U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB/A No. 1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended November 30, 1995
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________ to _________
Commission File Number 0-20936
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DIVERSIFAX, INC.
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(Name of small business issuer in its charter)
Delaware 13-3637458
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
39 Stringham Avenue, Valley Stream, New York 11580
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (516) 872-0650
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO __
--
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
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The issuer's revenues for its most recent fiscal year.
$5,690,982
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The aggregate market value of the voting stock held by non-affiliates of the
Issuer as of February 29, 1996 was $53,313,607.
There were 13,351,548 shares outstanding of the issuer's common stock, par
value $.001 per share, as of February 29, 1996.
Documents incorporated by reference:
None
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PART I
ITEM 1. Description of Business
-----------------------
Introduction
DiversiFax, Inc. (the "Company") is engaged in the business of owning and
operating coin and debit card pay-per-copy photocopy machines, microfilm reader-
printers and accessory equipment.
In addition, since April 1995, the Company has been engaged in the
development and initial marketing of the Smart SwitchTM, a computerized
switching device with an automated switching system. The Smart Switch permits
the use of any "off-the-shelf facsimile" ("Fax") machine as a public Fax machine
and facilitates billing of a public Fax message without the need for human
intervention or the incorporation of a high cost credit card reading device into
the Fax machine. The Company through January 1994 owned and operated self-
service, credit card activated, public access combination Fax machines, a
business different than its current Smart Switch business.
During the period from July through December 1993, the Company attempted to
redirect its marketing program with respect to its previous form of Fax business
which had yielded disappointing results. During January 1994, it became evident
that this redirected marketing program would not be successful. Management
believed that based on this and the continuation of disappointing revenues being
generated from the DiversiFax systems previously placed and being operated by
the Company, it would be in the best interest of the Company and the
shareholders of the Company to redirect the focus of the Company's business to
concentrate its efforts and resources on building and expanding the self-service
photocopying machine business. Accordingly, the Company terminated this
previous form of Fax business.
The Company thereafter, sought an alternative and more advanced technology
for its Fax business. The Company negotiated for the purchase of the Smart
Switch from FAXIT Corporation, as described in the second paragraph of this item
(the "Faxit Acquisition Agreement").
The Company was incorporated under the laws of the State of Delaware on
February 28, 1989. The Company's principal executive offices and operations
center are located at 39 Stringham Avenue, Valley Stream, New York 11580,
telephone number (516) 872-0650.
Acquisition and Merger of IMSG Systems, Inc., and Affiliates
- ------------------------------------------------------------
Prior to November 1, 1993, the Company was only engaged in the self-service
public Fax machine business. As of November 1, 1993, the Company became the
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sole parent of IMSG Systems, Inc. ("IMSG") and its affiliated companies,
National Copy Corp. ("National"), Capital Copy Corp. ("Capital") and Advanced
Business Systems, Inc. ("Advanced"), (IMSG, National, Capital and Advanced
collectively "IMSG and Affiliates") which have been operating their self-service
pay-per-copy photocopy and microfilm reader-printer business since 1969. The
acquisition was accomplished pursuant to four substantially similar merger
agreements (the "Merger Agreements"), which were deemed effective as of November
1, 1993, by and among each of IMSG, National, Capital and Advanced and a
separate acquisition subsidiary formed by the Company for each merger.
Pursuant to the terms of the Merger Agreements, the Company issued an
aggregate of 662,000 shares of Convertible Voting Preferred Stock, Series A, par
value $.001 per share (the "Series A Preferred Stock"), of the Company to Dr.
Irwin A. Horowitz, the sole stockholder of IMSG and Affiliates, in exchange for
all of their outstanding securities. The Preferred Stock was automatically
converted into an aggregate of 6,620,000 shares of Common Stock of the Company
in November 1995, upon requisite Board of Director and stockholder approval, and
the filing of an amendment to the Company's Certificate of Incorporation with
the Secretary of State of the State of Delaware to increase the number of shares
of Common Stock authorized for issuance by not less than 25,000,000 shares.
As a result of the Mergers, the Company acquired the self-service pay-per-
copy photocopier and microfilm reader-printers and accessories and the marketing
capacity and customer base of IMSG and Affiliates, which compromises a
substantial portion of the Company's business since November 1, 1993.
Upon the consummation of the acquisition of IMSG and Affiliates, Dr. Irwin
A. Horowitz ("Horowitz") became the Chairman of the Board, Chief Executive
Officer and President of the Company. Prior to the Merger, from July 1993 to
November 1, 1993, Dr. Horowitz served as Chief Operating Officer of the Company.
Acquisition of Smart Switch
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On April 27, 1995, the Company, through DiversiFax Acquisition Corp., a
wholly owned subsidiary of the Company, purchased from Faxit Corporation
("Faxit") the Smart Switch. Pursuant to the Faxit Acquisition Agreement, the
Company issued (a) shares of Series B convertible Preferred Stock (which were
automatically converted in November 1995 into 350,000 shares of Common Stock) to
Faxit in exchange for Faxit's Smart Switch assets and (b) shares of Series B
convertible Preferred Stock (which were automatically converted in November 1995
into 50,000 shares of Common Stock) to the finder, Josephthal Lyon & Ross
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Incorporated. Mario DiNatale, currently President of the Company's subsidiary
running the Smart Switch business and a director of the Company, was the
President and principal stockholder of Faxit.
OPERATIONS : COPIERS
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General
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Since November 1, 1993, the Company through its wholly-owned subsidiaries
IMSG and Affiliates, has been engaged in the business of owning, leasing,
operating and servicing coin and debit card pay-per-copy photocopiers and
microfilm reader-printers (collectively the "Copiers"), cash dispensers, laser
printers and accessory equipment. IMSG and Affiliates have been in business
since 1969. The Company operates its Copiers in New York, Massachusetts,
Illinois, Connecticut, Florida, Vermont, New Hampshire, Wisconsin and Georgia,
in various sites including libraries, courthouses, colleges, drug stores, office
supply stores and similar high traffic outlets. The Company has over 2,400
Copiers on site. Generally, the Company is responsible for the collection of
payments from each site and, at most locations, site operators share in the
revenues derived from the copy sales at their site. The Company has the ability
to service and repair its Copiers seven days a week. Users can pay per copy by
inserting coins in the Copier or by using a debit access card, which the user
may purchase at the site location.
Products
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The Company's Copiers consist of a photocopier or micro-film reader-printer
with an adaption which allows the user to operate the Copier and pay for the
copy by inserting coins or a debit access card. The users can purchase debit
access cards at the site location. If coins are used, the Copier will return
change in excess of the price of the copies. As copies are made using the debit
access card, the price of each copy is deducted from the aggregate value of the
debit access card.
Support Services
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The Company provides continuous preventative maintenance to its Copiers and
related equipment based on manufacturer specifications. Frequency of service
will vary depending upon usage of a given machine. Copiers in high volume
locations may require servicing as frequently as once a day. The Company
maintains service centers in Valley Stream (Long Island), New York; Albany, New
York; Chicago, Illinois; Jacksonville and Sarasota, Florida; and Norwood,
Massachusetts which it utilizes to service regional accounts including repairing
machines and storing supplies and parts. The Company may also service machines
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on site. Service of the Copiers is provided to its customers seven days a week
by the Company's staff which is supervised by the Company's trained technicians.
In addition, the Company provides four hour emergency service repair, when
needed. The cost to the Company of providing service to its Copiers and related
equipment is moderate, as the Company employs its own service personnel, and
amounts to approximately $.04 per copy. Impact to the Company's revenues from
down-time of copiers due to repair is negligible, as nearly all locations have
multiple machines and the Company's response time to service calls is generally
prompt.
Marketing and Distribution
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The Company employs a sales staff of five people who work to increase the
Company's customer base in regions where it is currently operating, as well as
to expand into new regions. To that end, the salespersons will target potential
high-traffic locations and ascertain whether there is the need for the Company's
Copiers and the potential that site locations will be profitable for the
Company. The salesperson will then directly solicit the site locations for the
placement for the Company's Copiers and establish a commission structure with
its site operators. The Company's salespersons are compensated on either a
salary basis or on a combination salary/commission basis. The site operator
commission structure varies with each customer, and will depend upon expected
volume, usage, competition and profit margin.
Supplies and Suppliers
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The Company currently purchases both new and used Copiers from a variety of
sources, including acquiring Copiers from other companies as it expands when it
purchases assets from other companies. Since machines are available from a
variety or sources, the loss of any one supplier will not adversely impact the
Company.
The Company has primarily used Sharp photocopiers and Minolta microfilm
reader-printers. The Company buys these machines from brokers, dealers and the
manufacturers.
The Company did not experience any difficulties in obtaining equipment or
parts and supplies and does not anticipate that there will be any problems
obtaining any equipment, parts or supplies in the future.
Expansion
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The Company presently intends to selectively expand its Copier operations
in certain targeted areas in the United States, both into some regions where it
has not previously operated, as well as expanding its presence in the regions
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where it currently operates its business, subject to the availability of
requisite financing and the number of Copiers in the Company's inventory. On
January 27, 1994, the Company through its wholly-owned subsidiary, Coin Copy,
Inc. acquired the contract revenues and business of MDM Copying Services, Coin-
Op, Inc., thereby expanding the Company's position in the New York Metropolitan
area.
The Company's planned expansion requires the increase in the number of its
Copiers and accessories. Additionally, as the Company expands into new regions,
it will carefully consider whether new service centers should be established and
may engage additional service staff members and supervising technicians. The
Company intends to continue to focus on controlled growth in new and existing
domestic market areas, so that the Company will expand at a rate which will
absorb new business without disrupting operations, and optimize working capital.
Significant Customers
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During the fiscal years ended November 30, 1995 and 1994, revenue derived
from two of the Company's Copier customers, a library system of the City of New
York and a large university located in the southeastern United States, amounted
to approximately 24.7% and 21.2%, respectively, of the Company's revenues. In
general, customer accounts are maintained pursuant to contractual agreements,
that have terms ranging from three to five years. Currently, there are varying
terms remaining on all of the Company's customer contracts, except for that with
the library system in the City of New York. In January 1995, the Company's
contract with this library system expired. The contract was subsequently
extended, but the Company lost its bid for renewal of the contract in March
1996. This customer provided approximately 12.3% of the Company's Sales for the
fiscal year ended November 30, 1995. The loss of the remaining 10% customer may
have a material adverse effect on the Company.
Patents and Technology
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The Company does not, in general, rely on patented technology to maintain
its competitive edge. The Company purchases and operates Copiers which may
contain patented technology. However, management believes that the proprietary
nature of this technology does not affect the Company's operations. There can
be no assurance however that patented technology will not affect the Company in
the future if the Company is unable to obtain Copiers that have a patented
feature which make them more desirable than Copiers being used by the Company or
that will be acquired by the Company in the future. The Company is presently
seeking a patent on a photocopy machine cover that allows books to be copied
without damage to the binding. There is no assurance that a patent will be
granted or that the patent will be of economic importance to the Company.
