<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 19, 1998
DIPLOMAT DIRECT MARKETING CORPORATION
formerly
DIPLOMAT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-22432 13-3727399
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
25 KAY FRIES DRIVE
STONY POINT, NY 10980
(Address of principal executive offices, including zip code)
(914) 786-5552
(Registrant's telephone number, including area code)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
This Form 8-K/A2 amends the Form 8-K/A1 filed October 16, 1998, which amends
the Form 8-K filed by registrant on March 6, 1998 solely to include the
Financial Statements required to be included under Item 7(a) and (b). The only
substantive changes are contained in the unaudited financial statements for the
six months ended June 30, 1997. The registrant engaged an audit of Lew Magram's
financial statements. The two substantive changes are (i) an increase in prepaid
catalog expenses to reverse changes made in the accounting method for prepaid
catalog expenses in the appropriate amount of $900,000, and (ii) an increase in
accrued expenses of approximately $2,300,000 to reflect customer returns in the
period subsequent to June 30, 1997. Other changes were typographical and other
non-material changes.
(a) Financial Statements of Lew Magram Ltd. -- Year Ended January 4,
1997, the Six Months Ended December 30, 1995 and the Year Ended July
1, 1995 (audited)
(b) Financial Statements of Lew Magram Ltd. -- Six Months Ended June 30,
1997 and June 30, 1996 (unaudited)
(c) Pro Forma Financial Statements of Diplomat Corporation and Lew Magram
Ltd. -- Nine Months Ended June 30, 1997 and Year Ended September 30,
1996 (unaudited)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Form 8-K\A2 to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: April 23, 1999 DIPLOMAT DIRECT MARKETING CORPORATION
By:/s/ JONATHAN ROSENBERG
---------------------------
Jonathan Rosenberg
Chief Executive Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
(a) Financial Statements of Lew Magram Ltd. -- Year Ended January 4,
1997, the Six Months Ended December 30, 1995 and the Year Ended July
1, 1995 (audited)
(b) Financial Statements of Lew Magram Ltd. -- Six Months Ended June 30,
1997 and June 30, 1996 (unaudited)
(c) Pro Forma Financial Statements of Diplomat Corporation and Lew Magram
Ltd. -- Nine Months Ended June 30, 1997 and Year Ended September 30,
1996 (unaudited)
<PAGE>
Financial Statements of Lew Magram Ltd. -- Year Ended January 4, 1997, the Six
Months Ended December 30, 1995 and the Year Ended July 1, 1995 (audited)
<PAGE>
Lew Magram Ltd.
Financial Statements
Year Ended January 4, 1997, Six Months Ended December 30, 1995
and Year Ended July 1, 1995
<PAGE>
Lew Magram Ltd.
================================================================================
Financial Statements
Year Ended January 4, 1997, Six Months Ended December 30, 1995
and Year Ended July 1, 1995
1
<PAGE>
Lew Magram Ltd.
Contents
================================================================================
Independent auditors' report 3
Financial statements:
Balance sheets 4
Statements of operations 5
Statements of stockholder's equity 6
Statements of cash flows 7
Summary of accounting policies 8-11
Notes to financial statements 12-17
2
<PAGE>
Independent Auditors' Report
Lew Magram Ltd.
New York, New York
We have audited the accompanying balance sheets of Lew Magram Ltd. as of
January 4, 1997 and December 30, 1995, and the related statements of
operations, stockholder's equity and cash flows for the year ended January 4,
1997, the six months ended December 30, 1995 and the year ended July 1, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lew Magram Ltd. as of January
4, 1997 and December 30, 1995, and the results of its operations and its cash
flows for the year ended January 4, 1997, the six months ended December 30,
1995 and the year ended July 1, 1995, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
May 16, 1997, except for Note 12, as to
which the date is July 1, 1997
3
<PAGE>
Lew Magram Ltd.
