SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DIPLOMAT DIRECT MARKETING CORPORATION
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(Name of Registrant as Specified in Its Charter)
N/A
------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
[DIPLOMAT DIRECT MARKETING CORPORATION LOGO]
PROXY STATEMENT
, 1999
DIPLOMAT DIRECT MARKETING CORPORATION
414 Alfred Avenue
Teaneck, New Jersey 07666
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
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TIME 10:00 a.m., EST, on , , 1999
PLACE Diplomat Direct Marketing Corporation
414 Alfred Avenue
Teaneck, New Jersey
ITEMS OF BUSINESS o To elect members of the Board of Directors
o To approve the 1-for-5 reverse common stock
split
o To approve changing our name to StyleSite
Direct, Inc.
o To approve an increase in the size off our board
to nine members
o To approve an increase in our November 1996
Stock Option Plan
o To ratify the appointment of BDO Seidman, LLP as
our auditors for the next year
o To approve the conversion and exchange offer to
our preferred stockholders
o To transact such other business as may properly
come before the meeting
RECORD DATE Holders of voting shares of record at the close of
business, July , 1999, are entitled to vote at
the meeting.
ANNUAL REPORT Our Annual Report for 1998 is enclosed.
PROXY VOTING It is important that your shares be represented and
voted at the meeting. Please mark, sign, date and
promptly return the enclosed proxy card in the
postage-paid envelope furnished for that purpose.
You may revoke your proxy in the manner described
in the accompanying proxy statement at any time
prior to the meeting.
, 1999 WARREN H. GOLDEN
President and Chief Executive Officer
TABLE OF CONTENTS
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Page
PROXY STATEMENT
Annual Meeting Admission
Proxies
Stockholders Entitled to Vote
Required Vote
Cost of Proxy Solicitation
Dissenter's Rights
Section 16(a) Beneficial Ownership Reporting Compliance
Relationship with Independent Public Accountants
GOVERNANCE OF DIPLOMAT
Committees of the Board of Directors
Compensation of Directors
Compensation Committee Interlocks and Insider Participation
ELECTION OF DIRECTORS
Vote
Nominees
PROPOSALS
Proposal to Approve 1-for-5 Reverse Common Stock Split
Proposal to Approve Name Change to StyleSite Direct, Inc.
Proposal to Increase the Size of Our Board of Directors to Nine Members
Proposal to Approve an Increase in Our November 1996 Stock Option Plan
Proposal to Ratify the Appointment of BDO Seidman, LLP as Our
Independent Certified Public Accountants
Proposal to Approve the Conversion and Exchange Offer to Our Preferred
Stockholders
EXECUTIVE COMPENSATION
Executives' Compensation Policies
Summary Compensation Table
Option Grants in Last Fiscal Year
Fiscal Year End Option Values
Employment Agreements
Stock Option Plans
Employee Benefit Plans
Performance Graph
Share Ownership of Management and Directors
Certain Transactions
OTHER MATTERS
Stockholder Proposals
Form 10-K Filed with the Securities and Exchange Commission
Financial Statements
PROXY STATEMENT
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Annual Meeting Admission
These proxy materials are being furnished in connection with the
solicitation by our Board of Directors of proxies to be voted at the 1999 Annual
Meeting of Stockholders and at any meeting following adjournment thereof.
The Annual Meeting will be held on , , 1999, beginning at
10:00 a.m., EST, at our head offices at 414 Alfred Avenue, Teaneck, New Jersey.
This Proxy Statement and accompanying forms of proxy and voting
instructions are being mailed on or about , 1999 to holders of our
voting shares on the record date, which is July , 1999.
An admission ticket, which will be required for entry into the Annual
Meeting, is attached to the proxy card accompanying the Proxy Statement. If you
plan to attend the Annual Meeting in person, please retain the admission ticket
attached to the proxy card.
If your shares are held in the name of a bank, broker or other holder
of record and you plan to attend the Annual Meeting in person, you may obtain an
admission ticket in advance by sending a written request, along with proof of
ownership, such as a bank or brokerage account statement to our transfer agent,
North American Transfer Company, at 147 West Merrick Road, Freeport, New York
11520.
Proxies
Your vote is important. Because many stockholders can not personally
attend the Annual Meeting, it is necessary that a large number be represented by
proxy. Stockholders of record may vote their shares by marking, signing, dating
and mailing their proxies in the postage-paid envelope provided. Proxies may be
revoked at any time before they are exercised by written notice to our
Secretary, by timely delivery of a properly executed, later-dated proxy or by
voting by ballot at the Annual Meeting.
All shares entitled to vote and represented by properly executed
proxies received prior to the Annual Meeting and not revoked will be voted at
the Annual Meeting in accordance with the instructions indicated in those
proxies. If no instructions are indicated on a properly executed proxy, the
shares represented by the proxy will be voted as recommended by the Board of
Directors.
If any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Annual Meeting to another time or place, the persons named in the
enclosed form of proxy will have discretion to vote on those matters according
to the best judgment to the same extent as the person signing the proxy would be
entitled to vote. At this date this proxy statement went to press, we did not
anticipate that any other matters would be raised at the Annual Meeting.
Stockholders Entitled to Vote
Holders of record of our voting shares at the close of business on
July , 1999, the record date, are entitled to notice of and to vote at the
Annual Meeting. On July , 1999, there were shares of common stock
outstanding. There were also issued and outstanding shares of Series B and C
Preferred Stock which have aggregate voting rights equal to 3,500,285 shares of
common stock. The common stock and the Series B and C Preferred Stock are
referred to as the voting shares. Each voting share is entitled to one vote on
each matter properly brought before the Annual Meeting.
A list of stockholders entitled to vote at the Annual Meeting will be
available at the Annual Meeting on , 1999, and for 10 days prior to the
Annual Meeting, between the hours of 9:00 a.m. and 4:00 p.m. at the office of
the transfer agent, North American Transfer Company, at 147 West Merrick Road,
Freeport, New York 11520.
Required Vote
The presence, in person or by proxy, of the holders of a majority of
the voting shares entitled to be cast by stockholders entitled to vote generally
at the Annual Meeting is necessary to constitute a quorum. Abstentions and
broker "non-votes" are counted as present and entitled to vote for purposes of
determining a quorum. A broker "non-vote" occurs when a nominee holding shares
for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received instructions from the beneficial owner.
The affirmative vote by the holders of the majority of the voting
shares present in person or represented by proxy is required
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to elect the directors.
The affirmative vote by the holders of the majority of the voting
shares outstanding as of the record date is required to approve:
o the 1-for-5 reverse common stock split,
o the change of our name to StyleSite Direct, Inc., and
o the increase in the size of our board.
The affirmative vote by the holders of the majority of the voting
shares present in person or represented by proxy is required to
o ratify the appointment of BDO Seidman as the independent auditors
for the next fiscal year,
o approve an increase in the number of shares reserved for issuance
under our November 1996 Stock Option Plan, and
o approve the conversion and exchange offer to our preferred
stockholders.
Abstentions and broker "non-votes" will have the same effect as a vote
against any proposal.
Cost of Proxy Solicitation
We will pay for the cost of soliciting proxies. Proxies may be
solicited by our directors or executive officers in person or by telephone,
facsimile or electronic transmission. We have not engaged a third party proxy
solicitor.
In accordance with rules of the SEC, we will also reimburse brokerage
firms and other custodians, nominees and fiduciaries for their expenses incurred
in sending proxies and proxy materials to beneficial owners of voting shares.
Dissenter's Rights
Under Delaware law, stockholders are not entitled to dissenter's rights
of appraisal with respect to any of the proposals in this proxy.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on our records and other information, we believe that no
officers, directors, beneficial owner of more than ten percent of any class of
our equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, or any other person subject to Section 16 of
the Exchange Act with respect to Diplomat, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year, which ended September 30, 1998.
Relationship with Independent Public Accountants
The Board has reappointed BDO Seidman, LLP as the independent public
accounting firm to audit our financial statements for the fiscal year beginning
October 1, 1998 and ending September 30, 1999.
Representatives of BDO Seidman will be present at the Annual Meeting.
They will be given the opportunity to make a statement if they desire to do so,
and they will be available to respond to appropriate questions.
GOVERNANCE OF DIPLOMAT
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Pursuant to the Delaware General Corporation Law, as implemented by our
Certificate of Incorporation and By-Laws, our business, property and affairs are
managed under the direction of the Board of Directors. Members of the Board are
kept informed of our business through discussions with our Chairman and
officers, by reviewing materials provided to them and by participating in
meetings of the Board.
The Board of Directors met once during fiscal 1998 and acted on
numerous matters by written consent.
Committees of the Board of Directors
We have three formal committees; the Audit Committee, which consists of
David Abel, Howard B. Katz and, as special advisor, Mark J. McSweeney; the
Compensation Committee, which consists of Robert M. Rubin, Howard Katz and David
Abel; and the Corporate Governance Compliance Committee, which consists of
Warren H. Golden and Robert M. Rubin. We do not currently have a stock option
committee or a nominating committee.