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Competition
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The Company markets its copier services to users at site locations who have
a need to copy documents, books, and other materials located at those site
locations. Other companies offering similar services include Continental Corp.,
Dual Office Suppliers, Inc., Boston Copico and Compucopy. Each of these
competitors competes directly with the Company in a different and limited
geographic region. Continental Copy Products Limited primarily conducts
operations in Connecticut and downstate New York; Dual Office Supplies primarily
conducts operations in Illinois; Boston Copico primarily conducts operations in
Massachusetts, Connecticut and downstate New York; and Compucopy primarily
conducts operations in southern Florida. Competition between companies is
generally based on price and quality of service offered.
Seasonality
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The Company's copier activities are subject to seasonal fluctuations.
Revenues from Copiers tend to be lower during the summer months of June through
September and in the last weeks of
December and the first weeks of January due to school and employee vacation
patterns. Although the Company has a working capital deficit and cash flow
tends to be tight in these periods of low revenue, the Company has not
experienced severe cash flow difficulties. Seasonally slow periods are
immediately preceded by periods of high volume of use, which generate increased
cash flows. In addition, because the Copier business is conducted primarily in
cash, there is no lead time between sales and collections. Also, fluctuations
are regular and predictable, thereby allowing the Company to plan for such low
revenue months. Historically, the President of the Company has advanced funds
to the Company when needed so that it could meet its day to day cash
obligations, although there can be no assurance he will continue to do so in the
future. Finally, many creditors have typically allowed the Company to forbear
during these slow months, although there can be no assurance they will continue
to do so in the future.
OPERATIONS: FAX MACHINES (Smart SwitchTM
)
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General - The Smart Switch
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The Company commenced its Smart SwitchTM operations in April 1995, upon the
acquisition of the Smart Switch assets of Faxit. The Smart Switch is a
computerized switching device, which has an automated switching system, which
permits the use of any "off the shelf" Fax machine as a public Fax machine and
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facilitates billing of a public Fax message without the need for human
intervention or the incorporation of a high cost credit card reading device into
the Fax machine. When using a Fax machine equipped with a Smart Switch, the
user takes the phone off the hook and hears a voice prompt directing the user to
enter his credit card number and expiration date. Once verified, the Smart
Switch gives the caller a dial tone and allows a direct call to be placed to the
receiving Fax machine. If the Fax number dialed is busy, the Smart Switch will
give the caller a Fax tone and accept and store the Fax for later retry,
allowing the customer the ability to have the Fax sent to a busy fax at such
time as it becomes free, without any human intervention.
Because the Smart Switch is a computer based system and not equipment
based, the Smart Switch gives the Company the capacity to offer a variety of Fax
and voice services, such as Fax and voice mailbox systems and services, for
hotels, libraries and airport lounges, and domestic and international Fax
transmission services at competitive rates. The Smart Switch permits hotels to
offer in-room Fax machines for guests' confidential use, thereby converting each
room into a "Smart Suite". The Smart Switch software has been upgraded by the
Company following its acquisition to permit billing of the user not only through
the user's credit card but also by billing to the user's hotel bill either by a
transfer of the billing information to the hotel's computer or by a scanning of
calls to listen for a Fax tone.
Support Services
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The Company services the Smart Switch units in all states where it
currently services its copiers and related equipment. In other states, the
Company will be using outside service companies for this purpose.
Marketing and Distribution
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The Smart Switch is marketed under the direction of Mario DiNatale, the
President of DiversiFax Information Service, Inc., the wholly-owned subsidiary
of the Company conducting Smart Switch operations.
Although certain limited trials of a version of the Smart Switch had been
conducted, no sales of the Smart Switch had been made prior to its acquisition
by the Company. The Company has recently commenced marketing of the Smart
Switch and has placed over 120 units under lease at hotels, airport lounges,
libraries and colleges, principally in the northeast, 84 of which have been
placed in the Western Hotel (formerly the Grand Hotel) in Washington D.C., 18 of
which have been placed in TWA Ambassador Lounges and 10 of which have been
placed in the Hotel Pennsylvania in New York City. The term of the agreements
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range from one to four years, and the hotel, lounge or other party is
responsible to pay the Company for the cost of the equipment as well as a per
minute usage charge. Generally, users of Fax machines (e.g., hotel guests) are
charged by the minute per usage, with the amounts collected by the Company, who
remits a portion to the relevant provider of the Fax machine (e.g., the hotel).
In some cases, the hotel collects for usage, and remits the required portion to
the Company.
The Smart Switch has also demonstrated for certain large hotel chains which
have indicated an interest in a trial purchase. In this respect, an aggregate
of 36 Fax machines have been supplied to two Doubletree Hotels to be used on a
beta site (i.e., test site), trial basis.
In November 1995, the Company entered into an agreement with AT&T Corp.
("AT&T") to jointly market DiversiFax's in-room Fax services on an exclusive
basis to AT&T hotel accounts.
The initial results from the Company's Fax machine operations have varied.
A number of hotels, airport lounges, libraries and colleges, as described above,
have installed and are currently utilizing the Smart Switch. Specifically,
there are 126 units in hotels, 20 units in airport lounges, five units in
libraries and six units in universities. A number of other hotels, which
primarily installed the Smart Switch on a trial basis, have canceled or
determined not to permanently install 90 such machines, apparently primarily due
to insufficient usage by guests. The Company believes that these hotels did not
adequately market to their guests the availability of the Fax machines. While
other customers are generally showing a greater degree of usage, there can be no
assurance that there will not be a material amount of cancellations, or that
significant new orders will develop so as to make the Fax machine operations of
the Company profitable.
The Company has neither conducted nor have others made available to it
results of market research such that management might have assurance from which
to estimate potential demand for its Smart Switch. There can be no assurance
that sufficient market penetration can be achieved so that planned placement of
any of the Company's equipment will be absorbed by the market in the event such
demand can be identified.
Agreement with AT&T
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In November 1995, the Company and AT&T entered into an agreement providing
for the joint marketing of the Smart Switch in hotels utilizing AT&T's "0 Plus"
service. The Agreement is for an initial term of one year, absent termination
based on breach, and may be renewed by agreement of the parties. Under the
agreement, the Company will (a) obtain, install and maintain all individual Fax
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units and the Facsimile Central Systems at hotel units desiring the service and
(b) partner exclusively with AT&T for hotels with AT&T "0 Plus" service. AT&T
is required to (a) provide a sales distribution channel for agreed upon
territories, (b) provide sales support, and (c) exclusively offer the Smart
Switch in room Fax service during the term of the agreement. The Company will
be compensated directly by the hotels and users (guests) of the Smart Switch.
Supplies and Suppliers
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The Company assembles the Smart Switch by programming the Company's
proprietary software into off-the-shelf computers and leases the programmed
computer together with off-the-shelf Fax machines and telephones, dialers and
components manufactured by other vendors. The Company purchases certain custom
components and complete Fax machines from single suppliers in order to obtain
lower prices. In the past, the Company has had satisfactory relationships with
its suppliers and has not experienced delays in the delivery of components or
public-Fax machines. The Company generally does not maintain supply contracts
with its suppliers and purchases pursuant to purchase orders in the ordinary
course of business. The Company believes that there are a number of other
suppliers for the components that it uses. The Company did not experience any
difficulties in obtaining equipment or parts and supplies and, although there
can be no assurance, does not anticipate that there will be any problems
obtaining any equipment, parts or supplies in the future.
Patents and Technology
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Although the Company has applied for a patent covering the technologies
upon which the Company's Smart Switch systems are based, there is no assurance
that the patent applied for will issue or will provide the Company with
meaningful protection from competition or that the Company will have the
financial resources necessary to enforce any patent rights that it may hold.
Other companies may have been or may be involved in research and development
which may lead to patents similar to or superior to those developed by the
Company or relating to specific aspects of the Company's products and
technologies, and the Company has not engaged counsel to determine whether its
products are in general free from patent infringement. Unless so protected or
protected by nondisclosure agreements, the Smart Switch is susceptible to being
analyzed and reconstructed by an existing or potential competitor. The Company
is not aware of any claims that its products infringe upon the proprietary
rights of third parties. However, there can be no assurance that third parties
will not assert infringement claims against the Company in the future, and the
cost of responding to such assertions, regardless of their validity, could be
significant. In addition, such claims may be found to be valid and could result
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in awards against the Company, which could have a material adverse effect on the
Company's business. As a result, the cost to the Company of protecting its
patent rights could be substantial. The market for the Company's public-Fax
products is characterized by rapidly changing technologies and evolving industry
standards. The Company's success will depend in large part on the Company
having a technically competent staff and on its ability to anticipate changes in
technology and industry standards and, to the extent such changes impact the
Company's technology and products, to respond to market and technological
developments on a timely basis. There can be no assurance that the Company will
be able to keep pace with the technological demands of the market place.
Moreover, there can be no assurance that new products or technologies will not
render the Company's Smart Switch less competitive or obsolete.
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Government Regulation
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There are no known federal or state regulations which regulate the public
facsimile transmission business, other than the regulations of the telephone
industry, whose services the Company utilizes. There can be no assurance that
the Company's business will not be regulated in the future nor that such
regulations will not have an adverse effect upon the Company's profitability.
Credit Card Regulations
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The Company's business is dependent on its securing processing for its
credit card transactions. Credit card companies establish the rules and
regulations for eligibility for processing and determine which businesses may
accept their cards, and upon what terms. While DiversiFax facsimile machines
are presently processed through all major credit card companies, there can be no
assurance that in the future some or all credit card companies may not change
the terms upon or circumstances under which their credit cards will be accepted
so as to adversely effect the business of the Company.
Competition
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The public Fax business is in an early stage of development. The Company
does not know of any other company which offers a computer software switching
device which can convert any "off-the-shelf" Fax machine into a public Fax. The
Company's principal competitors must physically reconfigure each fax machine
they install using a procedure that can only be used on a particular model of
fax machine in which they usually specialize (the same procedure cannot be used
on different models). AlphaNet, the Company's largest competitor, reconfigures
one model of a thermal paper fax machine which it has placed in a large number
of locations. Other competitors, Teledex and Action Fax, offer products which
do not currently offer the various features of the Company's Smart Switch, such
as the range of useable fax machines, customized billing by floor or room and
voice mail. In general, AlphaNet competes in all of the Company's markets,
while Teledex and Action Fax offer competition only in limited markets.
Competition between companies is generally based on price and quality of service
offered. It should be noted, however, that if the public Fax business generates
substantial profits and appears to be capable of significant growth, other
companies with greater resources than the Company's may enter the business and
present intense competition. The Company believes that if this were to occur,
it could expect to encounter significant competition in four general areas: (i)
major telecommunications companies, who have already established themselves in
the pay telephone equipment field and indicate a strong interest in the public
Fax business; (ii) other companies organized to provide public facsimile
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transmission services and/or equipment; (iii) facsimile machine manufacturers
who may expand their product line to include a coin, credit card swipe or
computer switch activated facsimile machine; and (iv) assisted facsimile
transmission services. In addition, it should be noted that facsimile
transmission also competes with alternative methods of document delivery,
principally overnight small package express services such as Federal Express and
United Parcel Service, as well as the United States Post Office Express Mail
Service. In all of the foregoing areas, virtually all competitors can be
expected to be considerably better established and larger than the Company in
total assets and resources.
