7.3(c) shall not apply to issuance of (i)
securities pursuant to options, warrants, or conversion rights outstanding on
the date this Warrant is issued, (ii) up to a maximum of 100,000 shares of
Common Stock pursuant to the Company's 1992 Stock Option Plan, August 1996
Stock Option Plan, November 1996 Stock Option Plan and the 1998 Stock Option
Plan, and (iii) up to a maximum of 475,000 shares of Common Stock in settlement
of Russo v. Diplomat Corporation, New York Supreme Court, No. 98/601194. Such
adjustment shall be made whenever such rights, warrants, Common Stock, or
securities are issued, and shall become effective immediately after (i) the
record date for the determination of stockholders entitled to receive such
rights or warrants, or (ii) the issuance of such Common Stock or common stock
equivalents. Provided, that upon the expiration of any right or warrant to
purchase or convert into Common Stock the issuance of which resulted in an
adjustment in the Exercise Price pursuant to this Section 7.3(c), if such right
or warrant shall expire and shall not have been exercised, the Exercise Price
shall immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Exercise Price made pursuant to the
provisions of this Section 7 after the issuance of such rights or warrants) had
the adjustment of the Exercise Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased or obtained upon the
exercise of such rights or warrants actually exercised.
(d) [Reserved]
(e) Distributions of Other Property. If the Company,
at any time prior to the expiration of this Warrant, shall distribute to all
holders of Common Stock (and not to holders of Warrants on an as-exercised
basis) evidences of its indebtedness, or any of its assets, or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Section 7.3(c) or Section 7.3(d) above), the Exercise Price at which this
Warrant shall thereafter be exercisable shall be determined by multiplying the
Exercise Price in effect prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which (x)
the denominator shall be the per share Fair Market Value of Common Stock
determined as of the record date mentioned above, and of which (y) the
numerator shall be such per share Fair Market Value of the Common Stock on such
record date less the then fair market value at such record date of the portion
of such evidence of indebtedness, assets, or rights or warrants so distributed
applicable to one outstanding share of Common Stock, as determined by the Board
of Directors of the Company in good faith; provided, however that in the event
of a distribution exceeding ten percent of the net assets of the Company, then
such fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the Holders of majority in interest of the Warrants, at the
Holders' sole expense; and provided, further, that the Company, after receipt
of the determination by such Appraiser shall have the right to select an
additional Appraiser, at the Company's sole expense, in which case the fair
market value shall be equal to the average of the determination by each such
Appraiser. Provided, that no such adjustment shall be made which has
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<PAGE>
the effect of increasing the Exercise Price. In either case the adjustments
shall be described in a statement provided to all Holders of Warrants. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
7.4 Other Adjustments, Etc.
(a) Rounding. All calculations under this Section 7
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be.
(b) Notice of Adjustments. Whenever the Exercise
Price is adjusted pursuant to this Section 7, the Company shall promptly mail
to each holder of Warrants, a notice setting forth the Exercise Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(c) Exercise After Reclassification, Merger, Share
Exchange, or Sale of Assets. In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another person,
any sale or transfer of all or substantially all of the assets of the Company,
or any compulsory share exchange pursuant to which share exchange the Common
Stock is converted into other securities, cash or property, then the holders of
Warrants shall have the right thereafter to purchase upon exercise of such
Warrants only the kind and amount of shares of stock and other securities and
property receivable upon or deemed to be held following such reclassification,
consolidation, merger, sale, transfer, or share exchange by a holder of the
number of shares of the Common Stock which the holder of this Warrant would
have received upon exercise of this Warrant immediately prior to such
reclassification, consolidation, merger, sale, transfer, or share exchange. The
terms of any such consolidation, merger, sale transfer or share exchange shall
include such terms so as to continue to give to the holder of this Warrant the
right to receive the securities or property set forth in this Section 7.4(c)
upon any exercise following such consolidation, merger, sale, transfer, or
share exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers, or share
exchanges.