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The functions of the Audit Committee include: (i) recommending for
approval by the Board of Directors a firm of certified public accountants whose
duty it will be to audit our financial statements for the fiscal year in which
they are appointed, and (ii) to monitor the effectiveness of the audit effort,
our internal financial and accounting organization and controls and financial
reporting. The Audit Committee will also consider various capital and investment
matters.
The Compensation Committee is responsible for establishing compensation
arrangements for officers and directors, reviewing benefit plans and
administering each of our stock option plans.
The Corporate Governance Compliance Committee is responsible for
reviewing us on an ongoing basis regarding compliance with the corporate
governance standards, including Nasdaq rules and standards.
The Board of Directors does not have a standing nominating committee.
Nominations for election to the Board of Directors may be made by the Board of
Directors, or by any shareholder entitled to vote for the election of directors.
The Audit, Compensation and Corporate Governance Compliance Committees
did not meet during fiscal 1998.
Compensation of Directors
We have not paid and do not presently propose to pay compensation to
any director for acting in such capacity, except for the grant of options
described below and nominal sums for attending meetings and reimbursement for
reasonable out-of-pocket expenses in attending those meetings.
In May 1997, we issued to Howard Katz and Wesley C. Fredericks, Jr.
options to purchase up to 50,000 shares and 100,000 shares of common stock,
respectively. The options are exercisable at $2.38 per share and terminate in
2001. In June 1998, we issued David Abel options to purchase 50,000 shares of
Common Stock at $3.125 per share which options terminate in May 2003. The
options were granted in connection with each of Messrs. Katz, Fredericks and
Abel agreeing to serve on the Board of Directors. Mr. Fredericks resigned as a
director effective December 31, 1998.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee is a current or former officer
or employee of Diplomat. Robert Rubin, a member of the Compensation Committee,
has made substantial equity and debt investments in Diplomat, has personally
guaranteed a portion of the First Source loan facility, was a controlling
stockholder of Lew Magram, Ltd. immediately prior to the acquisition of Lew
Magram by Diplomat, and has a consulting agreement with Diplomat.
ELECTION OF DIRECTORS
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Voting
Unless marked otherwise, proxies received will be voted FOR the election
of each of the nominees below. If any nominee is unable or unwilling to serve as
a nominee for the office of director at the time of the Annual Meeting, the
proxies may be voted for either (i) a substitute nominee who shall be designated
by the proxy holders or by the Chairman of the Board to fill such vacancy, or
(ii) for the balance of the nominees, leaving a vacancy. Alternatively, the size
of the Board may be reduced accordingly. We expect each nominee for election as
a Director at the Annual Meeting to be able to serve if elected.
Nominees
Below is certain information regarding the nominees. Information about
the nominees' ownership in Diplomat can be found on page .
Robert M. Rubin has served as a Director since June 1992 and has been
Chairman since November 1996. Since December 5, 1995, Mr. Rubin has been a
Director of Help at Home, Inc., a public company engaged in the business of
providing homemaker and general housekeeping services to elderly and disabled
persons at home. Since 1997, Mr. Rubin has been Chairman of the Board of IDF
International, Inc., a company that specializes in civil engineering for federal
and state government projects. In October 1996, Mr. Rubin became a director of
Med-Emerg International Inc., an operator of nursing homes and related
healthcare services. Mr. Rubin has served as a Director of Western Power and
Equipment Corporation, a construction equipment distributor, since November 20,
1992. Between November 20, 1992 and March 7, 1993, Mr. Rubin served as Chief
Executive Officer of Western Power. Since October 1990, Mr. Rubin has served as
the Chairman of the Board and Chief Executive Officer of American United Global
Inc., a telecommunications and software company. Mr. Rubin was formerly a
Director and Vice Chairman, and is a minority stockholder of American Complex
Care, Incorporated, a public company which provided on-site health care
services, including intradermal infusion
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therapies. In April 1995, the principal operating subsidiaries of American
Complex petitioned in the Circuit Court of Broward County, Florida for an
assignment for the benefit of creditors. Until 1997, Mr. Rubin was also
Chairman, Chief Executive Officer and a principal stockholder of ERD Waste
Corp., a public company specializing in the management and disposal of municipal
solid waste, industrial and commercial nonhazardous solid waste and hazardous
waste. In September 1997, ERD Waste Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Age: 58
Warren H. Golden was appointed our Chief Executive Officer and
President in May 1999 and had been Executive Vice President, Chief Operating
Officer and a Director of Diplomat since February 1998. Mr. Golden had been with
Lew Magram since 1991 as its Executive Vice President. From 1989 to 1991, Mr.
Golden was with S.C. Corporation, most recently as President. From 1983 to 1989,
he was Vice President of Operations, Chief Financial Officer and Treasurer of
Honeybee, Inc. Prior thereto, Mr. Golden was Senior Vice President, Operations
and Control, for Plymouth Shops, a New York apparel retailer. Mr. Golden is a
graduate of Long Island University. Age: 57
Stephanie Sobel was appointed as Executive Vice President and Director
in May 1999. Prior to May 1999, Ms. Sobel held the position of Senior Vice
President of Merchandising for Diplomat since February 1998. Ms. Sobel was
Senior Vice President of Merchandising at Lew Magram from 1995 to February 1998
and, prior to that, at Honeybee Inc., a store retailer and cataloger of women's
apparel, also in New York City, where she worked for five years. Prior to that
she had two years of buying experience at Macy's New York and was a graduate of
the management training program at Abraham & Straus Department Stores. Ms. Sobel
graduated from Cornell University in 1982 with a degree in Arts & Sciences. Age:
38
Julia Aryeh has been the Chief Strategic Officer since February 1999
and was appointed Secretary and Director in May 1999. From 1996 through February
1999, Ms. Aryeh was a Vice President of Investment Banking at Josephthal and Co.
Inc. where she acted as our financial advisor from April 1998 until joining
Diplomat. Prior to Josephthal, Ms. Aryeh practiced securities and corporate law
at the law firm of Shereff Friedman Hoffman & Goodman LLP from January 1995
through January 1996. Prior to that Ms. Aryeh practiced securities law at the
law firm of Kelly Drye & Warren from July 1992 through December 1994. Age: 32
Stuart A. Leiderman was appointed as Divisional President of Ecology
Kids, Inc. in October 1998. Prior to that he served as Executive Vice President
of Sales and Marketing since July 1989, and has been a Director of Diplomat
since June 1992. From 1985 to 1989, Mr. Leiderman was a Divisional Vice
President for Hasbro, Inc., Playskool Baby Division, a company engaged primarily
in the development, sales and marketing of toys. Age: 55
Howard B. Katz has been a Director since October 1996. Mr. Katz has
been Executive Vice President of American United Global, Inc. since April 15,
1996. From December 1995 through April 15, 1996, Mr. Katz was a consultant for
National Fiber Network, a fiber optics telecommunications company, and from
January, 1994 through December, 1995 held various executive positions, including
Chief Financial Officer with National Fiber. From January 1991 through December
1993 Mr. Katz was the President of Katlaw Construction Corporation, a company
that provides general contractor services to foreign embassies and foreign
missions located in the United States. Age: 56
David Abel has been a Director since May 1998. Mr. Abel has been
president of United Realty since its inception in 1972, an industrial and
commercial real estate company. Mr. Abel has served as a director of numerous
companies, and is currently a director of M.S. Farrell Holdings, Inc. and
Innapharma, Inc. Mr. Abel is a member of the Society of Industrial Realtors and
The Commercial Industrial Brokers Society. Mr. Abel received his BA from the
Bernard Baruch School of Business in 1962. Age: 57
PROPOSALS
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PROPOSAL NUMBER 1
PROPOSAL TO APPROVE 1-FOR-5 REVERSE COMMON STOCK SPLIT
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On July , 1999, the Board of Directors approved an amendment to our
Certificate of Incorporation to effect a 1-for-5 reverse stock split of the
issued and outstanding shares of our common stock. The amendment will increase
the par value of our common stock to $0.0005 from $0.0001 but will not change
the number of authorized shares of our common stock.
The proposed amendment would amend the first paragraph of Article 4 of
our Certificate of Incorporation to read as follows:
"4. Authorized Capital. The aggregate number of shares of
which the Corporation shall have authority to issue is 51,000,000,
consisting of (i) 50,000,000 shares of common stock, par value $0.0005
per share (the "Common Stock") and (ii) 1,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"). All shares
shall, when issued, be issued as fully paid and nonassessable shares
and the holders thereof shall not be liable for any further payment in
respect thereof.