Balance Sheets
================================================================================
<TABLE>
<CAPTION>
January 4, December 30,
1997 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 2)
Current:
Cash and cash equivalents $ 285,797 $ 71,104
Marketable securities 15,000 3,000
Accounts receivable 835,522 918,737
Inventories 4,219,567 4,152,549
Prepaid catalogue and advertising expenses 1,872,940 698,217
Prepaid expenses and other current assets 666,091 869,031
-------------------------------------------------------------------------------------------------------------------
Total current assets 7,894,917 6,712,638
Property and equipment, at cost, less accumulated depreciation and
amortization of $2,083,147 and $1,530,717 (Notes 1 and 4) 2,068,707 2,070,786
Prepaid catalogue and advertising expenses, noncurrent 68,601 49,147
Other assets 22,404 57,341
-------------------------------------------------------------------------------------------------------------------
$10,054,629 $8,889,912
===================================================================================================================
Liabilities and Stockholder's Equity
Current:
Line of credit (Note 2) $ 1,325,547 $1,000,000
Obligations under capital leases (Note 4) 345,566 193,199
Accounts payable 3,636,411 2,831,544
Accrued expenses and other current liabilities 2,373,649 2,253,946
Customer refunds payable 1,402,294 901,246
Customers' unshipped orders 226,260 182,173
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 9,309,727 7,362,108
-------------------------------------------------------------------------------------------------------------------
Noncurrent:
Obligations under capital leases(Note 7) 240,706 254,467
Deferred rent 90,359 109,715
Subordinated debt (Notes 3 and 11) - 351,212
Other long-term liability - 6,554
-------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 331,065 721,948
-------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5, 6 and 7)
Stockholder's equity
Capital stock, no par - shares authorized 200; issued and
outstanding 60 4,000 4,000
Additional paid-in capital (Notes 3 and 11) 1,426,212 1,000,000
Deficit (1,016,375) (198,144)
-------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 413,837 805,856
-------------------------------------------------------------------------------------------------------------------
$10,054,629 $8,889,912
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
4
<PAGE>
Lew Magram Ltd.
Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Year ended Six months ended Year ended
January 4, December 30, July 1,
1997 1995 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $51,926,603 $23,145,161 $57,616,471
Cost of goods sold 25,111,912 11,204,438 28,733,003
-------------------------------------------------------------------------------------------------------------------
Gross profit 26,814,691 11,940,723 28,883,468
-------------------------------------------------------------------------------------------------------------------
Operating (income) expenses:
Catalogue and advertising expenses 18,039,200 7,594,774 19,588,706
Selling and shipping expenses 3,952,479 2,235,467 4,921,123
General and administrative expenses 9,402,096 3,882,448 9,226,963
Officers' salaries 1,415,396 586,921 1,370,742
Postage and handling charges - net (4,512,922) (1,597,727) (4,117,223)
-------------------------------------------------------------------------------------------------------------------
Total operating expenses 28,296,249 12,701,883 30,990,311
-------------------------------------------------------------------------------------------------------------------
Loss from operations (1,481,558) (761,160) (2,106,843)
-------------------------------------------------------------------------------------------------------------------
Other income (expense):
List rentals, net 948,813 409,777 794,825
Net interest and dividend (expense) income (266,221) (129,051) 133,544
Other (Note 8) 8,961 - (228,010)
-------------------------------------------------------------------------------------------------------------------
Total other income - net 691,553 280,726 700,359
-------------------------------------------------------------------------------------------------------------------
Loss before state and local income taxes
(recoveries) (790,005) (480,434) (1,406,484)
State and local income taxes (recoveries) - (15,665) 8,562
-------------------------------------------------------------------------------------------------------------------
Net loss $ (790,005) $ (464,769) $ (1,415,046)
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
5
<PAGE>
Lew Magram Ltd.