(d) Procedure for Other Adjustments. In case at any
time conditions shall arise by reason of action taken by the Company which in
the opinion of the Board of Directors of the Company are not adequately covered
by the other provisions hereof and which might materially and adversely affect
the rights of the holders of Warrants (different than or distinguished from the
effect generally on the rights of holders of any securities of the Company) or
in case at any time any such conditions are expected to arise in the opinion of
the Board of Directors of the Company by reason of any action contemplated by
the Company, an Appraiser selected by the Holders of more than 50% of the
Warrants, at the Holders' sole expense, shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 7), of the Exercise Price (including, if necessary, any adjustment as
to the securities which may be acquired upon exercise) and any distribution
which is or would be required to preserve without diluting the rights of the
holders of the Warrants; provided, however, that the Company, after receipt of
the determination by such Appraiser, shall have the right to select an
additional Appraiser, at the Company's sole expense,
-6-
<PAGE>
in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Board of Directors of the
Company shall make the adjustment recommended forthwith upon the receipt of
such opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Exercise Price
shall be made which in the opinion of the Appraiser(s) giving the aforesaid
opinion or opinions would result in an increase of the Exercise Price then in
effect.
(e) No Double Counting. Notwithstanding anything to
the contrary contained in this Warrant, to the extent that any adjustment is
made under the terms of this Section 7 to the Exercise Price or the number of
shares issuable hereunder, no further adjustment shall be made with respect to
the recapitalization, issuance of securities, or distribution requiring
adjustment. No adjustment shall be made with respect to the issuance of Common
Stock upon the exercise of rights for which an adjustment was made under
Section 7.4(d), or for any securities issued in connection with the Debenture
Purchase Agreement or the exercise of any such securities.
(f) Definition of Fair Market Value. "Fair Market
Value" per share of common stock means (i) in the case of a security listed or
admitted to trading on any national securities exchange, the last reported sale
price, regular way (as determined in accordance with the practices of such
exchange), on each day, or if no sale takes place on any day, the last reported
sale price, regular way) as determined in accordance with the practices of such
exchange) on the immediately preceding trading day (and in the case of a
security traded on more than one national securities exchange, at such price
upon the exchange on which the volume of trading during the last calendar year
was the greatest), (ii) in the case of a security not then listed or admitted
to trading on any national securities exchange, the last reported sale price on
such day, or if no sale takes place on such day, the average of the closing bid
and asked prices on such day, as reported by a reputable quotation service
designated by the Company, (iii) in the case of a security not then listed or
admitted to trading on any securities exchange and as to which no such reported
sale price or bid and asked prices are available, the average of the reported
high bid and low asked prices on such day, as reported by a reputable quotation
service, or The Wall Street Journal, or if there are no bids and asked prices
on such day, the average of the high bid and low asked prices, as so reported,
on the most recent day (not more than 30 days prior to the date in question)
for which prices have been so reported, and (iv) in the case of a security
determined by the Company's Board of Directors as not having an active quoted
market or in the case of other property, if the Common Stock is no longer
publicly traded the fair market value of a share of Common Stock or other
property as determined by an Appraiser (as defined in Section 7.3(e) above)
selected in good faith by the Holders of more than 50% of the Warrants, at the
Holders' sole expense; provided, however, that the Company, after receipt of
the determination by such Appraiser, shall have the right to select an
additional Appraiser, at the Company's sole expense, in which case, the fair
market value shall be equal to the average of the determinations by each such
Appraiser.
8. Certain Notices. If at any time the Company shall propose to (i)
declare any cash dividend upon its Common Stock; (ii) declare any dividend upon
its Common Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock; (iii) offer for
-7-
<PAGE>
subscription to the holders of any of its Common Stock any additional shares of
stock in any class or other rights; (iv) reorganize, or reclassify the capital
stock of the Company, or consolidate, merge or otherwise combine with, or sell
all or substantially all of its assets to another corporation; (v) voluntarily
or involuntarily dissolve, liquidate or wind up the affairs of the Company; or
(vi) redeem or purchase any shares of its capital stock or securities
convertible into its capital stock, then the Company shall give to the Holder
of this Warrant, by certified or registered mail, (i) at least 10 days' prior
written notice of the date on which the books of the Company shall close or a
record shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
15 days' prior written notice of the date when the same shall take place. Any
notice required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto, and any notice required by clause (ii)
shall specify the date on which the holders of Common Stock shall be entitled
to exchange their Common Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
9. Article and Section Headings. Numbered and titled article and
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service, to the other party at the address set forth below,
or at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery or telecopy; or the
date two business days after the date of mailing, or the date of the next
business day after delivery to a courier service, as the case may be, shall be
deemed to be the date of such notice, election or demand.