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"Simultaneously with the effective date of the filing of this
amendment to the Corporation's Certificate of Incorporation (the
"Effective Date"), each share of common stock, par value $0.0001 per
share, of the Corporation issued and outstanding or held as treasury
shares immediately prior to the Effective Date (the "Old Common Stock")
shall automatically and without any action on the part of the holder
thereof, be reclassified and changed into one-fifth of a share of
common stock, par value $0.0005 per share, which the Corporation shall
be authorized to issue immediately subsequent to the Effective Date
(the "New Common Stock"), and any fractional interests resulting from
such reclassification will be rounded up to the nearest whole share.
Each holder of a certificate or certificates which immediately prior to
the Effective Date represented outstanding shares of Old Common Stock
(the "Old Certificates") shall, from and after the Effective Date, be
entitled to receive upon surrender of such Old Certificates to the
Corporation's transfer agent for cancellation, a certificate or
certificates (the "New Certificates") representing the shares of New
Common Stock into which the shares of Old Common Stock formerly
represented by such Old Certificates so surrendered are reclassified
under the terms hereof."
Effects of the Reverse Split
If the reverse split is approved by our stockholders, the reverse split
will become effective on the date the proposed amendment is filed with the
Delaware Secretary of State. We anticipate filing the amendment immediately
prior to an underwritten public offering of our common stock or such earlier
date that our Board choose. Our Board also may abandon the reverse split at any
time prior to filing the amendment.
The reverse split will have the effects set forth in the proposed
amendment. All outstanding shares of old common stock will, without any action
on the part of the holders, be deemed to represent shares of new common stock as
reclassified to effect the reverse split and accordingly do no need to be
replaced. Consequently, it will not be necessary to submit old certificates for
exchange. If the reverse split is approved, old certificates will be deemed to
represent that number of shares of new common stock into which such shares of
old common stock are reclassified. Upon the sale or transfer of shares of old
common stock, new certificates will be issued by our transfer agent.
The shares of new common stock into which the shares of old common
stock are reclassified and changed on the effective date will be fully paid and
nonassessable.
If the reverse split is effected, we will have outstanding
approximately shares of new common stock, replacing shares of old common
stock. Consummation of the reverse split will not alter the number of authorized
shares of our capital stock, which will remain at 50,000,000 shares of common
stock and 1,000,000 shares of preferred stock. Other than the rounding up of
fractional interests, the reverse split will not alter any stockholder's
proportionate ownership interest in Diplomat.
Our stockholder's equity does not change as a result of the reverse
split. Our aggregate stated capital will not change because, although one-fifth
as many shares of common stock will be issued, the par value of each share of
common stock after the reverse split will be increased by five times the
pre-reverse split amount.
With the possible exception of the additional shares (which should be
de minimis) received by stockholders in the rounding up process to avoid
fractional shares, we believe that the reverse split will result in no gain or
loss or realization of taxable income to holders of our common stock under
existing United States Federal income tax laws, and that the tax basis and
holding period of the old common stock will carry over to the new common stock.
In accordance with the terms of our stock option plans and outstanding
warrants and non-plan options, appropriate adjustments will be made in the
number of shares of common stock reserved for issuance and in the exercise price
of outstanding warrants and options. The number of shares of common stock
reserved for issuance pursuant to outstanding warrants and options will be
divided by five and the exercise price per share will be multiplied by five.
Purposes of the Proposed Reverse Split
The Board of Directors approved the amendment to our Certificate of
Incorporation to effect the reverse split
o to promote the effective marketability of our common stock; and
o to ensure the continued inclusion of our common stock on Nasdaq.
We believe that the low price per share of our common stock diminishes
the effective marketability of such stock because of the reluctance of many
brokerage firms to recommend lower-priced stocks to their clients. Additionally,
the policies and practices of a number of brokerage firms tend to discourage
individual brokers within those firms from dealing in lower-priced stocks. Some
of such
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policies and practices pertain to the payment of brokers' commissions and to
time consuming procedures that operate to make the handling of lower-priced
stocks unattractive to brokers from an economic perspective. The foregoing
factors adversely affect the liquidity of our common stock.
We are hopeful that the decrease in the number of shares of our common
stock outstanding as a consequence of the proposed reverse split, and the
anticipated corresponding increased price per share, will promote greater
liquidity for our stockholders with respect to those shares held by them.
Our common stock price has recently been trading near $1.00 per share.
The Nasdaq Stock Market, where are common stock is traded, requires that, to
maintain continued listing on Nasdaq, the stock price may not trade below $1.00
for a certain period of time. We believe that it would be prudent to effectuate
a reverse stock split to avoid the possibility of violating this Nasdaq rule.
We can not predict, however, whether the proposed reverse split will
achieve any of these desired results, nor can we predict that
o the price per share of our common stock immediately after the
proposed reverse split will increase proportionately with the
reverse split,
o any increase can be sustained for any period of time, or
o the market price of our common stock will exceed or remain in
excess of current market prices.
In addition, the reverse split may have the effect of creating odd lots
of stock for some shareholders and such odd lots may be more difficult to sell
or have higher brokerage commissions associated with the sale of such odd lots.
The Board of Directors recommends a vote FOR the approval of the
1-for-5 reverse common stock split. Proxies solicited by the Board will be voted
FOR this proposal unless you specify otherwise.
PROPOSAL NUMBER 2
PROPOSAL TO APPROVE NAME CHANGE TO STYLESITE DIRECT, INC.
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On July , 1999, the Board of Directors approved an amendment to
our Certificate of Incorporation to change the corporation's name to StyleSite
Direct, Inc.
We believe that our present name does not accurately describe our
business. We believe that the name change will enhance our recognition in the
investment and business community as a direct marketer of women's fashions with
an emphasis on the growing e-commerce industry. Accordingly, after examination
of a variety of possibilities, the Board has recommended that our Certificate of
Incorporation be amended to change our name to StyleSite Direct, Inc. Pending
approval of this proposal, we will apply to change our Nasdaq symbol.
The proposed amendment would amend Article 1 of our Certificate of
Incorporation to read in its entirety as follows:
"1. Name. The name of the corporation is StyleSite Direct, Inc.
(the "Corporation")."
The Board of Directors recommends a vote FOR the approval to change our
name to StyleSite Direct, Inc. Proxies solicited by the Board will be voted FOR
this proposal unless you specify otherwise.
PROPOSAL NUMBER 3
PROPOSAL TO INCREASE THE SIZE OF OUR BOARD TO NINE MEMBERS
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On July , 1999, the Board of Directors approved an amendment to our
Certificate of Incorporation to increase the maximum size of our Board from
seven members to nine members.
Our Certificate of Incorporation places a limitation on the number of
members our Board may have at any time to seven. We do not currently anticipate
increasing the size of the board above seven members. Events may occur, however,
in which additional Board seats would need to be available. To increase the
maximum size of the Board, we would need to hold a special meeting of our
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stockholders to approve amending our Certificate of Incorporation. We believe
that it is appropriate to give our Board of Directors the discretion to increase
the size of the board to nine members.
The proposed amendment would amend Article 5.2 of our Certificate of
Incorporation to read in its entirety as follows:
"5.2. Number and Election of Directors. The number of its directors
shall not be less than three nor more than nine. Directors need not be
stockholders."
The Board of Directors recommends a vote FOR the approval to increase
the maximum size of our board to nine members from seven. Proxies solicited by
the Board will be voted FOR this proposal unless you specify otherwise.
PROPOSAL NUMBER 4
PROPOSAL TO APPROVE AN INCREASE IN OUR NOVEMBER 1996 STOCK OPTION PLAN
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Our November 1996 Stock Option Plan was adopted by our Board of
Directors in November 1996 and ratified by our stockholders. The purpose of the
plan is to grant directors, officers, employees and consultants (but excluding
any officer or director that owns more than 5% of our outstanding common stock)
a favorable opportunity to acquire our common stock so that they have an
incentive to contribute to our success and remain in our employ.
Under the plan, we may issue options to purchase up to 1,500,000 shares
of our common stock. As of the date of the printing of this proxy, there were
granted options to purchase 1,500,000 shares of our common stock. As a result,
we have no additional shares reserved for issuance under this plan. For a
description of each of our stock option plans, see "Executive Compensation -
Stock Option Plans". Our Board of Directors has approved an increase in the
number of shares of common stock reserved for issuance to 2,500,000. As of the
date of the printing of this proxy, we have not allocated any of these
additional options.
Description of November 1996 Stock Option Plan
We may grant under the plan both incentive stock options and stock
options that do not qualify for incentive treatment under the Code.
The exercise price of each incentive stock option under the plan will
be determined by the committee of our Board, but will be not less than 100% of
the fair market value of common stock on the date of grant (or 110% in the case
of an employee who at the time owns more than 10% of the total combined voting
power of all classes of capital stock). The nonstatutory option exercise price
will be determined by the committee, but will not be less than 85% of the common
stock on the date of grant.