Seasonality
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Based on the limited information available to the Company regarding the
public fax industry, it appears to the Company that the Smart Switch business is
not subject to seasonal fluctuations.
Employees
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The Company presently has 106 full time employees, including three
executive officers, five managers, 79 service technicians, 14 clerical and
administrative employees and five sales persons, none of whom are subject to a
collective bargaining agreement.
ITEM 2. Description of Property
-----------------------
The executive offices of the Company are currently maintained at 39
Stringham Avenue, Valley Stream, New York 11580, which is also the headquarters
of IMSG, one of its wholly-owned subsidiaries. These facilities are comprised
of executive offices, warehouse space and repair facilities covering
approximately 1,500 square feet. The Company presently has no formal lease or
agreement with respect to its office facilities, and is on a month to month
lease at $2,145 per month. In the event the month to month lease arrangement is
terminated, the Company does not believe that it will be materially affected
since management believes it will be able to obtain similar facilities. In
addition, the Company maintains an executive and sales office in Mt. Laurel, New
Jersey, which is leased for a monthly rent of $950.
The Company also maintains service centers in Norwood, Massachusetts;
Albany, New York; Chicago, Illinois; and Jacksonville and Sarasota, Florida.
The Company utilizes these service centers to service regional accounts
including repairing machines and storing supplies and parts. The Norwood,
Massachusetts service center is leased for a monthly rent of $1,300. The
Albany, New York service center is leased for a monthly rent of $1,218. The
Chicago, Illinois service center is leased for a monthly rent of $825. The
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Jacksonville and Sarasota, Florida service centers are leased for an aggregate
monthly rent of $1,053. An additional Valley Stream warehouse is leased for a
monthly rent of $1,400.
All space currently utilized by the Company is dedicated to administrative,
marketing, data processing, equipment assembly storage, service and maintenance
and clerical functions. The Company believes that its facilities are adequate
for its present operations. Additionally, the Company believes its facilities
are adequately covered by insurance.
Machines are on site locations throughout New York, Massachusetts,
Illinois, Connecticut, Florida, Vermont, New Hampshire, Wisconsin, North
Carolina, South Carolina and Georgia.
ITEM 3. Legal Proceedings
-----------------
The Company is not a party to any material legal proceedings, except as
follows:
On October 26, 1995, the Company instituted an action in Supreme Court,
State of New York, Nassau County, entitled IMSG Systems, Inc. v. Kevin T.
------------------------------
Gallagher and LGG Corp. d/b/a Boston Copico. The Company brought the action to
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enforce a restrictive covenant against Kevin Gallagher, a former employee of the
Company. LGG Corp. counterclaimed for $1,750,000 based upon an alleged unfair
or trade practice in seeking to prevent it from hiring Mr. Gallagher. The Court
denied the Company's motion for a preliminary injunction.
On October 30, 1995, an action was brought against the Company in Supreme
Court, State of New York, New York County, entitled Diversified Investors Corp.
---------------------------
v. DiversiFax, Inc. and Judd Rothman. The suit was brought seeking payment owed
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to plaintiff pursuant to prior non-interest bearing loans totalling $228,670
(which amount is accrued at November 30, 1995), made to the Company by various
creditors, all of whom have assigned their rights under the loans to Diversified
Investors Corp. The Company has acknowledged the amount due, but has not paid
because the plaintiffs have not indicated how the amount was to be allocated
(due to a dispute between the plaintiffs). Based upon the agreement describing
the debt, the Company believes that the amount is payable in Common Stock of the
Company. The plaintiff is seeking cash in lieu of stock.
The Company believes that the outcome of the above actions will not have a
material adverse effect on the Company's financial condition.
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ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) On November 6, 1995, the Company held an Annual
Meeting of Stockholders.
(b) At the Annual Meeting, the following persons were
elected as directors:
Dr. Irwin A. Horowitz
Eugene Bilotti
Mario DiNatale
Kenneth Ross Wolfe
At the Annual Meeting, the stockholders also voted on, and approved the
following matters:
(a) the amendment to the Company's Certificate of
Incorporation to increase the number of authorized
shares of Common Stock from 5,000,000 to 25,000,000
shares (the "Stock Increase Amendment");
(b) the amendment to the Company's Certificate of
Incorporation to change the Company's name to Invictus
Industries, Inc. (the "Name Amendment"); and
(c) the ratification of the appointment of Hoberman, Miller
& Co., P.C. ("Hoberman, Miller") as the Company's
auditors for the fiscal year ending November 30, 1995.
The holder of 662,000 Series A Preferred Stock (which was subsequently
converted into 6,620,000 shares of Common Stock) voted all of his shares in
favor of the above proposals.
The holders of Common Stock voted their shares as follows:
The Stock Increase Amendment:
For: 2,227,407 Against: 51,420 Abstain: 16,050
The Name Amendment:
For: 2,177,072 Against: 51,230 Abstain: 106,575
The appointment of Hoberman, Miller:
For: 2,285,202 Against: 3,150 Abstain: 8,525
16
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder
------------------------------------------------
Matters
-------
The Company's Common Stock is currently traded in the NASDAQ over-the-
counter market under the symbol "DFAX" on the automated quotation system of the
National Association of Securities Dealers, Inc. (the "NASD"). Based on
information provided by NASDAQ, the following table sets forth the high and low
bid prices on NASDAQ for Common Stock during the periods indicated:
(in $)
BID
HIGH LOW
---- ---
December 1, 1993 4 2 7/8
through February 28, 1994
March 1, 1994 3 3/16 1 7/8
through May 31, 1994
June 1, 1994 2 7/8 2 1/8
through August 31, 1994
September 1, 1994 4 1/16 2 3/8
through November 30, 1994
December 1, 1994 3 15/16 2 11/16
through February 28, 1995
March 1, 1995 2 1/2 13/16
through May 31, 1995
June 1, 1995 4 3/4 13/16
through August 31, 1995
September 1, 1995 12 7/8 3 7/8
through November 30, 1995
The quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission, and may not represent actual transactions.
As of March 11, 1996, there were approximately 88
holders of record of the Company's Common Stock including record holders which
may hold such stock for beneficial owners and which have not been polled to
determine the extent of beneficial ownership.
17
<PAGE>
The Company has paid no dividends and it is not anticipated that any
dividends will be paid in the foreseeable future. The Company intends to retain
earnings for the foreseeable future to finance the expansion of its operations.
In all events, the declaration of dividends will depend on future earnings, if
any, the financial needs of the Company and other pertinent facts.
ITEM 6. Managements Discussion and Analysis of Financial
------------------------------------------------
Condition and Results of Operations.
------------------------------------
The fiscal year ended November 30, 1995 compared to the fiscal year ended
- -------------------------------------------------------------------------
November 30, 1994.
- ------------------
Sales declined approximately $336,000 or 5.6% for the fiscal year ended
November 30, 1995 compared to fiscal 1994. This decline was the result of the
loss of certain of the Company's customers and the elimination of non-profitable
accounts (approximately $360,000), a decrease in revenue from certain county
government offices (approximately $30,000), and a decrease in machine rental
revenue (approximately $140,000), offset by the additions of a major library
system (approximately $90,000) and university (approximately $104,000) to the
Company's customer base in July and March of 1995, respectively. The Company is
currently bidding, along with other parties, on the renewal of an agreement with
another existing major library system, which system provided approximately 12.3%
and 11.1% of the Company revenues in fiscal 1995 and 1994, respectively.
Cost of sales represented 78.3% of sales in fiscal 1995 compared to 74.2%
of sales in fiscal 1994. This increase is primarily attributable to an increase
in the cost of paper and other supplies. During 1995, the Company experienced
increases in the cost of paper ranging from 11% to 62% and the cost of certain
supplies increased as much as 15% from the prior year, and as a result of prior
cash flow problems, the Company was unable to take advantage of volume discounts
offered by its suppliers. In addition, during the second half of fiscal 1995,
the Company commenced a program to refurbish its Copiers. Management believes
that for certain segments of its customer base refurbishment represents a less
costly alternative to the purchase of new equipment.
As a result of the unfavorable determination with the State of Connecticut,
the Company continues to provide a provision, included in cost of sales, for any
other sales tax assessments by any other states that may arise. For the fiscal
year ended November 30, 1995, the Company accrued an additional $200,000.
Depreciation and amortization decreased approximately $48,000 in fiscal
1995 compared to fiscal 1994 as a result of certain of the Company's Copiers
becoming fully depreciated during fiscal 1994, offset by recently purchased
photocopy machines.
18
<PAGE>
Selling, general and administrative expenses increased from approximately
$2,104,000 or 34.9% of sales in fiscal 1994 to approximately $2,396,000 or 42.1%
of sales in fiscal 1995. This increase is primarily attributable to the
amortization of common stock issuances for consulting services (approximately
$302,000 or 5.3% of sales), and the marketing, promotion and development of the
Smart SwitchTM operation (approximately $317,000), offset by a reduction in
administrative salaries and professional fees resulting from the Company's
continued effort to trim expenses.
Interest expense increased approximately $93,000 in fiscal 1995 compared to
fiscal 1994 primarily as a result of increased borrowings for the purchase of
photocopy machines and accessories, and the fact the Company's credit facilities
were outstanding for the entire 1995 fiscal year and only part of fiscal 1994.
During fiscal 1995 the Company determined to write-off the unamortized
portion of the fair market value of common shares issued, in the amount of
approximately $1,615,000, to an individual for services that were to be
performed over a seven-year period, due to the individual's failure to continue
to perform his obligations pursuant to the agreement. The Company determined
not to pursue a cause of action against such individual as it did not believe
such person would have the funds to pay a judgment, if obtained.
The above resulted in a loss before income taxes of approximately
$3,409,000 in fiscal 1995 compared to a loss of $1,136,000 in fiscal 1994.
The loss of approximately $3,409,000 resulted in an increase in the
deferred tax benefit of approximately $500,000. Due to the Company's continued
poor operating results, management further evaluated the realizability of the
deferred tax asset and determined to increase the valuation allowance by
$340,000 at November 30, 1995, resulting in a net deferred tax asset of $340,000
at November 30, 1995.
Management believes that the future taxable income generated from the
development of the Smart Switch business coupled with the expected return to
profitability of the Copier business and the reversal of the existing deferred
tax liabilities will be sufficient to utilize the net deferred tax asset at
November 30, 1995.
19
<PAGE>
The year ended November 30, 1994 compared to the eleven months ended November
- -----------------------------------------------------------------------------
30, 1993.
- ---------
Sales increased approximately $1,194,000 or 24.9% in fiscal 1994 compared
to fiscal 1993. The increase is primarily attributable to the addition of a
major university to the Company's customer base in 1993 (1994 sales increased
approximately $285,000 from 1993), the acquisition of a copier company in
January 1994 (sales approximated $577,000 in 1994) and the fact that the 1993
period contains only eleven months.
Cost of sales represented 74.2% of sales in fiscal 1994 compared to 71.8%
of sales in fiscal 1993. Cost of sales in fiscal 1993 includes the write-off of
assets related to the prior form of facsimile business in the amount of
$665,723, or 13.8%, as the management of the Company attempted to redirect the
Company's marketing program with respect to its facsimile business.