To the Holder: Sirrom Capital Corporation d/b/a Tandem Capital
500 Church Street
Suite 200
Nashville, Tennessee 37219
Attention: Craig Macnab
Facsimile No.: (615) 242-0842
with a copy to: C. Christopher Trower, Esq.
3159 Rilman Road, N.W.
Atlanta, Georgia 30327-1503
Facsimile No.: (404) 816-6854
-8-
<PAGE>
To the Company: Diplomat Corporation
25 Kay Fries Drive
Stony Point, New York 10980
Attention: President
Facsimile No.: (914) 786-8727
with a copy to: Jay Kaplowitz, Esq.
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Facsimile No.: (212) 980-5192
11. Severability. If any provision of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
enforced under the laws of the State of New York applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
15. Jurisdiction and Venue. The Company hereby consents to
jurisdiction, service of process, and venue in the courts of the State of
Tennessee or the State of New York, for the purpose of any action arising out
of any of its obligations under this Warrant, and expressly waives jury trial
and any and all objections it may have as to jurisdiction, service of process,
and venue in such courts.
16. Equity Participation. This Warrant is issued in connection with
the Debenture Purchase Agreement. It is intended that this Warrant constitute
an equity participation under and pursuant to T.C.A. ss.47-24-101, et. seq. and
that equity participation be permitted under said statutes and not constitute
interest on the Debenture. If under any circumstances whatsoever, fulfillment
of any obligation of this Warrant, the Debenture Purchase Agreement, or any
other agreement or document executed in connection with the Debenture Purchase
Agreement, shall violate the lawful limit of any applicable usury statute or
any other applicable law with regard to obligations of like character and
amount, then the obligation to be fulfilled shall be reduced to such lawful
limit, such
-9-
<PAGE>
that in no event shall there occur, under this Warrant, the Debenture Purchase
Agreement, or any other document or instrument executed in connection with the
Debenture Purchase Agreement, any violation of such lawful limit, but such
obligation shall be fulfilled to the lawful limit. If any sum is collected in
excess of the lawful limit, such excess shall be applied to reduce the
principal amount of the Debenture.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Warrant this ____________ day of _______________, ____.
COMPANY: DIPLOMAT DIRECT MARKETING CORPORATION
By:
------------------------------------------
Title:
---------------------------------------
HOLDER: SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By:
------------------------------------------
Title:
---------------------------------------
-11-
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is dated as of the _________ day
of June, 1998, by and between DIPLOMAT DIRECT MARKETING CORPORATION, a Delaware
corporation (the "Borrower"), and SIRROM CAPITAL CORPORATION d/b/a TANDEM
CAPITAL, a Tennessee corporation ("Purchaser").
W I T N E S S E T H:
WHEREAS, Purchaser has purchased Subordinated Debentures in the
aggregate principal amount of $5,000,000 pursuant to a Debenture Purchase
Agreement dated June _______, 1998 between the Borrowers and Purchaser (the
"Debenture Purchase Agreement"); and
WHEREAS, in connection with the purchase of the Debentures, Purchaser
desires to obtain from Borrower and Borrower desires to grant to Purchaser a
security interest in certain collateral more particularly described below; and
WHEREAS, capitalized terms not defined herein shall have the meanings
assigned by the Debenture Purchase Agreement:
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Security Interest. As collateral security for the
obligations described in Section 2 below, Borrower hereby grants to Purchaser a
security interest in the following described property and any and all proceeds
and products thereof and accessions thereto (collectively the "Collateral"):
1.1 Equipment. All equipment owned by Borrower of any kind
and description, whether now owned or hereafter acquired and wherever located,
together with all parts, accessories and attachments and all replacements
thereof and additions thereto;
1.2 Inventory, Accounts, Contract Rights, Chattel Paper and
General Intangibles. All of Borrower's inventory and any agreements for lease
of same and rentals therefrom, and all of Borrower's accounts, accounts
receivable, contract rights, chattel paper and general intangibles and the
proceeds therefrom, whether now in existence or owned or hereafter arising or
acquired, entered into or created, and wherever located; and whether held for
lease or sale, or furnished or to be furnished under contracts of service;
1.3 Trademarks, Etc. All trademarks and service marks now
held or hereafter acquired by Borrower, both those that are registered with the
United States Patent and Trademark
<PAGE>
Office and any unregistered marks used by Borrower in the United States, and
trade dress, including logos and designs, in connection with which any such
marks are used, together with all registrations regarding such marks and the
rights to renewals thereof, and the goodwill of the business of Borrower
symbolized by such marks;
1.4 Copyrights. All copyrights now held or hereafter acquired
by Borrower and any applications for U.S. copyrights hereafter made by
Borrower; and
1.5 Proprietary Information, Computer Data, Etc. All
proprietary information and trade secrets of Borrower with respect to
Borrower's business and all of Borrower's computer programs and the information
contained therein and all intellectual property rights with respect thereto.
