SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For The Transition Period from _______to_______
Commission File Number 0-22432
DIPLOMAT CORPORATION
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 786-5552
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.0001 per value and Common Stock Purchase Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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
DIPLOMAT CORPORATION
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet - June 30, 1996 3
Consolidated Statements of Operations - For the six months
and three months ended June 30, 1996 and June 30, 1995 4
Consolidated Statements of Cash Flows - For the six months
and three months ended June 30, 1996 and June 30, 1995 5
Notes to Financial Statements 6-8
Item 2 - Managements' Discussion and Analysis of Financial
Conditions and Results of Operations 9-13
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURE 14
2
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
JUNE 30,1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 100,491
Accounts receivable, trade,net 2,919,109
Inventories 6,067,203
Prepaid expenses 761,526
Other current assets 762,449
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TOTAL CURRENT ASSETS 10,610,778
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PROPERTY AND EQUIPMENT
less accumulated depreciation 2,130,133
INTANGIBLE ASSETS 3,652,444
OTHER ASSETS 966,921
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$ 17,360,276
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 3,384,507
Loans payable-stockholders 50,885
Loans payable-bank 3,746,918
Loans payable-other 0
Accrued expenses 553,549
Current maturities of long term debt 233,749
Subordinated term notes 1,125,000
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TOTAL CURRENT LIABILITIES 9,094,608
------------
LONG TERM DEBT,less current maturities 4,463,595
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STOCKHOLDERS' EQUITY:
Preferred stock 600,000
Common stock 450
Paid-in capital 5,201,449
Accumulated deficit (1,999,826)
------------
TOTAL SHAREHOLDERS' EQUITY 3,802,073
------------
$ 17,360,276
See notes to financial statements.
3
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $14,392,850 $7,463,186 $9,239,984 $4,766,129
COST OF SALES 8,027,027 4,330,590 5,386,893 2,916,887
----------- ---------- ---------- ----------
GROSS PROFIT 6,365,823 3,132,596 3,853,091 1,849,242
OPERATING EXPENSES:
Selling expenses 2,755,266 1,085,832 1,441,698 669,841
General and administrative expenses 3,125,445 854,087 1,811,025 428,627
Warehouse and distribution expenses 468,389 448,404 253,405 241,593
----------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 6,349,100 2,388,323 3,506,128 1,340,061
----------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 16,723 744,273 346,963 509,181
OTHER INCOME 5,370 11,987 2,685 9,233
INTEREST EXPENSE (514,867) (256,213) (294,645) (142,889)
----------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (492,774) 500,047 55,003 375,525
INCOME TAXES (BENEFIT) (168,340) 47,000 41,052 0
----------- ---------- ---------- ----------
NET INCOME (LOSS) ($324,434) $453,047 $13,951 $375,525
NET INCOME (LOSS) PER SHARE ($0.07) $0.11 $0.00 $0.09
NUMBER OF SHARES USED IN
COMPUTATION 4,493,525 3,985,755 4,493,525 3,985,755
See notes to financial statements.
4
DIPLOMAT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended Three months ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) ($324,434) $453,047 $13,951 $375,525
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 134,866 59,088 76,316 29,544
Amortization of goodwill 60,000 36,000 0
(Increase) in deferred income taxes (223,000) 0 (11,608) 0
---------- ---------- ---------- -----------
(352,568) 512,135 114,659 405,069
CHANGES IN ASSETS AND LIABILITIES, net of
effects from acquisition of Biobottoms
(Increase) in accounts receivable (1,663,565) (1,395,283) (1,118,433) (1,086,859)
(Increase) decrease in inventories 231,724 (907,578) 614,946 405,899
(Increase)decrease in prepaid expenses and other assets 1,089,827 253,013 215,766 155,066
Increase(decrease) in accounts payable (893,779) 114,551 (336,722) (767,747)
Increase(decrease) in accrued expenses 93,556 55,534 (120,920) 53,967
---------- ---------- ---------- -----------
(1,494,805) (1,367,628) (630,704) (834,605)
---------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment,net (42,510) (7,902) (25,659) (2,709)
---------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 6,477,116 1,522,856 1,258,335 960,973
Repayments of loans payable (1,004,269) (96,946) (500,629) (50,055)
Issuance of preferred stock 600,000 0 0
Acquisition of Biobottoms (4,567,662) 0 (42,831) 0
---------- ---------- ---------- -----------
1,505,185 1,425,910 714,875 910,918
---------- ---------- ---------- -----------
NET INCREASE(DECREASE) IN CASH (32,130) 50,380 58,512 73,604
CASH AND CASH EQUIVALENTS-beginning of period 132,621 41,035 41,979 17,811
---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS-end of period $100,491 $91,415 $100,491 $91,415
5
DIPLOMAT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 1996
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
A. The financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
B. Inventories are stated at the lower 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 5 and 10 years for
machinery, furniture and equipment.