The Company's redirected marketing program included (i) leasing or selling
facsimile systems to site operators as an alternative to the Company's ownership
and (ii) selling service contracts to particular sites. During January 1994, it
became evident that this redirected marketing program would not be successful.
This factor, coupled with the continuance of disappointing revenues being
generated from the systems previously placed and being operated by the Company,
caused management to redirect the focus of its business to concentrate its
efforts and resources on the self-service photocopy machine business.
Accordingly, in fiscal 1993 management determined to write-off the value of
certain assets of the Company as they relate to the prior form of facsimile
business as follows:
Facsimile systems $417,157
Advance for credit card transaction processing 187,132
Other assets 61,434
--------
$665,723
--------
Cost of sales as a percentage of sales in fiscal 1994 was approximately
16.2% greater than cost of sales in fiscal 1993 exclusive of the write-off of
assets related to the prior form of facsimile business. The increase is
primarily attributable to the increase in the cost of paper and toner (increase
of 3.3% as a percentage of sales) and machine parts and supplies (increase of
7.5% as a percentage of sales). Additionally, the State of Connecticut assessed
a subsidiary of the Company for sales tax interest and penalty. The assessment
was made based upon the Commissioner of Revenue Services finding that sales by
the subsidiary of photocopies by machines placed in public and other libraries
are subject to the State of Connecticut sales tax. The subsidiary was not
successful before the State Tax Commission nor through the appeals process,
resulting in a final assessment in 1994 of approximately $157,000 inclusive of
20
<PAGE>
interest and penalty, all of which had been accrued through November 30, 1993
($19,000 for the eleven months ended November 30, 1993).
As a result of the unfavorable determination with the State of Connecticut,
the Company accrued $200,000 included in cost of sales (3.3% as a percentage of
sales) during fiscal 1994 to provide for any other assessments by any other
states that may arise.
Depreciation and amortization increased approximately $226,000 in fiscal
1994 compared to fiscal 1993 primarily as a result of depreciation on recently
purchased photocopy machines and accessories and depreciation and amortization
of assets obtained in connection with an acquisition.
Selling, general and administrative expenses increased from approximately
$1,419,000 in fiscal 1993 or 29.4% of sales to approximately $2,104,000 or 34.9%
of sales in fiscal 1994. This increase was primarily attributable to an
increase in professional fees (approximately $200,000) as a result of an
acquisition and certain securities filings and an increase in administrative
salaries (approximately $230,000) and the fact that the fiscal 1993 period
contained only eleven months.
The management fee charged by Key Consultants, Inc. was discontinued during
fiscal 1993.
Interest expense increased approximately $10,000 in fiscal 1994 compared to
fiscal 1993 primarily as a result of increased borrowing. Bank borrowing
increased from approximately $186,000 at November 30, 1993 to approximately
$952,000 (inclusive of capital lease obligations of approximately $421,000) at
November 30, 1994. The average interest rate was approximately 9%.
The above resulted in a loss before income taxes of approximately
$1,136,000 in fiscal 1994 compared to a loss of approximately $901,000 in fiscal
1993.
The loss of $1,136,000 in fiscal 1994 resulted in an increase in the
deferred tax benefit of approximately $300,000. Due to the poor operating
results, management determined to reflect a valuation allowance in the amount of
$360,000 at November 30, 1994, resulting in a net deferred tax asset of $150,000
at November 30, 1994.
In November 1994, the Board of Directors adopted a plan (the "Plan") for
the issuance of common stock for consulting services to be rendered by an
individual (the "Individual") for a period of one year. Pursuant to the Plan
the Individual would provide the Company with financial sponsorship, marketing
support (including the drafting and dissemination of research reports, press
21
<PAGE>
releases and new reports), and investment banking services. The Plan called for
the issuance to the Individual, at the Board's sole discretion of up to 275,000
shares of the Company's common stock. In December 1994, the Board approved an
amendment to the Plan which increased the number of shares issuable to the
Individual under the Plan from 275,000 shares to 525,000 shares. The term of
the individual's consulting agreement was increased to seven years. Through
December 1994, 450,000 shares were issued to the Individual pursuant to the
Plan, 125,000 shares of which were issued as of November 30, 1994. The 450,000
shares issued had an aggregate fair market value of approximately $1,630,000
upon issuance, which amount was to have been amortized over the seen year period
of the agreement. Amortization through November 30, 1994 amounted to $19,401.
In March 1995, the Individual ceased performing his obligations under the
agreement and the Company determined that the Individual was in breach thereof.
Accordingly, the remaining unamortized balance of the fair market value of the
common stock issued in the amount of approximately $1,600,000 was written off in
1995.
Liquidity and Capital Resources
- -------------------------------
At November 30, 1995, the Company had cash and a working capital
(deficiency) of $1,001,000 and $(1,254,000), respectively, as compared to
$166,000 and $(1,795,000), respectively, at November 30, 1994.
The Company's primary need for funds is to finance working capital, capital
expenditures and the further development of the Company's Smart Switch business.
Net cash used in operating activities of approximately $909,000 resulted
from the net loss of approximately $3,219,000 offset by non-cash items including
depreciation and amortization ($507,000), the write-off of a consulting
agreement ($1,615,000), the amortization of unearned compensation ($302,000) and
a net increase in the deferred tax benefit ($190,000). In addition net cash
used in operating activities included a decrease in amounts due to affiliates of
$224,000, offset by an increase in accounts payable and accrued expenses of
$357,000.
The Company incurred capital lease obligations of approximately $500,000 in
connection with lease agreements to acquire equipment, and used cash of
approximately $239,000.
Cash provided by financing activities amounted to approximately $1,983,000
during the fiscal year ended November 30, 1995 primarily as a result of the
proceeds from the exercise of common stock warrants ($1,504,000), proceeds from
22
<PAGE>
the sale of Series B convertible preferred stock ($856,000) and common stock
($40,500) and stockholder's loans payable ($75,000) offset by the repayment of
bank loans and capital lease obligations ($495,000). Proceeds from an
affiliates loan ($229,500) were utilized for the purchase of treasury stock
($229,500).
The above resulted in a net increase in cash of approximately $835,000 for
the year ended November 30, 1995.
In December 1995, the Company was successful in raising an additional
$1,548,000 in connection with the exercise of the remaining Common Stock
warrants. The proceeds of the warrants were used to pay down the bank debt in
full (approximately $1,000,000) and reduce trade payables. The balance of the
proceeds remain for working capital, capital expenditures and the further
development of the Smart Switch Business.
Management believes the remaining proceeds, expected cash flow from
operations as a result of a continued effort to reduce expenses and improve
control over purchasing and inventory, expected Smart Switch business and the
representation of the Chief Executive Officer of the Company to fund any
operating deficits will allow the Company to finance operations for at least 12
months. As of February 29, 1996, the Company had cash balances of approximately
$400,000.
ITEM 7. Financial Statements.
--------------------
The response to this item is submitted as a separate section to this report
on pages F1 through F21.
-- ---
ITEM 8. Changes In and Disagreements with Accountants on
------------------------------------------------
Accounting and Financial Disclosure.
------------------------------------
None.
23
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control
----------------------------------------------------
Persons; Compliance with Section 16(a) of the Exchange Act
----------------------------------------------------------
Directors and Executive Officers
- --------------------------------
Set forth below are the names, ages, positions and business experiences of
the executive officers and directors of the Company and an indication, if
applicable, of since when each has served as a member of the Board of Directors
of the Company.
Other Positions with the Has Served
Company, Principal as
Occupation and Certain Director
Name Other Directorships Age Since
- -----------------------------------------------------------------
Dr. Irwin A. Chairman of 59 November
Horowitz the Board, Chief 1, 1993
Executive Officer and
President; Director of
The Langer Biomechanics
Group, Inc.
Mario J. DiNatale President of DiversiFax 40 November
Information Service, Inc. 6, 1995
Kevin J. Coffey Chief Financial Officer 28 --
and Secretary
Eugene Bilotti Chief Executive Officer 46 November
and Director of 1, 1993
Marketing of Pegasus
Asset Management, a
registered investment
advisor
Kenneth Ross Attorney, 50 November Wolfe
Garden City, New York 1, 1993
A more detailed biographical description of each nominee is as follows:
IRWIN A. HOROWITZ has been the Chairman of the Board, Chief Executive
Officer and President of the Company since November 1, 1993. From July through
October 1993, he also served as Chief Operating Officer of the Company. For
more than the past five years, Dr. Horowitz has been Chairman of the Board and
President of IMSG Systems, Inc. and certain affiliated companies, ("IMSG and
Affiliates"), which were acquired by the Company effective November 1, 1993.
Dr. Horowitz is a director of The Langer Biomechanics Group, Inc., a public
company which is primarily engaged in the business of manufacturing and selling
orthotic products.
MARIO J. DiNATALE is the President and Chief Operating Officer of the
Company's subsidiary DiversiFax Information Service, Inc. since April 1995 and a
director of the Company since November 6, 1995. Mr. DiNatale founded Faxit
Corporation ("Faxit") in 1987 and has been its President and Chief Executive
Officer from inception. He became an employee of the Company upon the
24
<PAGE>
completion of the purchase by the Company of the Smart Switch from Faxit in
April 1995. Prior thereto, he had over fifteen years of marketing and
management experience with leading manufacturers of office automation equipment,
such as Ricoh and Toshiba.
KEVIN J. COFFEY has been Chief Financial Officer of the Company since
December 1995 and Secretary of the Company since January 1996. From March 1995
to December 1995, Mr. Coffey was the Accounting Manager of Lifetime Hoan
Corporation, a company engaged in the distribution of household cutlery and
other products. From January 1992 to March 1995, he was employed by Ernst &
Young LLP, most recently as an Audit Senior. From November 1989 to January
1992, Mr. Coffey was employed by Pannell Kerr Forster, a public accounting firm.
Mr. Coffey is a Certified Public Accountant.
EUGENE BILOTTI has been a director of the Company since November 1, 1993.
Since January 1, 1996, Mr. Bilotti has been the Chief Executive Officer and
Director of Marketing of Pegasus Asset Management, New York, New York, a
registered investment advisor. From 1971 to 1986, he was a Vice President of
Fiduciary Trust Company International in New York.
KENNETH ROSS WOLFE has been a director of the Company since November 1,
1993 and was Secretary of the Company from November 11, 1994 to January 1996.
Mr. Wolfe is an attorney who has maintained a private law practice since 1976.
From 1969 to 1976, he was a prosecuting attorney in New York, including two
years as a Special Assistant Attorney General in the Office of The Special State
Prosecutor, investigating corruption in the criminal justice system. Mr. Wolfe
received his JD degree from Brooklyn Law School in 1969, where he served as a
member of the law review. He is admitted to practice in New York, as well as
various Federal Courts, including the United States Supreme Court.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- --------------------------------------------------------------------
The Company's officers, directors and beneficial owners of more than 10% of
any class of its equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 ("Reporting Persons") are required under that
Act to file reports of ownership and changes in beneficial ownership of the
Company's equity securities with the Securities and Exchange Commission (the
"SEC"). Copies of those reports must also be furnished to the Company. Based
solely on a review of the copies of reports furnished to the Company pursuant to
that Act, the Company believes that during fiscal year ended November 30, 1995
all filing requirements applicable to Reporting Persons were complied with,
except that Eugene Bilotti and Kenneth Ross Wolfe, directors of the Company,
25
<PAGE>
each failed to timely file a Form 4 with respect to the grant of stock options.
