SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K/A1
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/A1 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).
(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 (unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this Form 8-K\A1 to be signed on its
behalf by the undersigned hereunto duly authorized.
Dated: October 16, 1998
DIPLOMAT DIRECT MARKETING CORPORATION
By:/s/ JONATHAN ROSENBERG
----------------------
Jonathan Rosenberg
Chief Executive Officer
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 (unaudited)
Lew Magram Ltd.
Financial Statements
Year Ended January 4, 1997, the Six Months Ended December 30, 1995
and the Year Ended July 1, 1995
Lew Magram Ltd.
Financial Statements
Year Ended January 4, 1997, the Six Months Ended December 30, 1995
and the Year Ended July 1, 1995
1
Lew Magram Ltd.
Contents
- --------------------------------------------------------------------------------
Independnt 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
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 October 14, 1998
3
Lew Magram Ltd.
Balance Sheets
- --------------------------------------------------------------------------------
January 4, December 30,
1997 1995
- --------------------------------------------------------------------------------------------------------------------
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
----------- ----------
----------- ----------
See accompanying summary of accounting policies
and notes to financial statements.
4
Lew Magram Ltd.
Statements of Operations
- -------------------------------------------------------------------------------
Six months
Year ended ended Year ended
January 4, December 30, July 1,
1997 1995 1995
- ------------------------------------------------------------------------------------------------------------------
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) 54,594
Other (Note 8) 8,961 - (228,010)
----------- ----------- -----------
Total other income - net 691,553 280,726 621,409
----------- ----------- -----------
Loss before state and local income taxes
(recoveries) (790,005) (480,434) (1,485,434)
State and local income taxes (recoveries) - (15,665) 8,562
----------- ----------- -----------
Net loss $ (790,005) $ (464,769) $(1,493,996)
----------- ----------- -----------
----------- ----------- -----------
The interim period amounts are not necessarily indicative
of the results of operations for a full fiscal year.
See accompanying summary of accounting policies
and notes to financial statements.
5
Lew Magram Ltd.
Statements of Stockholder's Equity
- --------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
Balance, July 3, 1994 120 $ 8,000 $ 11,446 $ 5,681,961
Net loss for the year - - - (1,493,996)
Cumulative effect of change in
accounting for investment in
marketable securities - - - 78,950
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
(Note 10) - - - (400,000)
Issuance 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)
------ -------- ---------- -----------
------ -------- ---------- -----------
See accompanying summary of accounting policies
and notes to financial statements.
6
Lew Magram Ltd.
Statements of Cash Flows
(Note 9)
- --------------------------------------------------------------------------------
Year ended Six months ended Year ended
January 4, December 30, July 1,
1997 1995 1995
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(790,005) $ (464,769) $(1,493,996)
--------- ------------ -----------
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) (1,880,455)
--------- ------------ -----------
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 4,277,567
--------- ------------ -----------
Net cash provided by (used in)
investing activities (543,950) 596,985 2,397,633
--------- ------------ -----------
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
--------- ------------ -----------
--------- ------------ -----------
See accompanying summary of accounting policies
and notes to financial statements.
7
Lew Magram Ltd.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Description of Business The Company is a mail order ladies apparel retailer.
Cash and Cash The Company considers all highly liquid investments
Equivalents 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 The Company expenses the production costs of
Advertising Expenses 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
Lew Magram Ltd.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
The Company has begun 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 resulted in an
increase to prepaid catalogue expenses of
approximately $892,000 for the year ended January
4, 1997, $450,000 for the six months ended
December 30, 1995 and $-0- for the year ended July
1, 1995.
Property, Equipment and Depreciation and amortization are computed by both
Depreciation 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
Lew Magram Ltd.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Income Taxes The Company elected, with the consent of its
stockholders, to be taxed as an S corporation
under the provisions of the Internal Revenue Code
and New York State Franchise Tax Law. The
stockholders are required to report the Company's
taxable income or loss in their 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 of a 52-week year.
10
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
Lew Magram Ltd.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Property and Major classes of property and equipment consist
Equipment of the following:
January 4, December 30, Estimated
1997 1995 useful lives
----------------- ---------------- -----------------
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
---------- ----------
---------- ----------
2. Credit Agreements In October 1992, the Company entered into an
agreement 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
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
Former its stock for $1,252,889 from two stockholders, who
Stockholders are 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
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 Plan The Company has a profit sharing plan covering
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
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
Lew Magram Ltd.