2. Secured Indebtedness. The obligations secured hereby shall include
(i) loans to be made in connection with this Agreement and the Debenture
Purchase Agreement as evidenced by one or more Debentures payable to the order
of Purchaser that shall be due and payable as set forth in such Debentures, and
any renewals or extensions thereof, and (ii) all future advances made by
Purchaser for taxes, levies, insurance and preservation of the Collateral and
all reasonable attorney's fees, court costs and out-of-pocket expenses of
whatever kind incident to the collection of any of said indebtedness or other
obligations and the enforcement and protection of the security interest created
hereby.
3. Representations, Warranties and Agreements of Borrower. Borrower
represents, warrants and agrees as follows:
3.1 Location. Borrower will promptly notify Purchaser, in
writing, of any new place or places of business and of any change in the
location of the Collateral (other than movement of the Collateral from one
place of business identified in Schedule 3.6 to another place of business
identified in Schedule 3.6) or any records pertaining thereto.
3.2 Permitted Encumbrances. Except as permitted pursuant to
Section 5.13 of the Debenture Purchase Agreement (the "Permitted
Encumbrances"), Borrower is the owner of the Collateral free and clear of any
liens and security interests. Borrower will defend the Collateral against the
claims and demands of all persons other than Permitted Encumbrances.
3.3 Payment and Performance. Borrower will pay to Purchaser
all amounts secured hereby as and when the same shall be due and payable,
whether at maturity, by acceleration or otherwise, and will promptly perform
all terms of said indebtedness and this or any other security or loan agreement
between Borrower and Purchaser, and will promptly discharge all said
liabilities.
3.4 Insurance. Borrower will at all times keep the Collateral
insured in accordance with the applicable requirements of the Debenture
Purchase Agreement. Such insurance shall be in such companies as may be
reasonably acceptable to Purchaser, with provisions reasonably
satisfactory to Purchaser for payment of all losses thereunder to Purchaser as
its interests may
-2-
<PAGE>
appear. If reasonably required by Purchaser, Borrower shall deposit copies of
the policies with Purchaser. Any money received by Purchaser under said
policies may be applied to the payment of any indebtedness secured hereby,
whether or not due and payable, or at Borrower's option shall be delivered by
Purchaser to Borrower for the purpose of replacing, repairing or restoring the
Collateral. Borrower assigns to Purchaser all right to receive proceeds of
insurance not exceeding the amounts secured hereby, directs any insurer to pay
all proceeds directly to Purchaser, and, if an Event of Default shall be
continuing, appoints Purchaser Borrower's attorney in fact to endorse any draft
or check made payable to Borrower in order to collect the benefits of such
insurance. If Borrower fails to keep the Collateral insured as required by
Purchaser, Purchaser shall have the right to obtain such insurance at
Borrower's expense and add the cost thereof to the other amounts secured
hereby.
3.5 Expenses. Borrower will pay all costs of filing of
financing, continuation and termination statements with respect to the security
interests created hereby, and Purchaser is authorized to do all things that it
deems necessary to perfect and continue perfection of the security interests
created hereby and to protect the Collateral.
3.6 Address. The address set forth after Borrower's signature
on this Agreement is Borrower's principal place of business and the place where
the records concerning all Collateral are kept and/or maintained. Schedule 3.6
contains the address of each location where Collateral is located. The Borrower
shall notify Purchaser of any additions, deletions, or changes in its principal
place of business or to such Schedule 3.6 as promptly as possible following the
occurrence of such changes in order to maintain Schedule 3.6 accurate and
complete in all material respects.
4. Default. Borrower shall be in default upon failure to observe or
perform any of Borrower's agreements herein contained which is not cured within
thirty days after written notice thereof to Borrower, or upon the occurrence of
an Event of Default under the Debenture Purchase Agreement that has not been
cured during the applicable grace period, or if any warranty or statement by
Borrower herein or furnished in connection herewith is false or misleading in
any material respect.