ITEM 10. Executive Compensation.
-----------------------
Executive Compensation
- ----------------------
Summary Compensation Table
- --------------------------
The following table sets forth information with respect to the compensation
of the Chief Executive Officer for services provided in all capacities to the
Company and its subsidiaries in the fiscal years ended November 30, 1995, 1994
and 1993. No other executive officer or former executive officer received more
than $100,000 in compensation in the fiscal year ended November 30, 1995.
Other
Annual
Compen-
Name and Principal Salary sation (1)
Position Year $ Bonus $
- ------------------ ---- ------ ----- ----------
Dr. Irwin A. 1995 201,923 None 65,155
Horowitz,
Chairman of the 1994 250,000 None 64,200
Board of Directors
and Chief Executive 1993 20,833 None 5,350
Officer
(1) Represents the fair market value of benefits and
perquisites afforded by the Company to Dr.Horowitz.
Dr. Horowitz did not receive any long term compensation as contemplated by
the Summary Compensation Table above or the rules and regulations of the SEC
other than as described herein.
Effective November 1, 1993, the Company and Capital Copy Corp ("Capital"),
one of the Company's wholly owned subsidiaries, entered into an employment
agreement with Dr. Horowitz (the "Dr. Horowitz Employment Agreement"), whereby
Dr. Horowitz served and presently serves as the Chief Executive Officer and
President of the Company and several of its subsidiaries. The Dr. Horowitz
Employment Agreement was for an initial term of two years, renewable for
successive two year terms with compensation to Dr. Horowitz of $250,000 per
annum plus such employee benefits made available by Capital and the Company to
their other executive employees; provided, however, that the Dr. Horowitz
Employment Agreement may be terminated by Dr. Horowitz, Capital or the Company
upon thirty days' prior written notice. The Dr. Horowitz Employment Agreement
was automatically renewed for a two year period. If Capital and the Company
26
<PAGE>
terminate Dr. Horowitz's employment due to his incapacity, disability or
inability by reason of illness or physical or mental disability, which renders
him unable to perform his duties for a consecutive period of ninety days or a
non-consecutive period of one hundred and twenty days during any consecutive
twelve month period, Capital and the Company are obligated to pay Dr. Horowitz
his annual $250,000 salary during the year after his termination and provide him
with disability benefits provided by applicable benefit plans and insurance
coverage. Capital is primarily responsible to pay all of Dr. Horowitz's
compensation under the Dr. Horowitz Employment Agreement and the Company is an
unconditional guarantor of that obligation. The Company and Dr. Horowitz are
currently considering entering into a new employment agreement.
Dr. Horowitz divides his business time primarily between New York (the
location of the Company's principal office and significant customers) and
Florida (where the Company also has significant business). The Company pays or
reimburses Dr. Horowitz for the travel expense between New York and Florida, the
rental of an apartment in New York and the rental of cars in both locations.
During fiscal 1995 and 1994, these expenses aggregated $65,155 and $64,200,
respectively. During fiscal 1993, for one month, these expenses aggregated
$5,350.
Directors' Remuneration
- -----------------------
The directors of the Company are not currently compensated, nor were they
during the last fiscal year, for their services as such, except that in
September 1995, the Company adopted the 1995 Directors Option Plan (the "Plan"),
pursuant to which all current non-employee directors and non-employees who
therefor became directors of the Company will receive an option to purchase
100,000 shares of the Company's Common Stock at the market value thereof at the
time of grant. Said options became vested at the rate of 20,000 per year (the
first 20,000 vesting upon grant) and terminate 90 days after the director ceases
to serve as a director. In accordance with the Plan, in September 1995, options
to purchase 100,000 shares at an exercise price of $4.125 were granted to each
of Messrs. Bilotti and Wolfe.
No family relationship exists between any director or executive officer and
any other director or executive officer.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
-------------------------------------------------------------------
The following table sets forth, as of February 29, 1996, certain
information concerning stock ownership of all persons known by the Company to
own beneficially 5% or more of the outstanding shares of the Company's Common
27
<PAGE>
Stock, each director, and all officers and directors of the Company as a group.
BENEFICIAL OWNERSHIP OF COMMON STOCK
------------------------------------
Per-
Cent
Number of shares of
Name and Address of Beneficial Owners beneficially owned (1) Class
- ------------------------------------- ---------------------- -----
Dr. Irwin A. Horowitz 6,320,000 47.3%
111 Ocean Place
Sarasota, Florida 24242
Mario J. DiNatale 176,000(2) 1.3%
Atrium Executive Center
3000 Atrium Way - Suite 200
Mt. Laurel, New Jersey 08054
Eugene Bilotti 44,000(2)(3) *
111 Broadway
New York, New York 10006
Kenneth Ross Wolfe 20,000(2) *
1325 Franklin Avenue
Garden City, New York 11530
All officers and directors as a 6,585,000(4) 49.0%
group (5 persons)
*Indicates less than 1% ownership of the Common Stock.
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
(2) Includes 20,000 shares underlying stock options.
(3) Includes 14,000 shares owned by his spouse, for which he disclaims
beneficial ownership.
(4) Includes an aggregate of 85,000 shares underlying stock options.
ITEM 12. Certain Relationships and Related Transactions.
-----------------------------------------------
Mr. Kenneth Ross Wolfe, a director of the Company, has provided legal
services to the Company since November 1, 1993. Mr. Wolfe has received
approximately $69,000 in legal fees in fiscal 1995 and $46,000 in legal fees in
fiscal 1994.
28
<PAGE>
The Company consummated an agreement (the "Merger Agreement") to acquire
IMSG and Affiliates on November 1, 1993 (the "Mergers"). IMSG and affiliates
were privately-held corporations which (prior to the consummation of the
transactions) were controlled by Dr. Irwin A. Horowitz, Chairman of the Board,
Chief Executive Officer and President of the Company, who was the sole
stockholder of all four companies. As a result of the Mergers, IMSG and
Affiliates became wholly-owned subsidiaries of the Company.
Concurrently with the Mergers, Diversified Investors Corp., the former
parent company of the Company ("DIC"), Dr. Horowitz and the Company entered into
a Stockholders' Agreement (the "Stockholder's Agreement"). The Stockholders'
Agreement provided that all parties thereto would agree to vote all securities
of the Company with voting rights owned by such parties in favor of the slate of
nominees to the Board of Directors of the Company designated in accordance with
the provisions of the Stockholders' Agreement. The Stockholders' Agreement also
provided that the Board of Directors of the Company would consist of seven
persons, of which (i) Dr. Horowitz would designate four persons and (ii) the
three remaining directors who were not nominated by Dr. Horowitz and their
successors, would continue to serve as directors until such time as IMSG and
Affiliates and any companies acquired by the Company or any of IMSG, National,
Advanced or Capital achieved pre-tax earnings of $1,000,000 or more in any
fiscal year. Thereupon, those directors would resign and the vacancies would be
filled by nominees of Dr. Horowitz. The three newly created vacancies at the
time of the closing of the Mergers and the vacancy created by the resignation of
Donald Z. Scheiber, who resigned upon the effective date of the Mergers, were
filed by nominees chosen by Dr. Horowitz as follows: Dr. Horowitz, Chairman of
the Board, Les Banks, Kenneth R. Wolfe and Eugene Bilotti. Howard B. Kesslin,
Judd Rothman and Harold A. Horowitz (no relation to Dr. Horowitz) remained as
directors of the Company. Les Banks resigned as a director of the Company
effective September 1, 1994. Messrs. Rothman, Kesslin and Harold Horowitz
resigned as directors effective November 11, 1994. The parties also agreed to
vote in favor of all recommendations of the Board of Directors of the Company
put to a vote of the security holders of the Company. The Stockholders'
Agreement was terminated effective as of November 11, 1994, pursuant to a
Termination Agreement. The Stockholders' Agreement also required that from
November 1, 1993 through November 1, 1995, the Company obtain and maintain a
$10,000,000 key-man life insurance policy on the life of Dr. Horowitz naming DIC
as beneficiary. If Dr. Horowitz died during said period, DIC was to use the
proceeds of the life insurance to buy the capital stock of the Company owned by
Dr. Horowitz. The Company never obtained this policy. Effective November 11,
1994, the Company is no longer obligated to maintain this insurance.
29
<PAGE>
ITEM 13. Exhibits, List and Reports on Form 8-K.
---------------------------------------
(a) Exhibits. The Exhibits are filed as part of, or incorporated by
reference, into this report.
Exhibit # Exhibit Page number or
- --------- ------- incorporation by
reference to
-------------
2. (a) Plan of reorganization and Incorporated by reference
Agreement of Merger by and
among the Company, Diversi-
fied Acquisition Corp. 1
and IMSG Systems, Inc.
(b) Plan of Reorganization and Incorporated by reference
Agreement of Merger by and
among the Company, Diversi-
fied Acquisition Corp. 2
and National Copy Corp.
(c) Plan of Reorganization and Incorporated by reference
Agreement of Merger by and
among the Company, Diversi-
fied Acquisition Corp. 3
and Advanced Business
Systems, Inc.
(d) Plan of Reorganization and Incorporated by reference
Agreement of Merger by and
among the Company, Diversi-
fied Acquisition Corp. 4
and Capital Copy, Inc.
3. (a) Restated Certificate of Incorporated by reference
Incorporation
(b) Amendment to Restated
Certificate of Incorporation Incorporated by reference
(c) By-laws Incorporated by reference
10. (a) Payment Deferral Agreement, Incorporated by reference
dated November 13, 1992 by
Diversified Investors
Corporation
(b) Loan Deferral Agreement, Incorporated by reference
dated November 13, 1992 by
Howard Kesslin
30
<PAGE>
(c) Loan Deferral Agreement, Incorporated by reference
dated November 13, 1992 by
Diversified Investors Corp-
oration
(d) Loan Deferral Agreement, Incorporated by reference
dated November 13, 1992 by
Diversified Distributing &
Marketing, Corp.
(e) Employment Agreement be- Incorporated by reference
tween Capital Copy, Inc. and
Irwin A. Horowitz
(f) Agreement of Acquisition Incorporated by reference
and Among DIVERSIFAX, INC.,
a Delaware Corporation,
FAXIT CORPORATION, a Dela-
ware Corporation, Faxit
Corporation, a New Jersey
Corporation, MARIO DINATALE,
and DIVERSIFAX ACQUISITION
CORP., a New York corporation
(g) Letter, dated March 13, 1996, Incorporated by reference
from Irwin A. Horowitz to
the Company regarding funding
of operating deficiencies of
the Company
21. Subsidiaries of the Company Incorporated by reference
No reports on Form 8-K were filed by the Company during the fourth quarter
of fiscal 1995.
31
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIVERSIFAX, INC.