Statements of Stockholder's Equity
================================================================================
<TABLE>
<CAPTION>
Year ended January 4, 1997, six months ended December 30, 1995 and year
ended July 1, 1995
------------------------------------------------------------------------------------------------------------------
Capital stock Additional
---------------------------------- paid-in
Shares Amount Capital Deficit
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, July 3, 1994 120 $ 8,000 $ 11,446 $ 5,681,961
Net loss for the year - - - (1,415,046)
S corporation distributions - - - (1,500,000)
Redemption of 50% stockholder (Note 10) (60) (4,000) (11,446) (2,100,290)
------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1995 60 4,000 - 666,625
Net loss for the six-month period - - - (464,769)
Adjustment to retained earnings - - - (400,000)
(Note 10)
Contribution of stockholder note - -
(Note 11) 1,000,000 -
------------------------------------------------------------------------------------------------------------------
Balance, December 30, 1995 60 4,000 1,000,000 (198,144)
Net loss for the year - - - (790,005)
Redemption of 50% stockholder (Note 10) - - - (28,226)
Forgiveness of debt by former
stockholder (Note 3) - - 426,212 -
------------------------------------------------------------------------------------------------------------------
Balance, January 4, 1997 60 $ 4,000 $1,426,212 $(1,016,375)
==================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
6
<PAGE>
Lew Magram Ltd.
Statements of Cash Flows
(Note 9)
================================================================================
<TABLE>
<CAPTION>
Year ended Six months ended Year ended
January 4, December 30, July 1,
1997 1995 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (790,005) $ (464,769) $(1,415,046)
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 546,030 310,440 491,204
Unrealized depreciation of marketable securities (12,000) - 3,278
Loss from abandonment of leasehold
improvements/disposal of fixed assets - - 203,330
Decrease (increase) in:
Accounts receivable 83,216 240,571 406,441)
Inventories (67,018) (414,298) 1,420,699
Prepaid expenses and other current assets (991,238) 715,779 1,307,124
Other assets 34,937 441,309 (203,046)
Increase (decrease) in:
Accounts payable 804,867 (2,023,503) (1,946,033)
Accrued expenses and other current
liabilities 113,148 312,732 (464,350)
Customer refunds payable 501,048 (142,830) (681,445)
Customers' unshipped orders 44,087 59,366 (100,396)
Deferred rent (19,356) (33,292) (10,383)
- -------------------------------------------------------------------------------------------------------------------
Total adjustments 1,037,721 (533,726) (386,459)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 247,716 (998,495) (1,801,505)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (543,950) (112,350) (677,459)
Proceeds from sale of fixed assets - - 362,000
Purchase of marketable securities - - (1,564,475)
Sale of marketable securities - 709,335 4,198,617
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) (543,950) 596,985 2,318,683
investing activities
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in line of credit 325,547 1,000,000 -
Payment of note payable to bank - (116,476) (331,633)
Payment of dividends - - (1,500,000)
Issuance of subordinated debt - - 1,037,990
Principal payments (receipts) under capitalized
lease obligations 138,606 (143,599) (143,048)
Redemption of 50% stockholder - retained earnings (28,226) (400,000) (2,100,290)
Capital stock and additional paid-in capital 75,000 - (15,446)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 510,927 339,925 (3,052,427)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 214,693 (61,585) (2,535,249)
Cash and cash equivalents, beginning of period 71,104 132,689 2,667,938
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 285,797 $ 71,104 $ 132,689
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
7
<PAGE>
Lew Magram Ltd.
Summary of Accounting Policies
================================================================================
Description of Business The Company is a mail order ladies apparel
retailer.
Cash and Cash Equivalents The Company considers all highly liquid
investments purchased with a maturity of
three months or less to be cash
equivalents.
Marketable Securities Effective July 3, 1994, the Company
adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain
Investments in Debt and Equity
Securities." At January 4, 1997 and
December 30, 1995, the Company's
investments consist primarily of
tax-exempt bonds and money market funds.
The investments have been classified as
trading securities and are stated at
market value with the resulting unrealized
gain reflected in other income.
Previously, the Company's investments were
carried at the lower of aggregate cost or
market.
Inventories Inventories consisting of finished goods
are valued at the lower of cost (first-in,
first-out) or market.
Catalogue and Advertising
Expenses The Company expenses the production costs
of advertising the first time the
advertising takes place, except for
direct-response advertising, which is
capitalized and amortized over its
expected period of future benefits.
Direct-response advertising consists
primarily of mail order catalogues that
include order forms for the Company's
products. The capitalized costs of the
catalogue are amortized over the shipping
season of the products appearing in the
catalogues, which does not exceed 6
months.
