As filed with the Securities and Exchange Commission on June 25, 1997
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DIVERSIFAX, INC.
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(Name of small business issuer in its charter)
DELAWARE 7389 13-3637458
- ------------------------------- ----------------- ----------------
(State or other jurisdiction of (Primary standard (I.R.S. employer
incorporation or organization) industrial classification identification no.)
code number)
39 Stringham Avenue
Valley Stream, New York 11580
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(Address and telephone number of principal executive offices)
IRWIN A. HOROWITZ
DiversiFax, Inc.
39 Stringham Avenue
Valley Stream, New York 11580
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(Names, address and telephone number of agent for service)
-----------------------------
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
GARY T. MOOMJIAN, ESQ.
Breslow & Walker, LLP
767 Third Avenue
New York, New York 10017
(212) 832-1930
-----------------------------
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|___________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
-----------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
Proposed
Maximum Proposed
Amount Offering Maximum Amount of
Title of Each Class of Securities to be Price Per Aggregate Registration
to be Registered Registered Share(1) Offering Price Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share(2) 5,000,000 $2.00 $10,000,000 $ 3,030.30
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share(3) 40,000 $2.00 $ 80,000 $ 24.24
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share(3)(4) 2,500,000 $2.00 $ 5,000,000 $ 1,515.15
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share(5) 100,000 $2.00 $ 200,000 $ 60.61
- --------------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 4,630.30
================================================================================================================================
</TABLE>
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(1) Represents the average of the bid and asked prices as quoted by NASDAQ on
June 23, 1997. Estimated solely for purposes of calculating the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended.
(2) Represents shares which may be issued in future acquisition transactions.
(3) Represents shares of Common Stock which may be sold by a Selling
Stockholder.
(4) Represents the maximum number of shares of Common Stock issuable upon
conversion of the Series D Convertible Preferred Stock of the Company. This
registration statement also relates to the resale of such shares of Common
Stock.
(5) Represents shares of Common Stock underlying three-year warrants to
purchase shares of Common Stock at $2.50 per share currently held by John
Clark and David Cowherd.
Pursuant to Rule 416 of the Securities Act of 1933, this Registration
Statement also relates to such additional indeterminate number of shares of
Common Stock as may become issuable by reason of stock splits, dividends and
similar adjustments.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
<PAGE>
Subject to Completion, Dated June 24, 1997
DIVERSIFAX, INC.
7,640,000 Shares of Common Stock
This Prospectus covers 5,000,000 shares of common stock, par value $.001
per share (the "Common Stock"), of Diversifax, Inc. (the "Company"), which the
Company, from time to time, may issue in connection with the acquisition of
companies involved in the copier business, fax business or any other business
which the Company may wish to acquire. The number of shares to be issued in
connection with any such acquisition shall be determined at the time of such
acquisition.
A prospectus supplement accompanying this Prospectus, to the extent
applicable, sets forth the acquisition terms and other specific terms related to
the offering of the Common Stock. The Company may only sell the Common Stock
pursuant to this Prospectus directly to the stockholders or assetholders of the
companies to be acquired by the Company. See "Plan of Distribution."
This Prospectus also covers the resale of (i) up to 2,500,000 shares of
Common Stock issuable upon conversion of the Series D Convertible Preferred
Stock of the Company ("Series D Preferred Stock"), (ii) 100,000 shares of Common
Stock underlying three year warrants to purchase Common Stock at $2.50 per
share, and (iii) 40,000 shares of Common Stock currently owned by a Selling
Stockholder, all of which shares, from time to time, may be sold by the Selling
Stockholders named herein. See "Selling Stockholders."
The Common Stock is traded on the NASDAQ Small Cap Market ("NASDAQ") under
the symbol "DFAX." On June 23, 1997, the last reported sale price of the Common
Stock was $1.96875 per share.
------------------------
THESE ARE SPECULATIVE SECURITIES. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following Regional Offices of the
Commission: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and New York Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or from the
Commission's Website at http://www.sec.gov.
2
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety.
The Company
Since November 1, 1993, the Company, through its wholly-owned subsidiary
IMSG Systems, Inc. ("IMSG") and IMSG's affiliated companies, National Copy
Corp., Capital Copy Corp. and Advanced Business Systems, Inc., has been engaged
in the business of owning, leasing, operating and servicing coin and debit card
pay-per-copy photocopiers and microfilm reader-printers and accessory equipment.