D. During the year ended January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"), and has applied the provisions prospectively.
The adoption of SFAS 109 changed the Company's method of accounting for income
taxes from the deferred method to an asset and liability method. Previously,
the Company deferred the past tax effects of timing differences between
financial reporting and taxable income. The asset and liability method requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between tax and financial reporting
bases of other assets and liabilities.
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. Art and design costs incurred in the development of the Company's
new Lamaze from AMI product lines are being amortized over 2 years.
G. On February 9, 1996, the Company completed the acquisition (the
"Closing") of Biobottoms, Inc. ("Biobottoms"), a California-based mail-order
catalog company, specializing in apparel and accessories for newborn through
preteen children, pursuant to an Agreement and Plan of Merger made as of
December 22, 1995 by and among Diplomat Corporation, Diplomat Acquisition
Corporation, a wholly-owned subsidiary of the Company, organized under the laws
of the State of Delaware ("DAC"), Biobottoms and Joan Cooper and Anita
Dimondstein, individuals and principal stockholders of Biobottoms (the "Merger
Agreement"). Biobottoms has become a wholly-owned subsidiary of the Company and
will continue its principal place of business in Petaluma, California.
The Company paid $2,500,000 for Biobottoms, $1,000,000 in cash and
$1,500,000 in the form of two promissory notes to Biobottoms' shareholders,
each in the amount of $750,000 ("Acquisition notes"). The notes bear interest
at 1% over the prime rate as defined in the agreements. The first $750,000 note
was due August 9, 1996, convertible at the option of the holder into common
stock at $2 per share and the second note is due in two equal installments of
$375,000 in November 1996 and August, 1997.
6
The promissory notes made in connection with the merger are referred
to hereinafter as the Deferred Payment.
In connection with the Closing, Biobottoms established an inventory
based credit facility with Congress Financial Corporation, the Company's
principal lender, secured by a first priority security interest in
substantially all of the assets of Biobottoms and a guaranty of such
obligations by the Company (the "Biobottoms Congress Loan Facility"). The
maximum credit available under the facility is $2.0 and on the date of Closing
$848,531 was available and borrowed. The Biobottoms Congress Loan Facility is
guaranteed by the Company and a default thereunder constitutes a default under
the Company's Loan and Security Agreement with Congress. The interest is
charged on the loan is the prime rate as announced by Core States Bank, N.A.
(the "Prime Rate") plus 2%. At the present time, the Company is borrowing at
the maximum available limitation. Simultaneously with the Closing, the Company
and Biobottoms also entered into a loan and subordinated security agreement
with Robert M. Rubin (a director and principal stockholder of the Company) and
American United Global, Inc. ("American United") (a corporation of which Mr.
Rubin is an officer, director and principal stockholder) pursuant to which the
Company borrowed from Mr. Rubin (the "Rubin Loan") and the Company borrowed
from American United (the "American United Loan") (collectively the
"Rubin/American United Loans") $2,353,100 and $450,000 respectively. The
amounts represented by the Rubin Loan do not include subordinated secured loans
made by Mr. Rubin to the Company in April, 1994. The American United Loan to
the Company provided for additional working capital and was repaid in May, 1996
in accordance with its terms. Repayment of these loans were secured by a first
priority security interest in the capital stock of Biobottoms owned by the
Company and a junior security interest in substantially all of the assets of
the Company and Biobottoms, other than real estate, Biobottoms guaranteed the
indebtedness of the Company to American United and Biobottoms guaranteed the
indebtedness of the Company to Mr. Rubin. The interest on these loans is
payable monthly at the Prime Rate plus 2%, the same rate charged by Congress
Financial Corporation, subject to the Intercreditor Agreement (defined below).
The Deferred Payment notes and the Rubin loans are subject to an
Intercreditor Agreement with Congress Financial Corporation (the "Intercreditor
Agreement") which has the effect of restricting or limiting enforcement
remedies under the promissory notes evidencing the Deferred Payment and the
Rubin Loans prior to repayment of the senior debt payable to Congress Financial
Corporation and restricting the repayment of principal amounts payable thereon
based upon certain minimum excess loan availability requirements.
The installment payable with respect to the Deferred Payment otherwise
payable on August 9, was not paid in accordance with the note terms. In
accordance with the Intercreditor Agreement, no enforcement action may be taken
by the noteholders for a period of 270 days without the express written consent
of the Company's Institutional Lender, unless such institutional lender's
indebtedness has been paid in full.