8
<PAGE>
Lew Magram Ltd.
Summary of Accounting Policies
================================================================================
The Company began a production
development program that extends the
useful lives of certain production costs
over many catalogue seasons. These costs
are being amortized on a straight-line
basis over 18 months, the estimated
useful life, and consist of photography,
modeling and color separation costs. The
change in estimate of amortizing these
costs over 18 months instead of 6 months
resulted in an increase to prepaid
catalogue expenses of approximately
$450,000 and decrease in advertising
expenses by the same amount for the six
months ended December 30, 1995.
Property, Equipment and
Depreciation Depreciation and amortization are computed
by both accelerated and straight-line
methods based on the estimated useful
lives of the assets.
Revenue Recognition Revenue is recognized at the time
merchandise is shipped to customers.
Proceeds received for merchandise not yet
shipped are reflected as "customers'
unshipped orders," a current liability. In
addition, the Company passes on the cost
of parcel shipments directly to the
customer as part of the postal and
handling charge, which is customary in the
direct mail industry. This is reflected as
a reduction of operating expenses.
The Company also derives revenue through
the rental of their customer mailing
list, which is reflected in other income.
Merchandise Credits The Company issues merchandise credits for
certain returns of merchandise sold with
substantial discounts. Unused credits are
periodically written off into income (see
Note 7).
9
<PAGE>
Lew Magram Ltd.
Summary of Accounting Policies
================================================================================
Income Taxes The Company elected, with the consent of
its stockholder, to be taxed as an S
corporation under the provisions of the
Internal Revenue Code and New York State
Franchise Tax Law. The stockholder is
required to report the Company's taxable
income or loss in his personal income tax
returns; accordingly, such income taxes
are not reflected in the financial
statements. The financial statements
include a provision for New York City and
New Jersey income taxes since New York
City and New Jersey do not recognize S
corporation status. New York State imposes
a corporate level tax based upon the
differential between corporate and
individual tax rates, which has been
provided for.
During the year ended July 1, 1995, the
Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes." SFAS
No. 109 is an asset and liability approach
that requires the recognition of deferred
tax assets and liabilities for the
expected future tax consequences of events
that have been recognized in the Company's
financial statements or tax returns. The
adoption of the statement did not have a
significant impact on the Company's
financial position or on its results of
operations. Deferred income taxes are
immaterial and not recorded by the
Company.
In connection with the transactions
discussed in Note 12, the Company's S
corporation status was automatically
terminated and the Company will now be
taxed as a C corporation. The change in
status will not materially affect the
Company.
Fiscal Year The Company's fiscal year is comprised of
52-53 weeks ending on the Saturday closest
to December 31. Fiscal 1996 ended on
January 4, 1997, which comprised of a
53-week year. The additional week was
added in the fourth quarter of this fiscal
year.
Prior to July 1995, the Company's year-end
was comprised of a 52-53 week fiscal year
ending on the Saturday closet to June 30.
The six-month period ended December 30,
1995 was comprised of 26 weeks and, fiscal
1995 ended on July 1, 1995, which
comprised a 52-week year.
10
<PAGE>
Lew Magram Ltd.
Summary of Accounting Policies
================================================================================
Reclassifications Certain reclassifications have been made
to the presentation for the six months
ended December 30, 1995 to conform to the
presentation for the year ended January 4,
1997.
11
<PAGE>
Lew Magram Ltd.
Notes to Financial Statements
================================================================================
1. Property and Major classes of property and equipment consist
Equipment of the following:
<TABLE>
<CAPTION>
January 4, December 30, Estimated
1997 1995 useful lives
------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer equipment $ 856,740 $ 762,363 5-7 years
Leasehold
improvements 897,417 766,359 Term of lease
Furniture and fixtures 893,794 849,747 7 years
Auto 27,979 27,979 5 years
Telephone and other
equipment 563,107 483,498 3-7 years
------------------------------------------------------------------------------
3,239,037 2,889,946
Less: Accumulated
depreciation
and
amortization 1,754,448 1,231,322
------------------------------------------------------------------------------
1,484,589 1,658,624
------------------------------------------------------------------------------
Computer equipment and
telephone under
capital leases 912,817 711,557 3-5 years
Less: Accumulated
depreciation 328,699 299,395
------------------------------------------------------------------------------
584,118 412,162
------------------------------------------------------------------------------
$2,068,707 $2,070,786
==============================================================================
</TABLE>
2. Credit In October 1992, the Company entered into an agreement
Agreements for a 3-year term loan with a bank in the amount of
$1,000,000 for use in acquiring certain leasehold
improvements and repaying certain debt outstanding. The
borrowings were payable in 36 monthly installments of
$27,778 plus interest. Interest was at 1 1/4% above the
bank's prime rate.