In the discretion of the committee and upon receipt of all regulatory
approvals, an optionee may be permitted to utilize a cashless exercise or
deliver as payment in whole or in part of the exercise price certificates for
shares of common stock (valued for this purpose at its fair market value on the
day of exercise) or other property.
An incentive stock option granted under the plan may not be exercisable
after the expiration of ten years from the date it is granted. The committee may
provide in the stock option agreement that the option expires 30 days following
the termination of employment for any reason other than death or disability or
twelve months following a termination of employment for disability or death;
provided, however, that in no event shall any option granted under the plan be
exercised after the expiration date of such option set forth in the applicable
stock option agreement.
If the outstanding shares of common stock are changed into, or under
the plan, exchanged for cash or different number or kind of our securities or
another corporation's securities through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse-stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment will be made by the committee in
the number and kind of shares as to which options may be granted. In the event
of such change or exchange, other than for securities of another corporation or
by reason of reorganization, the committee will also make a corresponding
adjustment in the number or kind of shares, and the exercise price per share
allocated to unexercised options or portions thereof, of options which have been
granted prior to such change. Any such adjustment, however, will be made without
change in the total price applicable to the unexercised portion of the option
but with a corresponding adjustment in the price for each share (except for any
change in the aggregate price resulting from rounding-off of share quantities or
prices).
Effect of Proposed Reverse Stock Split
7
If Proposal Number One is approved by our stockholders and when the
reverse stock split becomes effective, the total number of shares available for
issuance will be reduced by the ratio of 1 to 5. As a result of the reverse
stock split, the shares available for issuance under the plan will be 300,000,
and if this Proposal Number 4 is approved by our stockholders, will be 500,000.
The Board of Directors recommends a vote FOR the approval to increase
the number of shares reserved for future issuance under the November 1996 Stock
Option Plan from 1,500,000 to 2,500,000. Proxies solicited by the Board will be
voted FOR this proposal unless you specify otherwise.
PROPOSAL NUMBER 5
PROPOSAL TO RATIFY APPOINTMENT OF BDO SEIDMAN, LLP AS
OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors has adopted resolutions appointing BDO Seidman,
LLP, of New York, New York, as our independent certified public accountants for
the fiscal year ending September 30, 1999. BDO Seidman, LLP has served as our
independent certified public accountants since July 15, 1998, is familiar with
our operations, accounting policies and procedures and is, in our opinion, well
qualified to act in this capacity.
On July 15, 1998, we appointed BDO Seidman as our principal independent
certified public accountants for the fiscal year ended September 30, 1998 to
replace Feldman Sherb Ehrlich & Co., P.C. who were dismissed as our principal
certified public accountants effective with such appointment. The appointment
was approved by our Board of Directors. Feldman Sherb Ehrlich has and will
continue to perform certain accounting services for us.
During the two most recent fiscal years ended September 30, 1997 and
the interim period preceding July 15, 1998, there have been no disagreements
with Feldman Sherb Ehrlich on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure or any other
reportable events. Feldman Sherb Ehrlich's report on our consolidated financial
statements for the two fiscal years ended September 30, 1997 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
The Board of Directors recommends a vote FOR the ratification of BDO
Seidman, LLP as our independent certified public accountants for the year ending
September 30, 1999. Proxies solicited by the Board will be voted FOR this
proposal unless you specify otherwise.
PROPOSAL NUMBER 6
PROPOSAL TO APPROVE THE CONVERSION AND EXCHANGE OFFER TO OUR PREFERRED
STOCKHOLDERS
- --------------------------------------------------------------------------------
On June 11, 1999, we entered into an agreement with our principal
stockholder, The Rubin Family Irrevocable Stock Trust, to convert or exchange
all of the preferred shares owned by the Trust into our common stock. The Trust
owns all of our outstanding Series B Preferred Stock and Series C Preferred
Stock, approximately 49% of our standing Series E Preferred Stock, and
approximately 85% of our outstanding Series F Preferred Stock. We have also
offered the same exchange terms to the holders of the remaining Series E
Preferred Stock and Series F Preferred Stock.
Conversion of Series B Preferred Stock and Series C Preferred Stock
The Trust has agreed to convert all of the Series B Preferred Stock and
Series C Preferred Stock at a formula derived by dividing the total liquidation
value of such preferred shares ($3,500,000) by $0.65 per share for a total of
5,384,615 shares of common stock. The terms of the Series B Preferred and the
Series C Preferred stock provided that such preferred shares were to convert at
75% of the current market price base on the average closing price of our common
stock for the 10 days preceding the conversion (which would have been $0.6525 on
that date resulting in an issuance of 5,363,985 shares of common stock, a
difference of 20,630 shares of common stock). The additional shares of common
stock issued upon conversion of such preferred shares was consideration for the
early conversion of such preferred shares by the Trust and for surrendering
certain rights and privileges of owning the preferred shares.
Exchange of Series E Preferred Stock
The holders of the Series E Preferred Stock have been granted a limited
opportunity to exchange their shares into common stock at a formula derived by
dividing the total liquidation value of such preferred shares ($3,705,000) by
$0.90 per share. The terms of the Series E Preferred Stock provided that such
preferred shares were not convertible. The exchange offer of shares of common
stock for the Series E Preferred Stock was consideration for the holders to
surrender certain rights and privileges of owning the preferred shares. Of the
total shares to be issued upon exchange of all of the Series E Preferred Stock,
which is 4,116,667, the Trust will receive 2,005,556 shares.
8
Exchange of Series F Preferred Stock
The Trust has agreed to exchange for common stock all of the shares of
Series F Preferred Stock at a formula derived by dividing the total liquidation
value of such preferred shares ($2,744,000) by $0.50 per share. The terms of the
Series F Preferred Stock provided that such preferred shares were not
convertible. The agreement to exchange the Series F Preferred Stock for common
stock was consideration for the Trust giving up certain rights and privileges of
owning the preferred shares. We intend to redeem for cash the remaining $500,000
of Series F Preferred Stock.
Treatment of Dividends
We are paying in common stock accrued and unpaid dividends on the
Series E Preferred Stock and the Series F Preferred Stock. Of the total 399,690
shares of common stock being issued in lieu of cash dividends, the Trust will
receive 224,192 shares.
Effect of the Conversion or Exchange of Preferred Stock
If the conversion and exchange offer is approved by our stockholders,
it will become effective immediately prior to the closing of an underwritten
public offering of our common stock. Immediately after the conversion and
exchange of the preferred stock, assuming all of the holders of the Series E
referred Stock agree to exchange their preferred shares, we will have
outstanding approximately shares of common stock. If this proposal and
Proposal Number 1, the reverse stock split, are approved, we will have
outstanding approximately shares of common stock, of which the Trust will
own approximately shares, or %.
The conversion of the Trust's preferred shares where the conversion
price is less than that of the original terms, or in the case of the preferred
shares which were not convertible when issued where the conversion price is less
than the market price, will result in an imputed dividend to the Trust of
approximately $2 million, based on the market price of $0.875.
Purposes of the Conversion and Exchange Offer
Our Board of Directors approved the conversion and exchange offer
o to improve our capital structure; and
o to eliminate cash dividends on preferred stock and preserve cash.
We believe that our capital structure has been weakened by the
existence of our outstanding preferred stock. The aggregate liquidation
preference of the Series B,C E and F Preferred Stock, the amount of cash which
would repay preferred stockholders before any payments are made to common
stockholders in the event of liquidation, is approximately $10.4 million. In
addition, the Series B and Series C Preferred Stock had a conversion feature
providing for conversion of the preferred shares into common shares at a 25%
discount to the market price of our common stock at the time of conversion. This
"discount" may have had an effect of depressing the market value of our common
stock.
We have also been incurring cash dividends on our Series B and Series C
Preferred Stock of approximately $26,250 a month. After the conversion of these
preferred shares, we will no longer be making those cash dividend payments.
Our Certificate of Incorporation allows our Board of Directors to
designate additional preferred stock in future. We are currently negotiating to
close an investment of $1,050,000 in a new series of our convertible preferred
stock, which, as of the printing of this proxy, has not yet been completed.
Although our Board may designate additional preferred stock in the future,
except as described in the preceding sentence, we have no present plans to do
so.
The Board of Directors recommends a vote FOR the approval of the
conversion and exchange offer. Proxies solicited by the Board will be voted FOR
this proposal unless you specify otherwise.
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Executives' Compensation Policies
Compensation of our executives is intended to attract, retain and award
persons who are essential to the corporate enterprise. The fundamental policy of
our executive compensation program is to offer competitive compensation to
executives that appropriately rewards the individual executive's contribution to
corporate performance. The Board of Directors utilizes subjective criteria for
evaluation of individual performance and relies substantially on the executives
in doing so. The Board focuses on two primary
9
components of our executives compensation program, each of which is intended to
reflect individual and corporate performance: base salary compensation and
long-term incentive compensation.