7
Additionally, the Company incurred costs related to the of acquisition
in the amount of approximately $720,000. Of this amount, $600,000 represents
the estimated fair value of 100,000 shares of the Company's non-voting
convertible preferred stock issued to a significant stockholder (who is also a
member of the Board of Directors), as partial consideration to induce the
making of the loan and for his assistance in consummating the acquisition. The
preferred shares are convertible into 1,000,000 common shares of the Company,
which shares are subject to a voting agreement between the holder and two other
significant stockholders of the Company. The transaction has been accounted for
as a purchase and accordingly, Biobottoms results of operations are included
with the Company's beginning February 9, 1996.
The following unaudited pro-forma summary combines the consolidated
results of operations of the Company and Biobottoms as if the acquisition had
occurred at the beginning of fiscal 1995, after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
the acquisition debt, and the adjustments required as a result of changes to
certain employment agreements as a direct result of the acquisition.
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
------------- -------------
(unaudited) (unaudited)
Net Sales $15,494,196 $15,710,340
Net Loss (578,077) (314,408)
Net Loss Per Common Share (.13) (.08)
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.
The following is the condensed balance sheet of Biobottoms at the date
of acquisition, February 9, 1996.
Assets
------
Cash $ 1,250
Accounts Receivable, Net 267,670
Inventory, Net 1,988,962
Prepaid and Other Current Assets 1,569,027
Property and Equipment, Net 296,981
Other Assets 613,659
-----------
$4,737,549
Liabilities and Shareholders' Equity
------------------------------------
Bank Line of Credit $ 27,154
Accounts Payable 3,179,210
Accrued Liabilities 407,943
Current Portion of Long Term Debt 82,232
Long Term Debt, Net 6,994
Stockholders' Equity 1,034,016
----------
$4,737,549
8
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
NET SALES
Consolidated net sales for the Six Month Period ended June 30, 1996
("1996 Six Month Period") increased approximately $6,930,000 or 48% from the
Six Month Period ended June 30, 1995 ("1995 Six Month Period") primarily as a
result of the Biobottoms sales of $8,260,000 from the date of acquisition,
February 9, 1996. Sales of Diplomat decreased 17% for the period because of
lower unit volume and lower prices. The lower sales in 1996 were also impacted
significantly by an adverse retailing environment that has continued from the
last quarter of 1995.
Consolidated cost of sales were 56% of net sales in 1996 and 58% in
1995. The increase in cost of sales of $3,696,000 in 1996 included $3,878,000
from Biobottoms. Cost of sales of Diplomat decreased 3% in 1996 although sales
decreased 17%.
For the 1996 Six Month Period, Toys 'R Us and Wal-Mart represented 11%
and 40% respectively, of the Diplomat sales as compared to 21% and 44% in 1995.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increased approximately
$3,961,000 from 1995 to 1996 primarily from $4,200,000 of Biobottoms operating
expenses. Operating expenses as a percentage of net sales increased from 32% in
1995 to 44% in 1996 because of the greater percentage of fixed costs to the
lower sales.
Interest expense increased $259,000 in 1996 compared to 1995 as a
result of Diplomat's increased borrowing at higher interest rates which include
$149,000 of interest expense in connection with the acquisition of Biobottoms.
The net loss for the 1996 period was $324,000 as compared to net
income of $453,000 for the comparable period in 1995. Significantly lower sales
of Diplomat during the first half of 1996, without corresponding reductions in
operating expenses and additional interest expenses from the acquisition were
the principal components for the loss in 1996. Biobottoms had net income of
$80,000 from the date of acquisition.
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
NET SALES
Consolidated net sales for the Three Month Period ended June 30, 1996
("1996 Three Month Period") increased approximately $4,474,000 or 94% from the
Three Month Period ended June 30, 1995 ("1995 Three Month Period") primarily as
a result of the Biobottoms sales of 4,909,000 for the period. Sales of Diplomat
decreased 7% for the period because of lower unit volume and lower prices. The
lower sales in 1996 were also impacted significantly by an adverse retailing
environment that has continued from the last quarter of 1995.
9
Consolidated cost of sales were 58% of net sales in 1996 and 55% in
1995. The increase in cost of sales of $2,470,000 in 1996 included $2,376,000
from Biobottoms. Cost of sales of Diplomat increased 1% in 1996 although sales
decreased 8%.
For the 1996 Three Month Period, Toys 'R Us and Wal-Mart represented
7% and 52% respectively, of the Diplomat sales as compared to 13% and 49% in
1995.