The obligation was secured by collateral consisting of
all personal property and fixtures and was paid in full
by October 1995.
12
<PAGE>
Lew Magram Ltd.
Notes to Financial Statements
================================================================================
The Company had an agreement with the bank under which
it may borrow up to $1,000,000 through March 1, 1996.
Interest on borrowings under the agreement is at 1%
over the bank's prime rate. The amount of borrowings is
subject to a borrowing base formula consisting of 40%
of inventory and 75% of mailing list receivables aged
under 90 days and is secured by substantially all the
assets of the Company. As of December 31, 1995, the
outstanding balance under this agreement was $1,000,000
at a current rate of interest of 9.5%.
In April 1996, a new $2,000,000 line of credit was
entered into with similar terms and conditions.
In August 1996, the Company replaced its prior line
with a $5,000,000 committed line of credit with
Congress Financial Corp. for a term of three years. The
agreement provides for borrowings subject to a
borrowing base formula consisting of 50% of inventory
and is secured by substantially all the assets of the
Company. Interest on borrowings under the agreement is
at 1.5% over the bank's prime rate and is calculated on
a minimum borrowing of $2,000,000. As of January 4,
1997, the outstanding balance under this agreement was
$1,325,547 at a current rate of interest of 9.75%. The
effective interest rate was 14.71%.
3. Note Payable - In April 1991, the Company purchased 30 shares of its
Former stock for $1,252,889 from two stockholders, who are
Stockholders also the parents of the existing owners, which
represented all of the capital stock owned by them, in
exchange for a note. The principal amount outstanding
at December 31, 1995 was $313,221 at an interest rate
of 8.5%. The principal amount, as revised, was payable
in annual installments of $104,407 beginning on
September 30, 1995. On August 8, 1995, the principal
amount outstanding and all accrued interest were
subordinated to the term loan outstanding and the bank
agreement referred to in Note 2. In December 1996, the
former stockholders forgave the debt outstanding to the
Company. The forgiveness of debt was recorded as a
direct addition to additional paid-in capital.
13
<PAGE>
Lew Magram Ltd.
Notes to Financial Statements
================================================================================
4. Capitalized Lease The Company entered into various lease/purchase
Obligations agreements for certain computer and telephone equipment
during fiscal 1993 and 1992, which were renegotiated
with the addition of other computer and telephone
equipment during fiscal 1995. The agreements provide
for monthly payments at various rates of interest
through November 2000.
Future net minimum lease payments under capital leases
are as follows:
Fiscal year ending
------------------------------------------------------
1997 $411,384
1998 211,274
1999 32,680
2000 23,338
------------------------------------------------------
678,676
Less: Amount representing interest 92,404
------------------------------------------------------
Present value of net minimum lease
payments:
Total 586,272
Due within one year 345,566
------------------------------------------------------
Due after one year $240,706
======================================================
5. Profit Sharing The Company has a profit sharing plan covering
Plan substantially all employees, which provides for annual
contributions as determined by the Board of Directors.
The Company also has a 401(k) plan covering
substantially all employees. The profit sharing
contribution and 401(k) matching contribution made for
the year ended January 4, 1997 were approximately
$37,500 in total and for the six months ended December
30, 1995 were approximately $41,300 in total. There was
no profit sharing contribution made for the year ended
July 1, 1995.
14
<PAGE>
Lew Magram Ltd.