/s/ Irwin A. Horowitz
-------------------------
Date: September 9, 1996 Dr. Irwin A. Horowitz
President and Chief
Executive Officer
(Principal Executive,
Financial and Accounting
Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Irwin A. Horowitz September 9, 1996
- ------------------------
Irwin A. Horowitz Director
/s/ Mario DiNatale September 9, 1996
- ------------------------
Mario DiNatale Director
/s/ Kenneth Ross Wolfe September 9, 1996
- ------------------------
Kenneth Ross Wolfe Director
/s/ Eugene Bilotti September 9, 1996
- ------------------------
Eugene Bilotti Director
32
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
YEARS ENDED
NOVEMBER 30, 1995 AND 1994
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONTENTS
Report of Independent Certified Public Accountants . . . . . . . . . . . . F-2
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
DiversiFax, Inc.
Valley Stream, New York
We have audited the consolidated balance sheet of DiversiFax, Inc. and
Subsidiaries as of November 30, 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended November 30,
1995 and 1994. 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 audits 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 consolidated financial position of DiversiFax, Inc.
and Subsidiaries as of November 30, 1995 and the consolidated results of their
operations and their cash flows for the years ended November 30, 1995 and 1994,
in conformity with generally accepted accounting principles.
New York, New York
March 7, 1996
F-2
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1995
- --------------------------------------------------------------------------------
A S S E T S
Current Assets
Cash (Notes 13 and 15) $1,001,372
Accounts receivable 53,912
Inventories 184,397
Prepaid expenses and other 103,329
- --------------------------------------------------------------------------------
Total Current Assets 1,343,010
Equipment and vehicles, less accumulated depreciation (Note 3) 3,733,837
Intangible assets (net of accumulated amortization of $139,300)
(Note 2) 258,700
Deferred tax benefit (Note 10) 340,000
Other assets 58,327
- --------------------------------------------------------------------------------
Total Assets $5,733,874
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Loan payable, bank (Note 4) $ 146,238
Capital lease obligations (Note 5) 810,880
Accounts payable and accrued expenses 1,410,763
Due to affiliates (Note 7) 228,670
- --------------------------------------------------------------------------------
Total Current Liabilities 2,596,551
- --------------------------------------------------------------------------------
Loans payable, stockholder (Note 6) 147,228
Due to affiliates (Note 7) 130,800
- --------------------------------------------------------------------------------
278,028
- --------------------------------------------------------------------------------
Total Liabilities 2,874,579
- --------------------------------------------------------------------------------
Commitments and Contingencies (Notes 7 and 13)
Stockholders' Equity (Notes 2, 7, 8, 9 and 11)
Convertible preferred stock, Series A, $.001 par value,
authorized 1,000,000 shares
Convertible preferred stock, Series B, $.001 par value,
authorized 2,900 shares
Convertible preferred stock, Series C, $.001 par value,
authorized 10,000 shares
Common stock, $.001 par value, authorized 25,000,000
shares, issued 13,351,548 shares 13,350
Additional paid in capital 8,198,006
Deficit ( 4,800,914)
Unearned compensation ( 74,147)
- --------------------------------------------------------------------------------
3,336,295
Less: Treasury stock, at cost ( 229,500)
Subscription receivable ( 247,500)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 2,859,295
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $5,733,874
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1 9 9 5 1 9 9 4
Sales $5,690,982 $6,027,096
- -------------------------------------------------------------------------------
Cost and Expenses
Cost of sales, exclusive of depreciation 4,457,209 4,471,871
Depreciation and amortization 507,361 555,637
Selling, general and administrative 2,395,963 2,103,712
Write-off of consulting agreement 1,614,973
Interest 124,438 31,503
- -------------------------------------------------------------------------------
9,099,944 7,162,723
- --------------------------------------------------------------------------------
Loss Before Income Taxes ( 3,408,962) ( 1,135,627)
Income Taxes (Benefit) (Note 10) ( 190,000) 30,000
- --------------------------------------------------------------------------------
Net Loss ($3,218,962) ($1,165,627)
Weighted average common shares outstanding
(Note 2) 10,752,349 10,050,821
Loss per share of common stock ($.30) ($.12)
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE><CAPTION>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Total
Additional Stock-
Preferred Stock Common Paid In Unearned Treasury Subscription holders
Series A Series B Series C Stock Capital Deficit Compensation Stock Receivable Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1993 662 $ 3,383 $2,917,161 ($ 416,325) $2,504,881
Issuance of common stock
for services 125 467,063 ($467,188)
Amortization of unearned
compensation 19,401 19,401
Net loss for the year (1,165,627) (1,165,627)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1994 662 3,508 3,384,224 ( 1,581,952) ( 447,787) 1,358,655
Sale of common stock 36 40,464 40,500
Issuance of common stock for
services 505 1,477,081 ( 310,400) 1,167,186
Purchase of treasury stock ($229,500) (229,500)
Issuance of preferred stock in
connection with the acquisition
of Smart Switch $1 400,000 400,001
Issuance of preferred stock for
services 65,625 ( 65,625)
Issuance of preferred stock in connection
with the satisfaction of indebtedness $1 229,500 229,501
Sales of preferred stock 1 1,105,641 ($247,500) 858,142
Exercise of common stock warrants 521 1,503,586 1,504,107
Amortization of unearned
compensation and write-off
of consulting agreement 749,665 749,665
Conversion of preferred stock
to common stock (662) ( 2) ( 1) 8,780 ( 8,115)
Net loss for the year (3,218,962) (3,218,962)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1995 $13,350 $8,198,006 ($4,800,914) ($ 74,147) ($229,500)($247,500)$2,859,295
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1 9 9 5 1 9 9 4
- --------------------------------------------------------------------------------
Operating Activities
Net loss ($3,218,962) ($1,165,627)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 507,361 555,637
Write-off of amounts due from affiliates 48,000
Write-off of consulting agreement 1,614,973
Amortization of unearned compensation 301,878 19,401
Deferred tax debit ( 190,000) 30,000
Changes in operating assets and liabilities
Accounts receivable ( 17,774) ( 2,066)
Inventories ( 39,303) 41,490
Prepaid expenses and other ( 11,241) 875
Accounts payable and accrued expenses 356,942 514,231
Other assets 11,096 ( 69,423)
Due to affiliates ( 224,000) ( 86,200)
- --------------------------------------------------------------------------------
Net Cash Used in Operating Activities ( 909,030) ( 113,682)
- --------------------------------------------------------------------------------
Investing Activities
Purchases of equipment and vehicles ( 238,842) ( 357,361)
Acquisition of MDM Copying Services ( 625,000)
- --------------------------------------------------------------------------------
Net Cash Used in Investing Activities ( 238,842) ( 982,361)
- --------------------------------------------------------------------------------
Financing Activities
Proceeds from exercise of common stock warrants 1,504,107
Proceeds from (repayment of) long term debt and
conversion to capital lease obligations ( 281,372) 344,430
Sale of convertible preferred stock, Series C 2,500
Sale of convertible preferred stock, Series B 855,644
Sale of common stock 40,500
Proceeds from loan payable, affiliate 229,500
Purchase of treasury stock ( 229,500)
Proceeds from (repayment of) stockholder's
loans payable 75,479 ( 271,976)
Repayment of capital lease obligations ( 213,796) ( 37,756)
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,983,062 34,698
- --------------------------------------------------------------------------------
Net increase (decrease) in cash 835,190 ( 1,061,345)
Cash, beginning of year 166,182 1,227,527
- --------------------------------------------------------------------------------
Cash, End of year $1,001,372 $ 166,182
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $130,902 $31,503
Income taxes $11,875
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of
Business Effective November 1, 1993, DiversiFax, Inc. (the
"Company") acquired all of the outstanding common stock
of IMSG Systems, Inc. ("IMSG") and its affiliated
companies, National Copy Corp. ("National"), Capital
Copy Corp. ("Capital") and Advanced Business Systems,
Inc. ("Advanced") (IMSG, National, Capital and Advanced
collectively "IMSG and Affiliates") in exchange for the
issuance of 662,000 shares of Series A, convertible
preferred stock. Each share of preferred stock is
convertible into ten shares of common stock of the
Company, or an aggregate of 6,620,000 shares of common
stock.
IMSG and Affiliates, headquartered in Valley Stream,
New York, owns, supplies and maintains self-service
coin and card reader operated photocopy machines in
colleges, universities, libraries, courthouses,
government agencies, pharmacies and other retail
establishments throughout the eastern United States.
Generally, the Company is responsible for the
collection of the payments and most locations share in
the revenue from the photocopy machines.
On April 27, 1995, the Company's wholly owned
subsidiary, DiversiFax Information Services, Inc.
("DAC") purchased from Faxit Corporation ("Faxit") the
Smart Switch, a computerized switching device used in
the public facsimile business (See Note 2).
Principles of
Consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Cash Equivalents Cash equivalents include all temporary cash investments
with original maturities of three months or less.
Inventories Inventories, consisting principally of supplies and
parts, are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
F-7
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Equipment and
Vehicles Equipment and vehicles are recorded at cost.
Depreciation is generally recorded using the straight-
line method over the estimated useful lives of the
related assets as follows:
Photocopy machines and accessories 10 years
Office and computer equipment 5 years
Furniture and fixtures 5-7 years
Vehicles 5 years
Amortization The cost of the trademark and covenant not to compete
acquired are being amortized by the straight-line
method over the five year terms of the respective
agreements. Goodwill and the customer lists acquired
are being amortized by the straight-line method over
five years. Management and the Board of Directors
evaluate the intangible assets on a continuing basis at
each balance sheet date, and have concluded that there
has been no impairment, accordingly, no write-down is
required.
Income Taxes In 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting For Income
Taxes" ("SFAS 109"), which requires recognition of
deferred tax assets and liabilities for the expected
future tax consequences of events that have been
included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities
are determined based on the differences between the
financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
Earnings Per Share Earnings per share is computed by dividing net earnings
by the weighted average number of shares of common
stock and common stock equivalents outstanding during
the period. For purposes of this computation, the
convertible preferred stock, Series A, is deemed to
have been converted and, accordingly, is included as
outstanding for all periods presented. Common stock
equivalents consisting of common shares which may be
issued upon exercise of the outstanding stock warrants
are not included in weighted average shares outstanding
in years where losses are reported since their
inclusion would be antidilutive.
F-8
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Revenue Recognition Revenue from the Company's self-service coin and card
reader operated photocopy machines is principally
recognized at the time payment is received.
Revenue from the Smart Switch is recognized at the time
of facsimile transmission. Revenue from the Smart
Switch was not material during the year ended November
30, 1995.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
2. Acquisitions
MDM Copying
Services,
Coin-Op, Inc. On January 27, 1994, a wholly owned subsidiary of the
Company acquired the customer base, equipment and
furniture and fixtures of MDM Copying Services, Coin-
Op, Inc. ("MDM") for $625,000. MDM was in the coin and
debit card activated photocopy business. The
consideration was paid in cash, ten percent of which
was placed in escrow for twelve months to cover any
sales tax liability that may arise. The acquisition
has been accounted for as a purchase and, accordingly,
the results of operations of MDM have been included
since the date of acquisition. Pro forma information
reflecting results of operations as though MDM had been
owned for all required periods has not been presented
because the acquisition did not meet the materiality
parameters as required in accordance with Regulation S-
B.