5. Remedies Upon Default. During the continuance of a default as
defined in Section 4 above, all sums secured hereby shall immediately become
due and payable at Purchaser's option without notice to Borrower, and Purchaser
may proceed to enforce payment of same and to exercise any and all rights and
remedies provided by the Uniform Commercial Code or other applicable law, as
well as all other rights and remedies possessed by Purchaser, all of which
shall be cumulative. Whenever Borrower is in default hereunder, and upon demand
by Purchaser, Borrower shall assemble the Collateral and make it available to
Purchaser at a place reasonably convenient to Purchaser and Borrower. Any
notice of sale, lease or other intended disposition of the Collateral by
Purchaser sent to Borrower at the address hereinafter set forth, or at such
other address of Borrower as may be shown on Purchaser's records, at least ten
days prior to such action, shall constitute reasonable notice to Borrower.
Purchaser may waive any default before or after the same has been
declared without impairing its right to declare a subsequent default hereunder,
this right being a continuing one.
-3-
<PAGE>
6. Severability. If any provision of this Agreement is held invalid,
such invalidity shall not affect the validity or enforceability of the
remaining provisions of this Agreement.
7. Binding Effect. This Agreement shall inure to the benefit of
Purchaser's successors and assigns and shall bind Borrower's successors and
assigns.
8. Termination Statements. Borrower agrees that, notwithstanding the
payment in full of all indebtedness secured hereby and whether or not there is
any outstanding obligation of Purchaser to make future advances, Purchaser
shall not be required to send Borrower a termination statement with respect to
any financing statement filed pursuant hereto unless and until Borrower shall
have made written demand therefor.
9. Protection of Collateral. Borrower will not permit any liens or
security interests other than those created by this Agreement and the Permitted
Encumbrances to attach to any of the Collateral, nor permit any of the
Collateral to be levied upon under any legal process, nor permit anything to be
done that may impair the security intended to be afforded by this Agreement,
without the prior written consent of Purchaser.
10. Special Agreements With Respect to Certain Tangible Collateral.
Borrower additionally agrees and warrants as follows:
10.1 Movement of Collateral. Borrower will not permit any of
the Collateral to be removed from the locations specified in Schedule 3.6
(other than movement of the Collateral from one place of business identified in
Schedule 3.6 to another place of business identified in Schedule 3.6), except
for temporary periods in the normal and customary use thereof, without the
prior written consent of Purchaser, and will permit Purchaser to inspect the
Collateral at any reasonable time upon reasonable prior notice and without
undue disruption of Borrower's business.
10.2 [Reserved].
10.3 Sale. Borrower will not sell, exchange, lease or
otherwise dispose of any of the Collateral or any interest therein (except in
the ordinary course of business) without the prior written consent of
Purchaser, or as otherwise permitted by the holder of indebtedness which is
secured by a priority lien on the subject Collateral.
10.4 Condition. Borrower will keep the Collateral in good
condition and repair (reasonable wear and tear excepted) and will pay and
discharge all taxes, levies and other impositions levied thereon as well as the
cost of repairs to or maintenance of same. If Borrower fails to pay such sums,
Purchaser may do so for Borrower's account and add the amount thereof to the
other amounts secured hereby.
10.5 Possession. Except during the continuance of an Event of
Default, Borrower shall be entitled to possession of the Collateral and to use
the same in any lawful manner, provided that such use does not violate the
terms of any policy of insurance thereon.
-4-
<PAGE>
10.6 No Attachment. Borrower will not take any action to
cause the Collateral to be attached to real estate in such manner as to become
a fixture or a part of any real estate.
11. Special Agreements With Respect to Intangible and Certain Tangible
Collateral. Borrower additionally warrants and agrees as follows:
11.1 Inventory and Documents. Except during the continuance
of an Event of Default, Borrower shall have the right to process and sell
Borrower's inventory in the regular course of business. Purchaser's security
interest hereunder shall attach to all proceeds of all sales or other
dispositions of the Collateral. If at any time any such proceeds shall be
represented by any instruments, chattel paper or documents of title, then such
instruments, chattel paper or documents of title shall, subject to the rights
of senior lienholders thereon, be promptly delivered to Purchaser and subject
to the security interest granted hereby. If at any time any of Borrower's
inventory is represented by any document of title, such document of title will,
subject to the rights of senior lienholders thereon, be delivered promptly to
Purchaser and subject to the security interest granted hereby.