Notes to Financial Statements
================================================================================
6. Leases The Company rents real and personal property under
lease agreements which expire at various dates through
December 2004. In connection with the lease agreements,
the Company is required to pay certain costs including
real estate taxes, insurance and utilities. In
addition, various lease agreements include an option to
be renewed under similar terms and conditions. Future
minimum rentals under noncancellable operating leases
are as follows:
Fiscal year ending Amount
------------------------------------------------------
1997 $ 563,462
1998 553,861
1999 570,309
2000 574,291
2001 570,064
2002 and thereafter 1,031,945
------------------------------------------------------
Total minimum lease payments $3,863,932
======================================================
Rent expense amounted to approximately $563,000,
$286,000 and $568,000 for the year ended January 4,
1997, the six months ended December 30, 1995 and the
year ended July 1, 1995, respectively.
7. Contingencies Because of the Company's policy of periodically writing
off into income unused merchandise credits issued
(approximately $796,000, $983,000 and $1,095,000 for
the year ended January 4, 1997, the six months ended
December 30,1995 and the year ended July 1, 1995 ,
respectively), without expiration dates in connection
with the return of sale merchandise, it may be liable
for future claims on such amounts previously written
off.
8. Other Expense In connection with relocating a portion of the
Company's office, the Company terminated a portion of a
lease agreement. The net book value of related
leasehold improvements abandoned less the amount
received from the new tenants amounted to approximately
$176,000.
15
<PAGE>
Lew Magram Ltd.
Notes to Financial Statements
================================================================================
9. Supplemental (a) Cash Paid
Disclosures of
Cash Flow
Information
<TABLE>
<CAPTION>
Year ended Six months ended Year ended
January 4, December 30, July 1,
1997 1995 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Interest $266,261 $130,533 $ 98,508
Income taxes 1,975 - 276,990
======================================================================
</TABLE>
(b) Noncash Financing Activity
The Company renegotiated various capital lease
obligations for equipment during fiscal 1995.
The existing capital lease obligations of
$141,487 were renegotiated with additional
equipment added. The renegotiated capital leases
totaled $571,405.
(c) In December 1996, two former stockholders
forgave debt outstanding to the Company (see
Note 3).
10. Redemption of During fiscal 1995, the Company bought and cancelled
50% Stockholder the outstanding stock of a 50% stockholder of the
Company for an amount of approximately $2,100,000 which
was paid in cash. The December 30, 1995 financial
statements have been restated to include the $400,000
originally allocated to a one-year consulting agreement
with the former stockholder as part of the purchase
price of the shares. In fiscal 1996, additional $28,226
was required to be paid to the former stockholder as
per the redemption agreement.
11. Subordinated In June 1995, the remaining stockholder issued a note
Note - to the Company in the amount of $1,000,000. The note
Stockholder bore interest at 10%. On August 8, 1995, this note, in
addition to the notes to former stockholders described
in Note 3, was subordinated to the term loan
outstanding and the bank agreement referred to in Note
2.
As of December 30, 1995, the stockholder contributed
the $1,000,000 note payable to the Company as
additional paid-in capital.
16
<PAGE>
Lew Magram Ltd.
Notes to Financial Statements
================================================================================
12. Subsequent Events (a) On May 16, 1997, the Company issued 2,000 shares
of preferred stock to two individuals for
$2,000,000. The preferred stock has been
designated as senior convertible preferred stock
with $.01 par value. The preferred stock has a
$1,000 per share liquidation value and a 9.5%
cumulative dividend.
(b) In connection with the transaction discussed
above, the Company amended its certificate of
incorporation whereby the Company is authorized
to issue 2,000 shares of $.01 par value common
stock and 2,000 shares of $.01 par value
preferred stock.
(c) Effective July 1, 1997, the Company was acquired
by Diplomat Corporation ("Diplomat"), a Delaware
corporation with a place of business in Stony
Point, NY which is in the business of selling
infantwear and care products. The acquisition was
accounted for as a purchase, with the
consideration consisting of the issuance of
Diplomat preferred and common stock.