OPERATING EXPENSES
Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses, increased approximately
$2,166,000 from 1995 to 1996 primarily from $2,519,000 of Biobottoms operating
expenses. Operating expenses as a percentage of net sales increased from 28% in
1995 to 38% in 1996 because of the greater percentage of fixed costs to the
lower sales.
Interest expense increased $152,000 in 1996 compared to 1995 as a
result of Diplomat's increased borrowing at higher interest rates which include
$95,000 of interest expense in connection with the acquisition of Biobottoms.
The net income for the 1996 period was $14,000 as compared to net
income of $375,000 for the comparable period in 1995. Significantly lower sales
of Diplomat during the first half of 1996, without corresponding reductions in
operating expenses and additional interest expenses from the acquisition were
the principal components for the loss in 1996. Biobottoms had net income of
$20,000 for the 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 in order to fund its operation.
The Company's principal working capital credit facility is provided by
Congress Financial Corporation.
In April 1994, the Company entered into an agreement with Congress
providing the Company with a maximum $3 million secured line of credit to be
used for loans and trade letters of credit. The loans are secured by
substantially all of the Company's personal property, including without
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) percent above the prime rate announced by Core States Bank.
The credit agreement contains restrictions relating to the payment of dividends
and the maintenance of certain levels or working capital which may not be less
than $4,500,000, excluding the Congress loan and stockholders equity of not
less than $3,500,000. The Company is currently in compliance with all financial
covenants.
10
Under the terms of the credit agreement, the Company could borrow up
to 85% of the amount of eligible accounts receivable (as defined in the
agreement), not to exceed the maximum credit. In February 1995 the Agreement
was amended to adjust the formula used to determine the amount available for
revolving loans by including therein an amount based upon eligible inventory
not to exceed $750,000. As of the date hereof, the Company is borrowing the
maximum amount.
In connection with that amendment, Robert Rubin, a director and
principal stockholder of the Company, furnished the lender with a personal
limited guarantee up to a maximum liability of $375,000, pertaining to loans
made based upon eligible inventory. In connection with the initial Congress
transaction, the Company borrowed from Robert Rubin $590,000 on a secured term
loan basis, subordinated to Congress Financial, in order to repay in full its
then existing outstanding principal indebtedness to Citibank, N.A. Such
Citibank facility in the initial principal amount of $650,000, was established
in June, 1993, secured by certain assets of the Company and a shareholder
guaranty from Mr. Rubin. The loan from Mr. Rubin is repayable with interest at
the prime rate plus 1 1/2%, with required principal payment amortization
identical to the terms applicable to the Citibank loan terms. Accordingly, the
Company made principal payments of $120,000 in 1994, $120,000 in 1995 and will
be required to make payments of $175,000 and $174,800 in 1996 and 1997,
respectively.
In connection with the Biobottoms acquisition, the Company incurred
debt of $4,303,100 consisting of Deferred Payment Notes, payable to the former
Biobottoms stockholders, Mr. Rubin and American United Global. The American
United Global loan was paid in May 1996. The Deferred Payment Note of $750,000
was due August 9, 1996(Payment was not made), $375,000 is due November 9, 1996
and $375,000 is due August 9, 1997 together with interest.
The promissory notes made in connection with the merger are referred
to hereinafter as the Deferred Payment.
In connection with the Biobottoms acquisition, Biobottoms established
an inventory based credit facility with Congress Financial Corporation, the
Company's principal lender, secured by a first priority security interest in
substantially all of the assets of Biobottoms and a guaranty of such
obligations by the Company (the Biobottoms Congress Loan Facility"). The
maximum credit available under the facility is $2.0 and on the date of Closing
$848,531was available and borrowed. The Biobottoms/Congress Loan Facility is
guaranteed by the Company and a default thereunder constitutes a default under
the Company's Loan and Security Agreement with Congress. The interest rate
charged on the loan is the prime rate as announced by Core States Bank, N.A.
(the "Prime Rate") plus 2%. Simultaneously with the Closing of the Biobottoms
acquisition , the Company and Biobottoms also entered into a loan and
subordinated security agreement with Robert M. Rubin (a director and principal
stockholder of the Company) and American United Global, Inc. ("American
United") (a corporation of which Mr. Rubin is an officer, director and
principal stockholder) pursuant to which the Company borrowed from Mr. Rubin
(the "Rubin Loan") and the Company borrowed from American United (the "American
United Loan") (collectively the "Rubin/American United Loans") $2,353,100 and
$450,000 respectively. The amounts represented by the Rubin Loan do not include
subordinated secured loans made by Mr. Rubin to the Company in April 1994.