Executives' base salaries are determined primarily by reference to
compensation packages for similarly situated executives of companies of similar
size or in comparable lines of business with whom we expect to compete for
executive talent and with reference to revenues, gross profits and other
financial criteria. The Board also assesses subjective qualitative factors to
discern a particular executive's relative value to the corporate enterprise in
establishing base salaries.
It is the Board's philosophy that significant stock ownership by
management creates a powerful incentive for executives to build long-term
shareholder value. Accordingly, the Board believes that an integral component of
executive compensation is the award of equity-based compensation, which is
intended to align executives' long-term interests with those of our
stockholders. Awards of stock options to executives have historically been at
then-current market prices. The Board believes that option grants should be
considered on an annual basis.
Summary Compensation Table
The following table sets forth certain information regarding
compensation paid by Diplomat during each of the last three fiscal years to our
Chief Executive Officer and to each of our four most highly compensated
executive officers who earned in excess of $100,000.
Summary Compensation Table
Long Term Compensation
Annual ----------------------
Compensation Securities
------------ Other Annual Underlying
Name and Principal Position Year Salary Compensation Options/SARs (#)
- --------------------------- ---- ------ ------------ ----------------
Warren H. Golden
Executive Vice President, COO......................... 9/30/98 245,387 0 0
9/30/97 50,000(1) 0 0
Stephanie Sobel
Senior Vice President--Merchandising.................. 9/30/98 193,025 0 0
9/30/97 43,125(1) 0 0
Irving Magram
Divisional President--Lew Magram...................... 9/30/98 245,387 0 0
9/30/97 50,000(1) 0 0
Kenneth Grossman
Divisional President--Brownstone...................... 9/30/98 183,502 0 350,000
Jonathan Rosenberg(2)
President, CEO........................................ 9/30/98 225,000 0 0
9/30/97 190,769 0 250,000
9/30/96 130,804 0 75,000
Sheldon R. Rose(3)....................................... 9/30/96 159,375 0 0
(1) Salaries for Irving Magram, Warren H. Golden, and Stephanie Sobel for
the fiscal year ending September 30, 1997 are included only for the period
from July 1, 1997, the effective date Diplomat acquired Lew Magram, Ltd.,
through September 30, 1997. Prior to the acquisition of Lew Magram Ltd. on
July 1, 1997, their annual salaries were as follows: Irving Magram,
$300,000; Warren H. Golden, $287,500; Stephanie Sobel, $172,500.
(2) Mr. Rosenberg served as President and Chief Executive Officer from
November 1996 to May 1999. In May 1999, Mr. Rosenberg left Diplomat and is
entitled to six months salary, payable weekly, as part of his severance
arrangement.
(3) Mr. Rose resigned as President and Chief Executive Officer in November
1996.
Option Grants in Last Fiscal Year
The following table sets forth information concerning stock options
granted to each of the executives named in the Summary Compensation Table for
the fiscal year ending September 30, 1998:
10
Percentage of
Total of Potential Realizable Value
Number of Options at Assumed Annual Rates of
Shares Granted to Stock Price Appreciation
Underlying Employees Exercise for Option Term(1)
Options During Fiscal Price Per Expiration ------------------------
Name Granted Year Share Date 5% 10%
- ---- ------- ---- ----- ---- --- ---
Kenneth Grossman(2)............ 350,000 50% 2.75 3/24/03 $266,000 $588,000
(1) The amounts shown in these columns represent the potential realizable values
using the options granted and the exercise price. The assumed rates of stock
price appreciation are set by the Securities and Exchange Commission's executive
compensation disclosure rules and are not intended to forecast appreciation of
the common stock.
(2) Of the options granted to Kenneth Grossman, 100,000 are exercisable over a
four year period subject to Brownstone reaching certain earnings criteria, and
250,000 options are exercisable over time, of which 100,000 are currently
exercisable. Excludes 350,000 options granted to Joan Grossman, Kenneth
Grossman's wife and an employee of Brownstone, which options are on the same
terms as the options granted to Kenneth Grossman.
Fiscal Year-End Option Values
As of September 30, 1998, no options have been exercised by the
executives named in the Summary Compensation Table. The following table sets
forth certain information concerning the number of shares covered by both
exercisable and unexercisable stock options as of September 30, 1998. Also
reported are values of "in-the-money" options that represent the positive spread
between the respective exercise prices of outstanding stock options and the fair
market value of our common stock as of September 30, 1998.
Number of Shares Subject to Value of In-the-Money
Unexercised Options at Options at Fiscal Year
Fiscal Year-End End(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Jonathan Rosenberg(2)................................ 215,000 130,000 $18,750 $12,500
Kenneth Grossman..................................... 100,000 250,000 0 0
(1) Based on the closing bid price of our common stock of $1.125 per share on
September 30, 1998.
(2) As part of Mr. Rosenberg's severance agreement (entered into subsequent to
September 30, 1998), all of his options become immediately exercisable, contain
a cashless exercise feature and the underlying stock has registration rights.
Employment Agreements
Warren H. Golden has an employment agreement with us which provides
that Mr. Golden will be employed as Diplomat's Chief Operations Officer and
Executive Vice President and Lew Magram's Executive Vice President, subject to
annual renewals, at an annual salary of $235,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February 2001, may only be earlier terminated by us for cause as defined in the
agreement. Mr. Golden was appointed as Diplomat's Chief Executive Officer and
President on May 21, 1999.
Irving Magram has an employment agreement with us which provides that
Mr. Magram will be employed as Divisional President of Lew Magram, subject to
annual renewals, at an annual salary of $235,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February, 2001, may only be earlier terminated by us for cause as defined in the
agreement.
Stephanie Sobel has an employment agreement with us which provides that
Ms. Sobel will be employed as our Senior Vice President of Merchandising,
subject to annual renewals, at an annual salary of $187,500 subject to certain
periodic increases based on performance. The employment agreement, which
terminates in February, 2001, may only be earlier terminated by us for cause as
defined in the agreement. Ms. Sobel was appointed as Diplomat's Executive Vice
President on May 21, 1999.
In accordance with their respective employment agreements, Messrs.
Golden and Magram and Ms. Sobel will also receive cash bonuses based on Lew
Magram meeting certain profitability criteria. The maximum aggregate cash
payment to Messrs. Golden and Magram and Ms. Sobel under this bonus arrangement
is $185,000 per year.
Julia Aryeh has an employment agreement with us which provides that Ms.
Aryeh will be employed as our Chief Strategic Officer and Secretary, subject to
annual renewals, at an annual salary of $200,000 subject to certain periodic
increases based on performance. The employment agreement, which terminates in
February, 2002, may only be earlier terminated by us for cause as defined in the
agreement.
Kenneth S. Grossman has an employment agreement with us which provides
that Mr. Grossman is employed as Brownstone's Divisional President at an annual
salary of $200,000, plus certain other benefits, including an annual bonus of up
to $250,000 based on
11
Brownstone meeting certain income criteria. Mr. Grossman's agreement also
provides for Mr. Grossman to receive $10,000 per year for merchandise
consulting. The employment agreement, which terminates in October 2002, may only
be earlier terminated by us for cause as defined in the agreement.
Each of the foregoing employment agreements contain a provision
prohibiting such employee from competing with us for one year after the employee
terminates his or her position with us or our subsidiaries other than for cause,
as defined in the respective employment agreement.
Robert M. Rubin, Chairman of the Board, has a financial consulting
agreement with us pursuant to which Mr. Rubin is paid $200,000 per annum. The
agreement terminates in December, 2002.
On May 21, 1999, Diplomat entered into a severance agreement with
Jonathan Rosenberg. The agreement provides that Mr. Rosenberg will be paid six
months severance equal to $112,500 plus twelve months of health and other
benefits. The agreement terminated Mr. Rosenberg's employment agreement which
would have expired on February 15, 2002. Mr. Rosenberg resigned as Chief
Executive Officer, President and Director on May 21, 1999.
Stock Option Plans
1998 Stock Option Plan
Our 1998 stock option plan was adopted by the Board of Directors in
February 1998 and approved by the stockholders in May 1998. Under the 1998 plan,
we are authorized to issue options to purchase up to 1,200,000 shares of common
stock. All officers and other employees and as well as other persons who perform
significant services for or on behalf of us are eligible to participate in the
1998 plan. The plan is administered by the Board or a committee of the Board of
two or more non-management directors.
We may grant under the 1998 plan both incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
stock options that do not qualify for incentive treatment under the Code.
The exercise price of each incentive stock option under the plan will
be determined by the committee, but will be not less than 100% of the fair
market value of common stock on the date of grant (or 110% in the case of an
employee who at the time owns more than 10% of the total combined voting power
of all classes of capital stock). The nonstatutory option exercise price will be
determined by the committee, but will not be less than 85% of the common stock
on the date of grant.