11.2 Performance by Purchaser. By the execution of this
Agreement, Purchaser shall not be obligated to do or perform any of the acts or
things provided in any contracts covered hereby that are to be done or
performed by Borrower, but if there is a default by Borrower in the payment of
any amount due in respect of any indebtedness secured hereby, then Purchaser
may, at its election, perform some or all of the obligations provided in said
contracts to be performed by Borrower, and if Purchaser incurs any liability or
expenses by reason thereof, the same shall be payable by Borrower upon demand
and shall also be secured by this Agreement.
11.3 Receivables. During the continuance of an Event of
Default, Purchaser shall have the right to notify the account debtors obligated
on any or all of Borrower's accounts receivable to make payment thereof
directly to Purchaser, and to take control of all proceeds of any such accounts
receivable. Until such time as Purchaser elects to exercise such right by
mailing to Borrower written notice thereof, Borrower is authorized, to collect
and enforce said accounts receivable.
12. Power of Attorney. Borrower hereby constitutes the Purchaser or
its designee, as Borrower's attorney-in-fact with power, upon the occurrence
and during the continuance of an Event of Default, (a) to endorse Borrower's
name upon any notes, acceptances, checks, drafts, money orders, or other
evidences of payment for Collateral that may come into either its or the
Purchaser's possession; (b) to sign the name of Borrower on any invoice or bill
of lading relating to any of the accounts receivable, drafts against customers,
assignments and verifications of accounts receivable and notices to customers;
(c) to send verifications of accounts receivable; (d) to notify the Post Office
authorities to change the address for delivery of mail addressed to Borrower to
such address as the Purchaser may designate; (e) to execute any of the
documents referred to in Section 3.5 hereof in order to perfect and/or maintain
the security interests and liens granted herein by Borrower to the Purchaser;
and (f) to do all other acts and things necessary to carry out this Security
Agreement. All acts of said attorney or designee are hereby ratified and
approved, and said attorney or designee shall
-5-
<PAGE>
not be liable for any acts of commission or omission (other than acts of
gross negligence or willful misconduct), nor for any error of judgment or
mistake of fact or law; this power being coupled with an interest is
irrevocable until all of the obligations secured hereby are paid in full.
13. Governing Law and Amendments. This Agreement and all of the
Operative Documents shall be construed and enforced under the laws of the State
of New York applicable to contracts to be wholly performed in such State. No
amendment or modification hereof shall be effective except in a writing
executed by each of the parties hereto.
14. Survival of Representations and Warranties. All representations
and warranties contained herein or made by or furnished on behalf of the
Borrower in connection herewith shall survive the execution and delivery of
this Agreement.
15. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
16. Construction and Interpretation. Should any provision of this
Security Agreement require judicial interpretation, the parties hereto agree
that the court interpreting or construing the same shall not apply a
presumption that the terms hereof shall be more strictly construed against one
party by reason of the rule of construction that a document is to be more
strictly construed against the party that itself or through its agent prepared
the same, it being agreed that the Borrower, Purchaser and their respective
agents have participated in the preparation hereof.
-6-
<PAGE>
IN WITNESS WHEREOF, Borrower and Purchaser have executed this Security
Agreement, or have caused this Agreement to be executed as of the date first
above written.
Borrower:
DIPLOMAT DIRECT MARKETING CORPORATION
By:
-------------------------------------
Title:
-----------------------------------
Address:
--------------------------------
Purchaser:
SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By:
-------------------------------------
Title:
-----------------------------------
-7-
<PAGE>
SCHEDULE 3.6
Collateral Locations
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-11-1998
<PERIOD-END> JUN-30-1998
<CASH> 171,384
<SECURITIES> 0
<RECEIVABLES> 2,427,316
<ALLOWANCES> 172,001
<INVENTORY> 10,557,482
<CURRENT-ASSETS> 22,438,715
<PP&E> 6,725,246
<DEPRECIATION> (3,318,485)
<TOTAL-ASSETS> 48,256,664
<CURRENT-LIABILITIES> 24,424,427
<BONDS> 0
0
16,113,107
<COMMON> 1,100
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,256,664
<SALES> 57,118,755
<TOTAL-REVENUES> 57,118,755
<CGS> 26,029,624
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,018,326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 958,501
<INCOME-PRETAX> 2,112,304
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,112,304
<DISCONTINUED> (2,311,691)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (199,387)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.01)
</TABLE>