The purchase price was allocated as follows:
Photocopy machines and accessories $175,600
Vehicles 2,000
Inventories 49,400
Covenant not to compete 100,000
Customer lists 75,000
Trademark 10,000
Goodwill 213,000
F-9
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (Continued)
Smart Switch On April 27, 1995, DAC purchased from Faxit the Smart
Switch, a computerized switching device, which permits
the use of any "off the shelf" facsimile machine as a
public facsimile machine and facilitates billing of a
public facsimile message without the need for human
intervention or the incorporation of a high cost credit
card reading device into the facsimile machine.
Pursuant to the acquisition agreement, the Company
issued 335 shares of its Series B, Convertible
Preferred Stock to Faxit in exchange for the Smart
Switch, 15 shares of Series B, Convertible Preferred
Stock to a subsidiary of Faxit and 50 shares to an
investment banking firm as a finder's fee. Each share
of the Series B Preferred Stock is convertible into
1,000 shares of common stock, has a liquidation
preference of $2,000 per share, and may be required to
be redeemed at $2,000 per share if an increase in the
number of authorized common shares of the Company is
not approved on or prior to May 1, 1996.
On November 6, 1995, the 400 shares of Series B,
Convertible Preferred Stock issued in connection with
the acquisition of the Smart Switch were automatically
converted to 400,000 shares of common stock in
connection with the approval of an increase in the
number of authorized shares of common stock from
5,000,000 to 25,000,000.
3. Equipment and
Vehicles Equipment and vehicles consist of the following:
Photocopy machines and accessories $5,647,986
Furniture and fixtures and computer
equipment 99,738
Software 400,000
Vehicles 115,382
-------------------------------------------------------
6,263,106
Less: Accumulated depreciation 2,529,269
-------------------------------------------------------
$3,733,837
Photocopy machines and accessories include
approximately $810,000 of assets recorded under capital
leases (See Note 5).
F-10
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Loan Payable, Bank Loan payable, bank, consists of the following:
Term loan, payable in monthly
installments of $3,810 including
interest at the rate of 8.66% per
annum through August, 1999 (a) $146,238
(a) During 1994, the Company entered into various
agreements with a bank to provide credit
facilities. The agreements include a $250,000
line of credit, a $185,000 secured five year term
loan to replace then existing equipment financing,
and a $1,000,000, secured one year master lease
revolving credit facility to finance the purchase
of photocopy machines. The funds allocated from
the revolving credit line for the purchase of
photocopy machines convert to a five year lease at
the end of each calendar quarter (See Note 5).
The terms of the term loan agreement provide,
among other things, for a security interest in all
of the assets of the Company and all of its
subsidiaries, the subordination of amounts due the
stockholders and Key Consultants, Inc. in the
aggregate amount of $400,000, the personal
guarantee of the owner of the Series A preferred
stock and the corporate guarantees of IMSG and
Affiliates, as well as cross default provisions in
connection with the terms and covenants of all
obligations due the bank or any of its
subsidiaries.
The terms of the agreement also require certain
restrictive covenants with respect to the
maintenance of tangible net worth and working
capital and debt to tangible net worth ratios and
limitations on the salary of the Series A
preferred stockholder and the amount of consulting
fees payable to certain affiliates.
The Company has not been in compliance with
certain bank loan covenants. As a result of the
existence of these and other events of default, on
August 1, 1995, the bank demanded payment in full
of the indebtedness and advised the Company that
it would exercise its rights and remedies under
the guarantees included in the loan agreement and
foreclose upon any collateral for the
indebtedness.
On August 14, 1995, the Company entered into a
Forbearance Agreement with its bank, pursuant to
which the Company reduced its indebtedness to the
bank by $250,000, and the bank agreed to extend
the due date of the remaining indebtedness under
its loan agreements until December 31, 1995. The
terms of the Forbearance Agreement provide, among
other things, for an increase in the interest rate
on all outstanding indebtedness to 13% per annum
through September 30, 1995, and 15% per annum
thereafter until the entire indebtedness is repaid
in full.
F-11
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Loan Payable, Bank
(Continued) In addition, the Company's chief executive officer and
holder of the convertible preferred stock, Series A,
who is a personal guarantor of the bank loans, agreed
to grant the bank a second mortgage on his residence,
pledged as collateral his interest in a real estate
partnership, and agreed to a limitation of his salary.
On December 19, 1995, the Company paid the bank in full
with the proceeds from the exercise of its common stock
warrants (See Note 8).
5. Capital Lease
Obligations Minimum future lease payments under capital leases as
of November 30, 1995 aggregate $970,537, of which
$159,657 represents interest. Year by year maturities
have not been disclosed since the entire amount of the
Company's capital lease obligations have all been
reflected as current liabilities as a result of the
Company's violation of its bank loan covenants as
described in Note 4.
On December 19, 1995, the Company paid off all its
capital lease obligations with the proceeds from the
exercise of its common stock warrants.
6. Loans Payable,
Stockholder Loans payable, stockholder, represent non-interest
bearing working capital advances of $147,228, the
repayment of which is subordinated to the bank debt.
The stockholder has agreed not to require payment until
after December 1, 1996, and the Company does not
anticipate repaying the loan until such time as cash
flow permits.
The loan payable, stockholder, was $71,749 at November
30, 1994, and the average loan balance during the year
ended November 30, 1995 was approximately $196,000
computed on a quarterly basis.
7. Due To Affiliates Due to affiliates consist of the following:
Due to former director $ 62,556(a)
Due to Diversified Investors ("DIC") 39,316(a)
Due to Diversified Distributing and
Marketing ("DD&M") 126,798(a)
Due to Key Consultants, Inc. ("Key") 130,800(b)
------------------------------------------------------
359,470
Less: Current portion 228,670
------------------------------------------------------
$130,800
F-12
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Due To Affiliates
(Continued) (a) Due to affiliates include a non-interest bearing
loan from a former director of the Company and
officer of DIC (the former parent of the Company)
in the amount of $62,556, a non-interest bearing
loan from DIC of $39,316, and non-interest bearing
working capital advances from DD&M in the amount
of $126,798 at November 30, 1995. DD&M obtained
the funds which it lent to the Company through
loans from its officers and directors, who were
former directors of the Company. The Company and
its affiliates had agreed to defer payment of all
principal and interest on the amounts due the
former director, DIC and DD&M for a period of two
years after the closing of DiversiFax, Inc.'s
public offering (November 25, 1992), after which
two year period, payment of the principal and
interest will only be made if immediately
following repayment, the Company continues to meet
all financial requirements for continued listing
on NASDAQ.
The amounts due the former director, DIC and DD&M
did not change during the years ended November 30,
1995 and 1994.
Pursuant to a termination agreement (the
"Termination Agreement") entered into in October,
1994, between the Company, the former director,
DIC, DD&M and others, the former director, DIC and
DD&M agreed to accept in full satisfaction of the
respective amounts due them such number of shares
of the common stock of the Company calculated by
dividing the respective amounts due by the closing
bid price of the common stock on October 14, 1995.
There is presently an action pending by DIC
against the Company and a former director. The
claim by DIC is for monies due them pursuant to
the Termination Agreement. The Company
acknowledges that it is indebted to DIC, DD&M and
a former director for $228,500 worth of its common
stock and has requested the parties to specify who
the stock certificates should be made out to.
There is a dispute between the parties over how
the stock is to be split. DIC is seeking a cash
payment in lieu of stock. Management believes
that the outcome of this action will not have a
material adverse effect on the Company's financial
condition.
(b) Key is an entity whose sole stockholder, was the
stockholder of IMSG and Affiliates. Prior to the
acquisition, Key provided management services to
IMSG and Affiliates. This amount represents the
amount due in connection with the management
services provided. $150,000 of the amount due Key
is subordinated to the bank debt. Key has agreed
not to require payment of the $130,800 until after
December 1, 1996.
F-13
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Due To Affiliates
(Continued) (b) The amount due to Key was $354,800 at
November 30, 1994, and the average balance
due during the year ended November 30, 1995
was approximately $179,000 computed on a
quarterly basis.
8. Stockholders' Equity In November 1992, the Company completed its
initial public offering (1,000,000 units) which
included 1,000,000 shares of common stock and
1,000,000 warrants to purchase an additional
500,000 shares of common stock. The warrants were
exercisable until November, 1995 (subsequently
extended through December, 1995), at an exercise
price of $7.50 per share. The Company has the
right to redeem the warrants at any time during
the exercise period at a price of $.05 per
warrant. Net proceeds from the offering were
$4,127,848 after deducting underwriting
commissions of $500,000, the underwriter's non-
accountable expense allowance of $150,000 and
direct offering costs of $222,152.
In addition, the Company has agreed to sell to the
underwriter or its designees, for $100, four year
unit purchase warrants to purchase from the
Company an aggregate of 100,000 units at an
exercise price of $6 per unit.
By their original terms, two warrants were
exercisable to purchase one share of common stock
for $7.50. As a result of the acquisition, the
dilutive effect of the conversion of all 662,000
shares of preferred stock into 6,620,000 shares of
common stock, and the issuance of other shares by
the Company, the exercise price has been adjusted
to $2.25 per share (or $4.545 per 2.02 shares) and
the number of shares purchasable upon the exercise
of two warrants has been increased to 2.02 shares.
The warrants may be subject to further adjustments
pursuant to their anti-dilution provisions.
On January 26, 1995, the Company borrowed
approximately $229,500 from a company. An
officer/shareholder of the company is a former
director and officer and current shareholder of
the Company. The loan was interest-free through
February 26, 1995 at which time it became due and
payable. Thereafter, the loan bears interest at
the rate of 2% per month on the unpaid principal
balance. In connection with the loan agreement,
the company received a warrant to purchase 100,000
shares of the Company's common stock at an
exercise price of $1.50 per share. The Company
used the proceeds of the loan to purchase 153,000
shares of its common stock at $1.50 per share.
In July 1995, effective May 31, 1995, the Company
agreed to issue 350 shares of its Series C
Convertible Voting Preferred Stock to the
officer/shareholder of the company in full
satisfaction of the $229,500. Each share of the
Series C Preferred Stock is convertible into 1000
shares of common stock. The Series C Preferred
Stock has a liquidation preference of $1,000 per
share and is redeemable at the demand of the
holder at a price of $1,000 per share if not
converted into common stock of the Company within
one year from the date of the agreement.
F-14
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stockholders' Equity
(Continued) In March, 1995, the Company issued to an individual and
a company, 80,000 and 100,000 shares of common stock,
respectively, for consulting services to be rendered.
The individual is a current shareholder of the Company
and the officer/shareholder of the company that
provided the loan to the Company to purchase the
treasury shares.
In July, 1995, the Company issued 75 shares of its
convertible preferred stock, Series C, to a company for
services to be rendered.
In July, 1995, the Company successfully completed a
private placement of 1,070 shares of its convertible
preferred stock, Series B, and two year warrants to
purchase 535,000 shares of common stock at $2.00 per
share, for aggregate gross proceeds of $535,080.
In another private placement of its convertible
preferred stock, Series B, in July, 1995, the Company
sold 140 shares for aggregate gross proceeds of
$352,500.