In the discretion of the committee and upon receipt of all regulatory
approvals, an optionee may be permitted to utilize a cashless exercise or
deliver as payment in whole or in part of the exercise price certificates for
shares of common stock (valued for this purpose at its fair market value on the
day of exercise) or other property.
An incentive stock option granted under the plan may not be exercisable
after the expiration of ten years from the date it is granted. Without limiting
the generality of the foregoing, the committee may provide in the stock option
agreement that the option subject thereto expires 30 days following the
termination of employment for any reason other than death or disability or
twelve months following a termination of employment for disability or death;
provided, however, that in no event shall any option granted under the plan be
exercised after the expiration date of such option set forth in the applicable
stock option agreement.
If the outstanding shares of common stock are changed into, or under
the plan, exchanged for cash or different number or kind of our securities or
another corporation's securities through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse-stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment will be made by the committee in
the number and kind of shares as to which options may be granted. In the event
of such change or exchange, other than for securities of another corporation or
by reason of reorganization, the committee will also make a corresponding
adjustment in the number or kind of shares, and the exercise price per share
allocated to unexercised options or portions thereof, of options which have been
granted prior to such change. Any such adjustment, however, will be made without
change in the total price applicable to the unexercised portion of the option
but with a corresponding adjustment in the price for each share (except for any
change in the aggregate price resulting from rounding-off of share quantities or
prices).
Under the plan, we have outstanding options to purchase an aggregate of
1,200,000 shares of common stock, 700,000 of which are exercisable at $2.75 per
share and 500,000 of which are exercisable at $1.00, all of which are held by
our employees. Options to purchase 200,000 shares of common stock become
exercisable upon Brownstone meeting certain minimum net income. The remaining
outstanding options become exercisable over four years.
1992 Stock Option Plan
12
Our 1992 stock option plan provides for the issuance of up to 200,000
shares of common stock. The terms of the plan are substantially similar to the
1998 Plan. We have outstanding options to purchase an aggregate of 130,000
shares, exercisable at $1.50 per share, all of which are held by affiliates or
employees of Diplomat at the time of grant.
August 1996 Stock Option Plan
We also established a stock option plan providing for the issuance of
options to purchase up to 1,500,000 shares of common stock to our directors,
officers, key employees and consultants. To date, we have granted directors,
officers and key employees an aggregate of 150,000 nonstatutory options at an
exercise price of $2.00 per share. Excluding the fact that options granted under
the plan cannot qualify as incentive stock options, the terms of the August 1996
Plan are substantially similar to the 1998 Plan.
November 1996 Stock Option Plan
Under our November 1996 stock option plan, options to purchase up to
1,500,000 shares of common stock may be granted to employees, officers,
directors and other persons who provide services to us. As of September 30,
1998, 1,060,000 of such options have been granted and are exercisable at an
exercise price of $1.00, of which options to purchase 620,000 shares of common
stock expired on June 17, 1998, 150,000 are exercisable at $2.375 and 50,000 are
exercisable at $1.00. The options to be granted under the plan may be designated
as incentive stock options or nonstatutory options. Other than the fact that
officers and directors who currently own more than 5% of the issued and
outstanding stock are not eligible to participate in the plan, the terms of the
November 1996 plan are substantially similar to the 1998 plan.
Employee Benefit Plans
Pension Plan
In 1985, we instituted a pension plan, which is a defined benefit
pension plan maintained for all employees. Benefits are payable based on 60% of
average compensation for the three highest paid consecutive years of service,
reduced for less than 29 years of service retirement. The pension plan is funded
as required by the Employee Retirement Income Security Act of 1974 and does not
require employee contributions. Full vesting occurs immediately upon joining the
plan. As of February 1993, the pension plan was curtailed and no additional
pension benefits will accrue.
Profit Sharing and 401(k) Plans
Lew Magram has a profit sharing program established on April 1, 1981.
On July 1, 1993, Lew Magram amended the Plan to include 401(k) provisions. All
employees servicing either the Lew Magram or Brownstone subsidiaries are invited
to participate in the plan after the required waiting period and while they work
the minimum hours required. Lew Magram and Brownstone match employee 401(k)
contribution on the basis of 25% of the employee's first 5% of 401(k)
withholdings. As of December 31, 1998, the entire plan had assets of
approximately $2.3 million. Benefits vest on a 5-year schedule. Vesting and
eligibility for matching requires the employee to be employed as of the last day
of each plan year.
We also have a 401(k) plan in effect for employees of the Ecology Kids
subsidiary, which was established on January 1, 1997. As of December 31, 1998,
the plan had assets of approximately $175,000.
Performance Graph
Below is the line graph comparing the yearly percentage change in our
common stockholders' return with the Nasdaq Stock Market (U.S.) Index and the
Nasdaq Non-Financial Index from our initial public offering in November 1993
through September 1998.
[GRAPH OMITTED]
Cumulative Total Return
-----------------------
11/4/93 9/94 9/95 9/96 9/97 9/98
------- ---- ---- ---- ---- ----
Diplomat Direct Marketing Corporation............................. 100 162 64 27 62 23
NASDAQ Stock Market (U.S.)........................................ 100 99 136 162 222 227
NASDAQ Non-Financial.............................................. 100 96 134 157 211 213
Share Ownership of Management and Directors
The following table sets forth, as of July 2, 1999, except as otherwise
provided, information with respect to beneficial ownership of the common stock
by (i) each director, (ii) each current officer named in the Summary
Compensation Table
13
above, (iii) the officers and directors as a group and (iv) each person known to
us who beneficially owns 5% or more of the outstanding shares of our common
stock. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities and includes shares of common stock issuable
upon conversion of outstanding convertible preferred stock and options and
warrants exercisable within 60 days. The following table does not give effect to
the conversion and exchange offer as described in Proposal Number 6, but does
give effect to the conversion of the Series B and Series C Preferred stock as if
such preferred shares were converted based on the existing conversion features
as of June 11, 1999. The following table does not give effect to the proposed
1-for-5 reverse common stock split describe in Proposal Number 1. The percentage
of stock outstanding for each stockholder is calculated by dividing (i) the
number of shares of common stock deemed to be beneficially held by such
stockholder as of July 2, 1999 by (ii) the sum of (A) the number of shares of
common stock outstanding as of July 2, 1999 plus (B) the number of shares
issuable upon exercise of options or warrants or conversion or exchange of
convertible preferred stock held by such stockholder which were exercisable or
convertible as of July 2, 1999 or which will become exercisable within 60 days
after July 2, 1999. Unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to the shares beneficially owned.
Unless otherwise indicated, the address of each person listed below is c/o
Diplomat Direct Marketing Corporation, 414 Alfred Avenue, Teaneck, New Jersey
07666.
Number of Shares Percentage
Name and Address Beneficially Owned Ownership
- ---------------- ------------------ ---------
The Rubin Family Irrevocable
Stock Trust U/A dated April 30, 1997(1)(9)............................. 11,432,420 54 %
18 Pinetree Drive
Great Neck, New York 11024
Irving Magram............................................................. 933,301 6 %
Warren H. Golden(2)....................................................... 468,535 3 %
Stuart Leiderman(3)....................................................... 328,000 2 %
Stephanie Sobel(4)........................................................ 259,268 2 %
Kenneth Grossman(5)....................................................... 200,000 1 %
Julia Aryeh(6)............................................................ 125,000 *
Howard Katz(7)............................................................ 108,334 *
David Abel(8)............................................................. 20,000 *
Robert M. Rubin(9)........................................................ 0 0
All officers and directors as a group (8 persons)......................... 2,442,438 15 %
* less than one percent
(1) Represents (i) 6,068,435 shares of common stock currently owned and (ii)
5,363,985 shares of common stock issuable upon conversion of the outstanding
Series B and Series C Preferred Stock assuming conversion at 75% of the market
price of our common stock based on the average closing price of our common
stock for the 10 days preceding June 11, 1999, the date of the conversion and
exchange offer. The Series B and Series C Preferred Stock have aggregate voting
rights equal to 3,500,285 shares of common stock, giving the Trust aggregate
voting shares of 9,568,720.
(2) Represents (i) 418,535 shares of common stock currently owned and 50,000
shares of common stock issuable upon exercise of currently exercisable options
granted under the November 1996 stock option plan. Mr. Golden also has
additional options to purchase 150,000 shares of common stock which are not
currently exercisable and not exercisable in the next 60 days.
(3) Represents 268,000 shares of common stock currently owned, and 60,000 shares
of common stock issuable upon exercise of currently exercisable options granted
under the November 1996 stock option plan. Mr. Leiderman also has additional
options to purchase 40,000 shares of common stock which are not currently
exercisable and will not become exercisable in the next 60 days.
(4) Represents 209,268 shares of common stock currently owned and 50,000 shares
of common stock issuable upon exercise of currently exercisable options granted
under the November 1996 stock option plan. Ms. Sobel also has additional options
to purchase 150,000 shares of common stock which are not currently exercisable
and will not become exercisable in the next 60 days.