17
<PAGE>
Financial Statements of Lew Magram Ltd. -- Six Months Ended June 30, 1997 and
June 30, 1996 (unaudited)
<PAGE>
LEW MAGRAM LTD
BALANCE SHEET
JUNE 30, 1997
(Unaudited)
ASSETS
Current Assets:
Cash $2,036,007
Marketable Securities 15,000
Accounts Receivable 846,499
Inventory 3,281,298
Prepaid Catalogs 1,361,734
Prepaid and Other Current 902,626
----------
Total Current Assets 8,443,164
Property & Equipment 1,438,222
Other Assets 22,404
Total Assets $9,903,790
==========
LIABILITIES & STOCKHOLDER'S DEFICIT
Current Liabilities:
Current portion-capital leases $ 205,193
Accounts payable 4,443,303
Loans payable-bank 2,694,628
Accrued expenses 7,072,897
------------
Total current liabilities 14,616,024
Long term debt 252,450
Stockholders' Equity
Preferred stock 2,000,000
Common stock 4,000
Paid-in capital 997,381
Accumulated deficit (7,966,062)
------------
Total Stockholders' Deficit (4,964,681)
------------
Total liabilities and shareholders' deficit $ 9,903,790
============
<PAGE>
LEW MAGRAM LTD.
UNAUDITED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Six Months Six Months
Period Ended Period Ended
June 30, 1997 June 30, 1996
Net Sales $ 19,692,703 $ 26,333,335
Cost of Goods Sold 11,960,210 12,417,647
------------ ------------
Gross Profit 7,682,493 13,915,688
Selling,General and Administrative Expenses 14,670,290 13,379,020
------------ ------------
Operating Income (Loss) (6,987,797) 536,668
Other Income (Loss) (218,636) (95,289)
------------ ------------
Net Income (Loss) Before Income Taxes (7,306,433) 441,379
Income Tax Expense (Benefit) 70,000 0
------------ ------------
Net Income (Loss) ($ 7,276,433) $ 441,379
============ ============
<PAGE>
LEW MAGRAM LTD
STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Six months ended
June 30, June 30,
1997 1996
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($7,276,433) $ 441,379
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation and amortization 303,547 279,324
Decrease(Increase) in:
Accounts receivable (10,977) 18,112
Inventories 738,578 (73,034)
Prepaid expenses and other current assets 6,363 (1,015,680)
Other assets 241,416
Increase(Decrease) in:
Accounts payable (469,981) 1,664,028
Accrued expenses 5,278,391 (582,141)
-----------
Net cash provided(used in) operating activities (1,230,492) 973,404
Cash flows from investing activities-capital expenditures (87,175) (183,183)
----------- -----------
Cash flows from financing activities:
Increase in long term debt 1,369,084 (761,927)
Issuance of preferred stock 2,000,000
Dividends on preferred stock (24,466)
Payments under capital leases (199,121) (100,120)
Redemption of stockholder (77,619) 75,000
----------- -----------
3,067,878 (787,047)
----------- -----------
Net increase(decrease) in cash 1,750,211 3,174
Cash, beginning of year 285,796 71,104
----------- -----------
Cash, end of year $ 2,036,007 $ 74,278
=========== ===========
</TABLE>
<PAGE>
LEW MAGRAM LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1997 and 1996
1. Significant Account Policies
The accompanying financial statements reflect all adjustments which, in the
opinion of the management, are necessary for the fair representation 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 the full fiscal year.
2. Acquisition by Diplomat Direct Marketing Corporation
On February 19, 1998, Diplomat Direct Marketing Corporation ("DDMC") completed
the acquisition of Lew Magram, Ltd. The acquisition was effected as of July 1,
1997, the date that DDMC 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 DDMC's $.10 par value, Series D convertible
preferred stock and 250,000 shares of DDMC's common stock. The Series D
preferred stock is convertible into, 3,166,667 shares of DDMC's common stock.
The fair market value of the consideration was approximately $646,000. DDMC
recorded the carryover basis for a certain selling stockholder of Magram who
is also a principal stockholder of DDMC.
The net fair market value of the identifiable assets acquired was
approximately $1.9 million, and including customer lists value 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.