11
The American United loan to the Company provided for additional
working capital. Repayment of these loans were secured by a first priority
security interest in the capital stock of Biobottoms owned by the Company and a
junior security interest in substantially all of the assets of the Company and
Biobottoms, other than real estate, Biobottoms guaranteed the indebtedness of
the Company to American United and Biobottoms guaranteed the indebtedness of
the Company to Mr. Rubin. The interest on these loans is payable monthly at the
Prime Rate plus 2%, the same rate charged by Congress Financial Corporation,
subject to the Intercreditor Agreement (defined below).
The Deferred Payment notes and the Rubin loans are subject to an
Intercreditor Agreement with Congress Financial Corporation (the "Intercreditor
Agreement") which has the effect of restricting or limiting enforcement
remedies under the promissory notes evidencing the Deferred Payment and the
Rubin Loans prior to repayment of the senior debt payable to Congress Financial
Corporation and restricting the repayment of principal payable thereon based
upon certain minimum excess loan availability requirements.
The Intercreditor Agreement also provides that irrespective of the
relative priority status between the holders of the Deferred Payment
obligations and the Rubin/American United loans, repayment of the Deferred
Payment is permitted to be paid provided that there has been no default of
senior debt payable by the Company or Biobottoms to Congress, minimum excess
availability requirements under the Company's loan facility with Congress are
satisfied and such payments are made with proceeds from a subsequent sale of
its capital stock. Subject to the Intercreditor Agreement, the Deferred Payment
and the Rubin/American United loans will be payable from the proceeds from any
sale of capital stock by the Company in the proportions of 40% on account of
the Deferred Payment and 60% on account of the Rubin/American United Loans,
except that before any such distributions are made, the Company will be
required to reduce the outstanding principal amount of the Deferred Payment by
$150,000.
It was the Company's intention to provide for the repayment of the
Deferred Payment and the Rubin Loan with proceeds of a subsequent financing
consisting of equity, debt or a combination of both. The Company does not
presently have any commitment for any such financing. Prior to March 1, 1998,
no principal amount of the Rubin Loan may be repaid, except from proceeds from
the sale of capital stock by the Company, subject in all respect to the
Intercreditor Agreement. Commencing March 1, 1998 and subject to the provisions
of the Intercreditor Agreement, including without limitation the requirement
that the Company have certain minimum levels of excess loan availability at the
time of the making of any such principal payment, the Rubin Loan is subject to
principal payments monthly of the amount equal to 25% of the Company's net
profit for the second preceding month, plus depreciation and amortization
expenses for said month, with the unpaid principal amount of the Rubin Loan and
unpaid interest accrued thereon payable in full on February 9, 1999.
In connection with the Biobottoms Congress Loan Facility, Mr. Rubin
also issued to Congress his written commitment to provide additional term loans
to the Company, not to exceed in the aggregate the principal amount of
$300,000, such loans to be made solely at the discretion of Congress. Proceeds
from any such loans may only be used by the Company to provide working capital
for Biobottoms.
12
Proceeds from the Congress loan and the Rubin/American United Loans
were used on February 9, 1996 or remained otherwise available as follows:
Payment at Closing of Biobottoms'
Institutional Secured Lender $1,448,025
Cash portion of Biobottoms Purchase
Price 1,000,000
Loan Costs and Legal Fees 96,690
Available Working Capital 1,103,816
As of the date hereof, the Company has a serious working capital
deficiency. No working capital is presently available to the Company under
either of the credit facilities to Diplomat or Biobottoms.Management is
pursuing a number of alternative financial proposals. Although no assurances
can be given that such efforts can be successful, it is management's belief
that suitable financing can be obtained and existing operations sustained.
The Companys's liquidity position was also adversely affected by the
slow moving imported layette inventory purchased with letters of credit in
favor of foreign suppliers. The Company's inventory position at June 30, 1996
reflects this inventory build up and sales for the period were significantly
less than originally anticipated, which also affected liquidity.
In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C and Class D
Warrants, each exercisable for 500,000 shares of common stock, at $1.37, $2.50
and $3.00 per share, respectively. All of the Class B Warrants were exercised
during 1995 providing the Company with net proceeds of $628,000. The Class D
Warrants expired in July, 1996. The Class C Warrants are exercisable until July
1997.
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.
13
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DIPLOMAT CORPORATION
August 19, 1996 By: /s/ Sheldon R. Rose
----------------------------------
Sheldon R. Rose
Chief Executive Officer and
Chairman of the Board
August 19, 1996 By: /s/ Irwin Oringer
----------------------------------
Irwin Oringer
Principal Accounting Officer and
Controller
14