(5) Represents 100,000 shares of common stock issuable upon exercise of
currently exercisable options granted under the 1998 stock option plan, and
100,000 shares of common stock issuable upon exercise of currently exercisable
options granted under the 1998 stock option plan to Joan Grossman, Kenneth
Grossman's wife and an employee of Brownstone. Each of Kenneth Grossman and Joan
Grossman has an additional 150,000 options under the 1998 stock option plan
which are not currently exercisable and will not become exercisable in the next
60 days, and an additional 100,000 options under the 1998 stock option plan
which are not currently exercisable and will become exercisable only upon
Brownstone meeting certain minimum earnings criteria which, at the present, have
not been achieved.
(6) Represents 125,000 shares of common stock issuable upon exercise of
currently exercisable options granted pursuant to the 1998 stock option plan.
Ms. Aryeh also has an additional 375,000 options which are not currently
exercisable and will not become exercisable within the next 60 days.
(7) Represents 108,334 shares of common stock issuable upon exercise of
currently exercisable options granted pursuant to the November 1996 stock option
plan. Mr. Katz also has an additional 16,666 options which are not currently
exercisable and will not become exercisable within the next 60 days.
14
(8) Represents 20,000 shares of common stock issuable upon exercise of currently
exercisable options granted pursuant to the November 1996 stock option plan. Mr.
Abel also has an additional 30,000 options which are not currently exercisable
and will not become exercisable in the next 60 days.
(9) Robert M. Rubin, the Chairman of the Board, is the spouse of the Trust's
co-trustee and parent of the Trust's beneficiaries and may be deemed to be a
beneficial owner of the shares. Mr. Rubin disclaims beneficial ownership of
these shares.
Certain Transactions
Unless otherwise stated, the following information does not give effect
to the conversion or exchange of preferred stock or the 1-for-5 reverse split of
our common stock.
We have a financial consulting agreement with Robert M. Rubin, Chairman
of the Board, providing for the payment to him of $200,000 per annum. Mr. Rubin
consults with us on financial management and long term planning matters,
including consideration of acquisitions. The agreement terminates in December
2002.
In February 1996, Mr. Rubin loaned us $2,353,500 to be used as part of
the acquisition price of Biobottoms, Inc. which we sold in April 1998. In
connection with such loan, we issued Mr. Rubin 100,000 shares of our Series A
Preferred Stock, convertible into 1,000,000 shares of common stock at the option
of Mr. Rubin. Mr. Rubin transferred the shares to the Rubin Family Irrevocable
Stock Trust which converted the Series A Preferred Stock in November 1998.
On September 9, 1996, we entered into an arrangement with Gersten,
Savage, Kaplowitz & Fredericks, LLP which provided that Gersten Savage will
provide certain legal and consulting services to us over an extended period of
time. As compensation for its services, certain individual members of Gersten
Savage received an aggregate of 350,000 shares of common stock and options to
purchase an aggregate of 150,000 shares of common stock at $2.50 per share. Of
such securities, 157,500 shares of common stock and 67,500 options were issued
to Wesley C. Fredericks, who was a Director and resigned on December 31, 1998.
We issued to Mr. Rubin an aggregate of 550,000 shares of common stock
in consideration of Mr. Rubin's waiver of certain compensation owed to him and
for restructuring certain debt owed to him, waiving certain defaults and
providing an additional loan to us in the aggregate amount of $600,000.
As of September 30, 1996, the $600,000 loan was converted into 60,000
shares of Series C Preferred Stock. The Series C Preferred Stock, which has a
liquidation value of $10.00 per share, is convertible into common stock at 75%
of the current market price based on the average closing price for the common
stock for the 10 days preceding the conversion. Each share of Series C Preferred
Stock entitles the holder to 10 votes per share. The Series C Preferred Stock
pays an annual dividend of 9%, based on the per share liquidation value. In the
event that the dividend, which is payable monthly, is not paid for three
consecutive months, the holder is entitled to an additional 100,000 shares of
common stock for each month that the dividend is not paid. Mr. Rubin transferred
the shares to the Trust.
As of September 30, 1996, Mr. Rubin converted an aggregate of
approximately $2,900,000 in outstanding debt into an aggregate of 290,000 shares
of Series B Preferred Stock. The Series B Preferred Stock, which has a
liquidation value of $10 per share, is convertible into common stock at 75% of
the current market price based on the average closing price for the common stock
for the 10 days preceding the conversion. In addition, each share of Series B
Preferred Stock entitles the holder thereof to 10 votes per share. The Series B
Preferred Stock pays an annual dividend of 9%, based on the per share
liquidation value. In the event that the dividend, which is payable monthly, is
not paid for three consecutive months, the holder is entitled to an additional
100,000 shares of common stock for each month that the dividend is not paid. Mr.
Rubin transferred the shares to the Trust.
In November 1996, we issued an aggregate of 1,060,000 options to 35
employees, including two executive officers and one outside director, pursuant
to the November 1996 stock option plan. The options are exercisable at $1.00 per
share, vest over a period of five years, and expire ten years from the date of
grant, if not sooner due to termination or death of the employee. Options to
acquire 620,000 shares were granted to certain employees of Biobottoms Inc.,
which we subsequently sold, and expired in July, 1998.
In March 1997, we issued 52,217 shares of common stock to Mr. Rubin in
lieu of the dividend payments due under the Series B and Series C Preferred
Stock, as well as for an adjustment in consulting fees, for the period from
January 1, 1997 through March 31, 1997. In May 1999, we issued 150,000 shares of
common stock in lieu of the dividend payments due under the Series B and Series
C Preferred Stock.
In May 1997, we issued 200,000 shares of common stock to Mr. Rubin in
consideration of Mr. Rubin extending loans to us as well as extending a personal
guarantee to Congress Financial Corporation in connection with our loan
facilities.
In May 1997, Robert Rubin and Jay Kaplowitz acquired for $2 million all
of the outstanding senior convertible preferred stock of Lew Magram Ltd., which
was convertible into one-half of the outstanding common stock of Lew Magram Ltd.
after giving
15
effect to the conversion. The purpose for the investment was to provide Lew
Magram Ltd. with sufficient working capital to maintain operations until
Diplomat and Lew Magram Ltd. could reach an agreement for the acquisition by
Diplomat of Lew Magram. In December 1997, Diplomat entered into an Agreement and
Plan of Merger with Lew Magram Ltd., Robert Rubin, Jay Kaplowitz, Irving Magram,
Warren Golden and Stephanie Sobel, all of the shareholders of Lew Magram Ltd.
Simultaneous with the closing of the merger on February 19, 1998, Lew Magram
Ltd. merged with Magram Acquisition Corp. resulting in Lew Magram becoming a
wholly owned subsidiary of Diplomat. Prior to the closing Messrs. Magram and
Golden and Ms. Sobel owned all of the outstanding common stock of Lew Magram
Ltd. and Messrs. Rubin and Kaplowitz owned all of the outstanding senior
convertible preferred stock of Lew Magram Ltd. At the closing of the Merger,
Diplomat issued 95,000 shares of the Series D Preferred Stock to each of the Lew
Magram Ltd. shareholders of which Mr. Rubin received 46,253 shares, Mr. Magram
received 24,999 shares (excluding 2,497 shares sold to third parties who
converted the shares to common stock), Mr. Kaplowitz received 5,417 shares, Mr.
Golden received 10,556 shares, and Ms. Sobel received 5,278 shares. In addition,
Mr. Magram, Mr. Golden and Ms. Sobel received 100,000, 66,667 and 33,333 shares
of Diplomat's common stock, respectively, excluding 50,000 shares of Diplomat's
common stock issued to their counsel at the closing. Each share of Diplomat's
Series D Preferred Stock is convertible into 33 1/3 shares of Diplomat's common
stock. Each of the Lew Magram Ltd. shareholders have agreed to indemnify
Diplomat for any material breach of the representations made by Lew Magram Ltd.
in the Merger Agreement limited to $9,500,000 and which claims for
indemnification must be brought within one year of the closing date of the
Merger. Messrs. Rubin and Kaplowitz assigned to Diplomat their rights to any
claim either of them may have for breach of any warranty made by Lew Magram Ltd.
in the May 1997 Senior Convertible Preferred Stock Purchase Agreement in return
for a release of their indemnification obligations under the Merger Agreement.
Mr. Rubin transferred his shares to the Trust. All of the Series D Preferred
Stock was converted in May 1999.
In September 1997, Robert Rubin and Jay Kaplowitz advanced an aggregate
of $2,205,000 for the financing of Jean Grayson's Brownstone Studio, Inc. prior
to the purchase by Diplomat, as well as for working capital.