In August, 1995, the Company sold 125 shares of its
convertible preferred stock, Series C, and two year
warrants to purchase 375,000 shares of common stock at
$2.00 per share and warrants to purchase 125,000 shares
of common stock at $2.50 per share for $2,500 in cash
and six month promissory notes in the aggregate amount
of $247,500.
On November 6, 1995, the stockholders voted passing an
amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common
stock from 5,000,000 to 25,000,000 shares. In
connection therewith the Series A, B and C convertible
preferred stock automatically converted into an
aggregate of 8,780,000 shares of common stock.
In November, 1995, the Company received approximately
$827,000 in connection with the exercise of the
underwriter's warrants resulting in the issuance of
200,998 shares of common stock.
Also, in November, 1995, the Company received
approximately $720,000 in connection with the exercise
of the warrants issued in the initial public offering,
resulting in the issuance of 320,119 shares of common
stock.
In December, 1995, an additional $1,548,000 was
received by the Company in connection with the exercise
of the remaining outstanding warrants, resulting in the
issuance of 688,130 shares of common stock.
F-15
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stockholders' Equity
(Continued) In September, 1995, the Board of Directors of the
Company approved a stock option plan ("the 1995
Plan") subject to stockholder approval to grant
500,000 shares of the Company's common stock to
key employees upon exercise of options designated
as "incentive stock options" under Section 422 of
the Internal Revenue Code. The 1995 Plan is
administered by the Board of Directors. Options
granted pursuant to the 1995 Plan are non-
transferable by the optionees during their
lifetime, expire if not exercised within five
years from the date of the grant and, under
certain circumstances set forth in the 1995 Plan,
may be exercised within three months following
termination of employment, or up to one year after
death or total disability. Incentive stock
options are granted to key employees as determined
by the Board of Directors at not less than the
fair market value of the shares underlying the
option on the date the option is granted. The
amount of aggregate fair market value of common
stock (determined at the time of the grant of the
option) for which an employee may be granted
incentive stock options under the 1995 Plan in any
calendar year shall not exceed $100,000, plus
certain unused carryovers from previous years.
The 1995 Plan contains anti-dilution provisions
authorizing appropriate adjustment under certain
circumstances. Options to purchase an aggregate
of 125,000 shares of the Company's common stock
exercisable at $4.125 - $8.063 per share have been
granted.
In September, 1995, the Company adopted a
Director's option plan pursuant to which all
current non-employee Directors and non-employees
who thereafter become Directors of the Company
will receive an option to purchase 100,000 shares
of the Company's common stock at the market value
thereof at the time of grant. Said options become
vested at the rate of 20,000 per year and
terminate 90 days after the Director ceases to
serve as a Director. Options to purchase 100,000
shares at an exercise price of $4.125 per share
were granted to two directors.
9. Consulting
Agreement In November 1994, the Board of Directors adopted a
plan (the "Plan") for the issuance of common stock
for consulting services to be rendered by an
individual (the "Individual") for a period of one
year. Pursuant to the Plan the Individual would
provide the Company with financial sponsorship,
marketing support (including the drafting and
dissemination of research reports, press releases
and news reports), and investment banking
services.
F-16
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Consulting Agreement
(Continued) The Plan called for the issuance to the
Individual, at the Board's sole discretion of up
to 275,000 shares of the Company's common stock.
In December 1994, the Board approved an amendment
to the plan which increased the number of shares
issuable to the Individual under the Plan from
275,000 shares to 525,000 shares. The term of the
Individual's consulting agreement was increased to
seven years. Through December 1994, 450,000
shares were issued to the Individual pursuant to
the Plan, 125,000 shares of which were issued as
of November 30, 1994. The 450,000 shares issued
had an aggregate fair market value of
approximately $1,630,000 upon issuance, which
amount was to have been amortized over the seven
year period of the agreement. Amortization
through November 30, 1994 amounted to $19,401.
In March 1995, the Individual ceased performing
his obligations under the agreement and the
Company determined that the Individual was in
breach thereof. Accordingly, the remaining
unamortized balance of the fair market value of
the common stock issued in the amount of
approximately $1,600,000 was written off in 1995.
10. Income Taxes In connection with the acquisition, IMSG and
Affiliates (formerly S corporations) became
subject to income taxes which are being accounted
for under the provisions of SFAS No. 109.
Accordingly, deferred income taxes in the amount
of $300,000 were provided as of November 1, 1993.
The deferred taxes arose as a result of the
difference between the carrying value of IMSG and
Affiliates' assets and their tax bases. In
addition, in connection with the acquisition the
Company recognized a deferred tax benefit in the
amount of $480,000 as a result of the anticipated
utilization of its net operating loss
carryforwards. No valuation allowance was
established at November 30, 1993. During 1994,
the Company reevaluated the realizability of the
deferred tax asset and determined a valuation
allowance of $360,000 was required and,
accordingly, a reserve in that amount was
established. During 1995, with the increase in
the net operating loss, the Company further
evaluated the realizability of the deferred tax
asset and determined an increase in the valuation
allowance in the amount of $340,000 was required.
Management believes that future taxable income and
the reversal of the existing deferred tax
liabilities will be sufficient to utilize the net
deferred tax asset at November 30, 1995.
F-17
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
(Continued) The Company's total deferred tax liabilities and
deferred tax assets at November 30, 1995 are as
follows:
Total deferred tax assets $1,280,000
Total deferred tax liabilities ( 240,000)
Valuation allowance ( 700,000)
-----------------------------------------------
Net Deferred Tax Asset $ 340,000
A reconciliation of income tax (benefit) at the
statutory rate to the Company's effective rate is
as follows:
1995 1994
Computed "expected" tax
expense (benefit) ($1,160,000) ($400,000)
Losses for which no benefit
was provided 660,000 100,000
Reversal of previously
established deferred tax
liability ( 30,000) ( 30,000)
Change in valuation
allowance 340,000 360,000
-------------------------------------------------
($ 190,000) $ 30,000
The Company has a net operating loss carryforward
of approximately $4,200,000 at November 30, 1995
which may be used to reduce taxable income in
future years. The carryforward will expire
through the fiscal year 2010. The annual
utilization of the available net operating loss
carryforward may be limited by the provisions of
section 382 of the Internal Revenue Code, as
amended.
11. Supplemental Disclosure
of Cash Flow
Information During the year ended November 30, 1995, the
Company incurred capital lease obligations of
approximately $500,000 in connection with lease
agreements to acquire equipment.
During the year ended November 30, 1995, the
Company issued 400 shares of its Series B
Convertible Preferred Stock for the acquisition of
the Smart Switch from Faxit Corporation (See Note
2).
During the year ended November 30, 1995, the
Company issued 350 shares of its Series C
Convertible Voting Preferred Stock in satisfaction
of $229,500 of related party indebtedness (See
Note 8).
F-18
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Supplemental Disclosure
of Cash Flow
Information (Continued) During the year ended November 30, 1994, the
Company incurred capital lease obligations of
approximately $460,000 in connection with lease
agreements to acquire equipment.
12. Related Party
Transactions The Company's general counsel is a director of the
Company. Fees incurred to the general counsel
amounted to approximately $69,000 and $46,000 for
the years ended November 30, 1995 and 1994,
respectively.
During the fourth quarter of 1994, the Company
wrote-off non-interest bearing advances made prior
to the acquisition by the Company to one of its
directors and officers in the amount of $35,000,
and to a principal stockholder and Chairman of the
Board of Directors of DIC in the amount of
$13,000, as the amounts were determined to be
uncollectible.
13. Commitments and Contingencies
Lease Commitments IMSG and Affiliates lease office and warehouse
space at certain locations under operating leases.
Minimum annual lease payments are as follows:
1996 $38,000
1997 17,000
1998 18,000
1999 19,000
2000 19,000
Other locations are rented on a month-to-month
basis. Rent expense totalled approximately
$123,000 and $119,000 for the years ended November
30, 1995 and 1994, respectively.
Employees Savings
Plan IMSG and Affiliates on behalf of their employees
participate in a deferred savings and profit
sharing plan (the "Plan"), whereby eligible
employees may voluntarily contribute a percentage
of compensation. In addition, the Plan provides
for a discretionary contribution by IMSG and
Affiliates at the end of each plan year as
determined by IMSG and Affiliates. No
discretionary contributions were made for the
years ended November 30, 1995 and 1994.
F-19
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies (Continued)
State of Connecticut
Sales Tax Assessment The State of Connecticut assessed Advanced for
sales tax plus interest and penalty. The
assessment was made based upon the Commissioner of
Revenue Services finding that sales by Advanced of
photocopies by machines placed in public and other
libraries are subject to the State of Connecticut
sales tax. Advanced was not successful before the
State Tax Commission nor through the appeals
process, resulting in a final assessment of
approximately $157,000 inclusive of interest and
penalty, all of which had been accrued through
November 30, 1993.
As a result of the unfavorable determination with
the State of Connecticut, the Company has accrued
$200,000 in each of the fourth quarters of 1995
and 1994 to provide for by any other assessments
by any other states that may arise.
Employment
Agreement Effective November 1, 1993, the Company and
Capital entered into an employment agreement with
the former sole shareholder of IMSG and
Affiliates, now the Chief Executive Officer,
Chairman of the Board and principal stockholder of
the Company. The employment contract provides for
a base compensation of $250,000 a year plus
various other benefits. It has an initial term of
two years and is renewable for successive two year
terms in the same annual amount. At the present
time, a new employment agreement is under
consideration.
Consulting
Agreements Effective October 13, 1993, the Company entered
into consulting agreements with two individuals
who were directors of the Company through October,
1994, and the Chairman of the Board of Directors
of DIC for terms of four years at an aggregate
compensation of $100,000 per year. In connection
with the Termination Agreement, the consulting
agreements were terminated effective October,
1994. Consulting fees for the year ended November
30, 1994 amounted to approximately $92,000.
Cash Due to the nature of its business and the volume
of sales activity, the Companies accumulate, from
time to time, bank balances in excess of the
insurance provided by Federal and/or other
insurance sources.
Litigation In October, 1995, the Company instituted an action
against a former employee and a company to enforce
a restrictive covenant. The company
counterclaimed for $1,750,000 based upon an
alleged unfair or trade practice in seeking to
prevent the company from hiring the former
employee. The Company's motion for a preliminary
injunction has been denied by the court.
F-20
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.Commitments and Contingencies (Continued)
Litigation (Continued) Although the ultimate liability, if any, that
might result from the final resolution of this
matter is not presently determinable, management
and the Company's counsel in this matter are of
the opinion that the final outcome of the
litigation will not have a materially adverse
effect on the Company's consolidated financial
position.
14. Major Customers During the year ended November 30, 1995, two
customers accounted for 24.7% of total sales.
During the year ended November 30, 1994, two
customers accounted for 21.2% of total sales.
The Company is currently bidding, along with other
parties, for the renewal of an agreement with one
of its major customers. The custommer accounted
for approximately 12.3% and 11.1% of the total
sales for the years ended November 30, 1995 and
1994, respectively.
15. Fair Value of Financial
Instruments The carrying amount approximates fair value of
cash and short-term instruments.
F-21