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Supplemental (a) Cash Paid
Disclosures of Year ended Six months ended Year ended
Cash Flow January 4, December 30, July 1,
Information 1997 1995 1995
---------------- ---------------- ------------------ ---------------
Interest $266,261 $130,533 $ 98,508
Income taxes 1,975 - 276,990
--------------------------------------------------------------------
--------------------------------------------------------------------
(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 $2,200,000 which was paid
in cash. The July 1, 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.
Stockholder The note 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
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, 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
is expected to be accounted for as a purchase,
with the consideration consisting of the
issuance of preferred and common stock.
17
Financial Statements of Lew Magram Ltd. - Six Months Ended June 30, 1997 and
June 30, 1996
LEW MAGRAM LTD
BALANCE SHEET
JUNE 30, 1997
(Unaudited)
ASSETS
Cash $2,036,007
Marketable Securities 15,000
Accounts Receivable 846,499
Inventory 3,281,298
Prepaid Catalogs 470,734
Prepaid and Other Current 902,626
----------
Total Current Assets 7,552,164
Property & Equipment 1,438,222
Other Assets 22,404
----------
Total Assets $9,012,790
LIABILITIES & SHAREHOLDERS' EQUITY
Current portion-capital leases $205,193
Accounts payable 4,028,396
Loans payable-bank 2,694,628
Accrued expenses 4,901,832
-----------
Total current liabilities 11,830,049
Long term debt 252,450
Shareholders' Equity
Preferred stock 2,000,000
Common stock 4,000
Paid-in capital 997,381
Accumulated deficit (6,071,090)
-----------
(3,069,709)
-----------
Total liabilities and shareholders' equity $9,012,790
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 $22,013,768 $26,333,335
Cost of Goods Sold 11,545,303 12,417,647
---------- ----------
Gross Profit 10,468,465 13,915,688
Selling,General and Administrative Expenses 15,561,290 13,379,020
---------- ----------
Operating Income (Loss) (5,092,825) 536,668
Other Income (Loss) (218,636) (95,289)
--------- --------
Net Income (Loss) Before Income Taxes (5,311,461) 441,379
Income Tax Expense (Benefit) 70,000 0
------ -
Net Income (Loss) ($5,381,461) $441,379
LEW MAGRAM LTD
STATEMENTS OF CASH FLOWS
Unaudited
Six months ended
June 30, June 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) ($5,381,461) $441,379
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation and amortization 303,547 279,324
Purchase accounting adjustments (458,968)
Decrease(Increase) in:
Accounts receivable (10,977) 18,112
Inventories 1,307,269 (73,034)
Prepaid expenses and other current assets 2,315,800 (1,015,680)
Other assets 241,416
Increase(Decrease) in:
Accounts payable (884,888) 1,664,028
Accrued expenses 1,579,186 (582,141)
--------- ---------
Net cash provided(used in) operating activities (1,230,492) 973,404
Cash flows from investing activities (87,175) (183,183)
Cash flows from financing activities 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
NOTES TO INTERIM FINANCIAL STATEMENTS
1. Significant Accounting Policies
The accompanying financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
financial position and results of operations for the interim periods
presented. Except as otherwise disclosed, all such adjustments are of a normal
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results attainable for a 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 ("Magram"). The acquisition was
effected as of July 1, 1997, the date that DDMC took effective control of
Magram.
Pro Forma Financial Statements of Diplomat Corporation and Lew Magram Ltd. -
Nine Months Ended June 30, 1997
DIPLOMAT CORPORATION AND LEW MAGRAM LTD.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997
Diplomat Corp Lew Magram Ltd.
and Subsidiaries
Nine Month Nine Month Pro Forma
Period Ended Period Ended Adjustments
June 30, 1997 June 30, 1997 DR (CR) Total
Net Sales $19,866,711 $37,616,878 $57,483,589
Cost of Goods Sold 9,178,866 19,608,616 28,787,482
--------- ---------- ----------
Gross Profit 10,687,845 18,008,262 28,696,107
Selling,General and Administrative Expenses 8,815,989 23,596,418 33,014,317
--------- ---------- ----------
Operating Income (Loss) 1,871,856 (5,588,156) (4,318,210)
Other Income (Loss) (488,577) 32,011 (456,566)
--------- ------ ---------
Net Income (Loss) Before Income Taxes 1,383,279 (5,556,145) (4,774,776)
Income Tax Expense (Benefit) 324,000 70,000 394,000
------- ------ -------
Net Income (Loss) 1,059,279 (5,626,145) (5,168,776)
Preferred Stock Dividends 162,000 0 162,000
------- - -------
Net Income (Loss) To Common Shareholders $897,279 ($5,626,145) ($5,330,776)
Net Income (Loss) Per Common Share $0.16 ($0.93)
Average Number of Shares Used in Computation 5,458,525 250,000 5,708,525
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.