In October 1997, in part to raise capital for our acquisition of
substantially all of the assets of Brownstone out of bankruptcy, we completed a
private offering of our securities which raised $3,630,000 from accredited
investors. The private placement consisted of units, each unit consisting of ten
shares of Series E Preferred Stock and 7,500 shares of common stock at a
purchase price of $10,000 per unit. As a result, we issued an aggregate of 3,630
shares of Series E Preferred Stock and 2,608,750 shares of common stock. Robert
Rubin and Jay Kaplowitz purchased an aggregate of 220.5 of the units for
$2,205,000, the proceeds of which repaid the $2,205,000 advance by Messrs. Rubin
and Kaplowitz made in September 1997. Mr. Rubin transferred his shares to the
Trust. In April 1999, an additional 75 shares of Series E Preferred Stock and
38,470 shares of common stock were issued to a shareholder.
In March, 1999, Diplomat issued 32,440 Series F Preferred Stock plus
346,027 shares of common stock for an aggregate amount of $3,244,000. Of this
amount, 5,000 shares of Series F Preferred Stock and 53,333 shares of common
stock were issued to an investor for a cash contribution of $500,000. 17,200
shares of Series F Preferred Stock and 183,467 shares of common stock were
issued to the Trust for a cash contribution of $1.72 million. Mr. Rubin received
10,240 shares of Series F Preferred Stock and 109,227 shares of common stock for
(i) converting his $200,000 principle amount loan, (ii) converting his $500,000
loan in connection with the Fashionmall.com advance, and (iii) advancing
$324,000 directly to Diplomat's catalog printer. Mr. Rubin transferred his
shares to the Trust.
Our principal working capital credit facility was provided by Congress
Financial Corporation. The lines of credit between Congress and us were
personally guaranteed by Mr. Rubin up to an aggregate amount of approximately
$1,000,000. In addition, Mr. Rubin provided cash collateral in the amount of $1
million and Jay Kaplowitz provided cash collateral in the amount of $100,000 to
increase availability under the Congress credit facility.
We refinanced our asset based loan facility in May, 1999. We obtained a
$17 million loan facility from First Source Financial LLP and terminated the
Congress credit facilities. Mr. Rubin provided a guaranty to First Source of $2
million which includes a $1 million cash collateral. Mr. Rubin received 50,000
shares of common stock for the First Source guaranty. Mr. Rubin transferred
these shares to the Trust.
In June 1999, we entered into an agreement with our principal
stockholder, The Rubin Family Irrevocable Stock Trust, to convert or exchange
all of the preferred shares owned by the Trust into our common stock other than
the Series D Preferred Stock which was already converted as described above. The
conversion becomes effective immediately prior to the closing of an underwritten
public offering of our common stock. The Trust has agreed to convert all of the
Series B Preferred Stock and Series C Preferred Stock at a formula derived by
dividing the total liquidation value of such preferred shares ($3,500,000) by
$.65 per share for a total of 5,384,615 shares of common stock. The terms of the
Series B Preferred Stock and Series C Preferred Stock provided that such
preferred shares were to convert at 75% of the current market price based on the
average closing price of the common stock for the 10 days preceding the
conversion (which would have been $0.6525 on that date, resulting in an issuance
of 5,363,985 shares of common stock, a difference of 20,630 shares of common
stock). The additional shares of common stock issued upon conversion of such
preferred shares was consideration for the early conversion of such preferred
shares by the Trust and for surrendering certain rights and privileges of owning
the preferred shares. The holders of the Series E Preferred Stock have been
granted a limited
16
opportunity to exchange their shares into common stock at a formula derived by
dividing the total liquidation value of such preferred shares ($3,705,000) by
$.90 per share. The terms of the Series E Preferred Stock provided that such
preferred shares were not convertible. The exchange offer of shares of common
stock for the Series E Preferred Stock was consideration for the holders to
surrender certain rights and privileges of owning the preferred shares. Of the
total shares to be issued upon exchange of all of the Series E Preferred Stock,
which is 4,116,667, the Trust will receive 2,005,556 shares. The Trust has
agreed to exchange for common stock all of the shares of the Series F Preferred
Stock at a formula derived by dividing the total liquidation value of such
preferred shares ($2,744,000) by $.50 per share. The terms of the Series F
Preferred Stock provided that such preferred shares were not convertible. The
agreement to the exchange of common stock for the Series F Preferred Stock was
consideration for the Trust giving up certain rights and privileges of owning
the preferred shares. We intend to redeem for cash the remaining $500,000 of
Series F Preferred Stock. We are paying in common stock accrued and unpaid
dividends on the Series E Preferred Stock and Series F Preferred Stock. Of the
total 399,690 shares of common stock being issued in lieu of cash dividends, the
Trust will receive 224,192 shares. The conversion of the preferred shares of the
Trust where the conversion price is less than that of the original terms, or in
the case of preferred shares which were not convertible when issued where the
conversion price is less than the market price, will result in an imputed
dividend to the Trust of approximately $2,000,000 based upon a market price of
$0.875 per common share.
OTHER MATTERS
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Stockholder Proposals
Proposals from our stockholders that are intended to be presented by
such stockholders at our next Annual Meeting must be received by us no later
than , 2000 in order that such proposals be considered for inclusion
in the proxy statement relating to that Annual Meeting.
Form 10-K Filed with the Securities and Exchange Commission
Copies of the annual report on Form 10-K for the year ended September
30, 1998, as filed with the Securities and Exchange Commission and any
amendments thereto, are available to stockholders free of charge by writing to:
Diplomat Direct Marketing Corporation
414 Alfred Avenue
Teaneck, New Jersey 07666
Financial Statements
Our audited consolidated financial statements for the fiscal year ended
September 30, 1998 are included in our Annual Report accompanying this Proxy
Statement.
By Order of the Board of Directors
Warren H. Golden
President and Chief Executive Officer
DIPLOMAT DIRECT MARKETING CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints WARREN H. GOLDEN, attorney and proxy,
with power of substitution and revocation, to vote, as designated below, all
voting shares of Diplomat Direct Marketing Corporation which the undersigned is
entitled to vote, with all powers which the undersigned would possess if
personally present, at the Annual Meeting of Stockholders (including all
adjournments thereof) of Diplomat Direct Marketing Corporation to be held on
, 1999 at 10:00 a.m., EST, at Diplomat Direct Marketing
Corporation, 414 Alfred Avenue, Teaneck, New Jersey.
ELECTION OF DIRECTORS
Robert M. Rubin _ FOR _ ABSTAIN
Warren H. Golden _ FOR _ ABSTAIN
Stephanie Sobel _ FOR _ ABSTAIN
Stuart Leiderman _ FOR _ ABSTAIN
Julia Aryeh _ FOR _ ABSTAIN
Howard B. Katz _ FOR _ ABSTAIN
David Abel _ FOR _ ABSTAIN
PROPOSAL NUMBER 1
APPROVAL of an amendment to our Certificate of Incorporation to effect
a 1-for-5 reverse split of our common stock.
_ FOR _ AGAINST _ ABSTAIN
PROPOSAL NUMBER 2
APPROVAL of an amendment to our Certificate of Incorporation to change
our name to StyleSite Direct, Inc.
_ FOR _ AGAINST _ ABSTAIN
PROPOSAL NUMBER 3
APPROVAL of an amendment to our Certificate of Incorporation to
increase the maximum size of our Board of Directors from seven members to nine.
_ FOR _ AGAINST _ ABSTAIN
PROPOSAL NUMBER 4
APPROVAL of the increase in the number of shares reserved for future
issuance under our November 1996 Stock Option Plan from 1,500,000 to 2,500,000.
_ FOR _ AGAINST _ ABSTAIN
PROPOSAL NUMBER 5
RATIFY BDO Seidman, LLP as our independent certified public auditors
for the next fiscal year.
_ FOR _ AGAINST _ ABSTAIN
PROPOSAL NUMBER 6
APPROVAL of the conversion and exchange offer to our preferred
stockholders.
_ FOR _ AGAINST _ ABSTAIN
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned holder of voting shares. If no direction is
given, this proxy will be voted FOR each of the directors nominated above and
each of the proposals and in the discretion of said proxy on any other matter
which may come before the meeting or any adjournments thereof.
Dated: ______________, 1999
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Signature
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Signature, if held jointly
NOTE: When voting shares are held by joint tenants, both should sign.
When signing as attorney, executor, administrator, trustee, custodian, guardian
or corporate officer, please give your full title as such. If a corporation,
please sign full corporate name by authorized officer. If a partnership, please
sign in partnership name by authorized person.
PLEASE FILL IN, DATE, SIGN AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
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ADMISSION TICKET TO ANNUAL MEETING
If you plan to attend the Annual Meeting on , 1999 at Diplomat
Direct Marketing Corporation, at 414 Alfred Avenue, Teaneck, New Jersey, you
must keep this portion of the proxy card and present it in order to attend the
meeting.