<PAGE>
Pro Forma Financial Statements of Diplomat Corporation and Lew Magram Ltd. -
Nine Months Ended June 30, 1997 and Year Ended September 30, 1996
<PAGE>
DIPLOMAT CORPORATION AND LEW MAGRAM LTD.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Diplomat Corp. Lew Magram
and Subsidiaries Ltd.
Nine Month Nine Month Pro Forma
Period Ended Period Ended Adjustments
June 30, 1997 June 30, 1997 DR (CR) Total
------------- ------------- ------- -----
<S> <C> <C> <C> <C>
Net Sales.............................. $19,866,711 $35,245,814 $55,112,525
Cost of Goods Sold..................... 9,178,866 19,923,523 29,102,389
--------- ---------- ----------
Gross Profit........................... 10,687,845 15,322,291 26,010,136
Selling, General and
Administration Expenses................ 8,815,989 22,605,789 601,910 32,023,317
--------- ---------- ------- ----------
Operating Income (Loss)................ 1,871,856 (7,282,998) (6,013,052)
Other Income (Loss).................... (488,577) 283,094 (205,483)
--------- ------- ---------
Net Income (Loss) Before
Income Taxes........................... 1,383,279 (6,999,904) (6,218,535)
Income Tax Expense
(Benefit).............................. 324,000 70,000 394,000
------- ------ -------
Net Income (Loss)...................... 1,059,279 (7,069,904) (6,612,535)
Preferred Stock Dividends.............. 162,000 0 162,000
------- - -------
Net Income (Loss) To
Common Shareholders.................... $897,279 ($7,069,904) ($6,774,535)
======== ============ ============
Net Income (Loss) Per
Common Share........................... $0.16 ($1.19)
===== =======
Average Number of Shares
Used in Computation.................... 5,458,525 250,000 5,708,525
========= ======= =========
</TABLE>
<PAGE>
DIPLOMAT CORPORATION AND LEW MAGRAM LTD.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Diplomat Corp.
and Subsidiaries Lew Magram Ltd. Pro Forma
Year Ended Year Ended Adjustments
September 30, 1996 January 4, 1997 DR (CR) Total
------------------ --------------- ------- -----
<S> <C> <C> <C> <C>
Net Sales...................... $19,222,801 $51,926,603 $71,149,404
Cost of Goods Sold............. 13,334,566 25,111,812 36,446,500
---------- ---------- ----------
Gross Profit................... 5,888,213 28,814,891 32,702,904
Selling, General and
Administration Expenses 10,589,561 28,296,249 802,547 39,686,357
Restructuring and
Reorganization Costs 1,738,975 0 1,738,975
--------- - ---------
Operating Income (Loss)........ (6,440,323) (1,481,558) (8,724,428)
Other Income (Loss)............ (784,577) 691,553 93,024)
--------- ------- -------
Net Income (Loss)
Before Income Taxes............ (7,224,900) (790,005) (8,817,452)
Income Tax Expense
(Benefit)...................... 0 0 0
- - -
Net Income (Loss).............. (7,224,900) (790,005) (8,817,452)
Preferred Stock
Dividends...................... 0 0 0
- - -
Net Income (Loss) To
Common Shareholders............ ($7,224,900) ($790,005) ($8,817,452)
============ ========== ============
Net Income (Loss) Per
Common Share................... ($1.59) 0 ($1.99)
======= = =======
Average Number of
Shares Used in
Computation.................... 4,549,525 0 250,000 4,799,525
========= = ======= =========
</TABLE>
<PAGE>
DIPLOMAT CORPORATION AND LEW MAGRAM LTD.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma adjustments are included in the accompanying unaudited
pro forma consolidated financial statement for the nine months ended June 30,
1997.
1. To record amortization of intangibles acquired in the acquisition for
the period October 1, 1995 through September 30, 1996, the period
prior to acquisition. Resulting amortization for such period totals
$302,547 for the goodwill and $500,000 for the customer list.
2. To record the issuance of 250,000 shares of common stock which were
included in the purchase price consideration (See Lew Magram Ltd.
Note 2 to Consolidated Financial Statements for the six months ended
June 30, 1997 and 1996).