The Company operates its copiers in various states throughout the Eastern United
States, as well as Wisconsin and Illinois, in differing sites including
libraries, courthouses, colleges, drug stores, office supply stores and similar
high traffic outlets. The Company has over 2,500 copiers and accessories at
various locations. Generally, the Company is responsible for the collection of
payments from each site and, at most locations, the 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 of the copier.
The Company commenced its Smart Switch(TM) operations in April 1995 upon
the acquisition of the Smart Switch from Faxit Corporation. The Smart Switch is
a computerized switching device which has an automated switching system to
permit the use of any "off the shelf" fax machine as a public fax machine.
Billing of a public fax message is effected without the need for human
intervention or the incorporation of a high cost credit card reading device into
the fax machine. The Smart Switch gives the Company the capacity to offer a
variety of fax and voice services for hotels, libraries and airline lounges, and
domestic and international fax transmission services. 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 has been upgraded by
the Company 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 an electronic scanning of
calls to listen for a fax tone.
In November 1995, the Company entered into an agreement with AT&T Corp.
("AT&T") to jointly market the Company's in-room fax services on an exclusive
basis to AT&T hotel accounts. In November 1996, the Company entered into a
co-marketing agreement with Danka Business Systems plc ("Danka"), a leading
independent supplier of office imaging equipment and related services, to
jointly market the Company's Smart Switch fax services as part of Danka's
preferred vendor status offered to Hotel Franchise System, a hotel chain
association. To date, the Company has not generated significant revenues from
its Smart Switch operations.
Since October 1996, the Company, through an exclusive supply and
distribution agreement, has been engaged in the marketing and sale of scanner
units capable of screening microfilm, microfiche and microcard images and (1)
printing the scanned images onto a printer without the aid of a computer and/or
(2) transferring the images to CD Rom and maintaining the information on the
users' computers.
The Company currently intends to pursue a strategy of growth by acquisition
of companies involved in the copier business, fax business or other businesses
which the Company may determine to pursue. There can be no assurance, however,
that any acquisitions shall be consummated.
The executive offices of the Company are located at 39 Stringham Avenue,
Valley Stream, New York 11580. The telephone number is (516) 872-0650.
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3
<PAGE>
- --------------------------------------------------------------------------------
THE OFFERING
Securities Offered:............ 5,000,000 shares of Common Stock which may
be issued in connection with acquisition
transactions and the resale of (i) up to
2,500,000 shares of Common Stock issuable
upon conversion of the Series D Convertible
Preferred Stock of the Company(1), (ii)
100,000 shares of Common Stock underlying
three year warrants to purchase Common Stock
at $2.50 per share (the "Private Warrants"),
and (iii) 40,000 shares of Common Stock
which may be sold by a Selling Stockholder.
See "Selling Stockholders;" "Description of
Securities" and "Plan of Distribution."
Shares of Common Stock Outstanding
Before Offering.............. 14,145,215(2)
After Offering............... 21,745,215(3)
Use of Proceeds................ The Company will receive no proceeds in
connection with an offering hereunder, as
shares of Common Stock shall be issued to
sellers as part or all of the purchase
prices to be paid in connection with
potential future business acquisitions or
will be sold by the Selling Stockholders.
Proceeds from the potential exercise of the
Private Warrants ($250,000) are expected to
be utilized for working capital purposes.
Risk Factors................... Investment in the securities offered hereby
involves a high degree of risk and immediate
substantial dilution and should not be
purchased by investors who cannot afford the
loss of their entire investment. Such risk
factors include, without limitation, the
Company's history of losses and accumulated
deficit, working capital deficit and need
for additional financing. See "Risk
Factors."
NASDAQ Symbol of
Common Stock.................. DFAX
- -----------------
(1) For a description of the Series D Preferred Stock, see "Description of
Securities."
(2) Does not include (i) an aggregate of 2,404,000 shares of Common Stock
issuable upon the exercise of outstanding stock options, (ii) 2,259,950
shares of Common Stock issuable upon the exercise of outstanding warrants
and (iii) a maximum of 2,500,000 shares issuable upon conversion of the
shares of Series D Preferred Stock.
(3) Does not include (i) an aggregate of 2,404,000 shares of Common Stock
issuable upon exercise of outstanding stock options and (ii) 2,159,950
shares of Common Stock issuable upon exercise of outstanding warrants.
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4
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial data set forth below is derived from and
should be read in conjunction with the consolidated financial statements,
including the notes thereto, appearing elsewhere in this prospectus.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended Year Ended November 31,
----------------------------- ---------------------------------------------------
February February
28, 1997 29, 1996 1996 1995 1994
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales........................... $1,553,626 $1,339,620 $ 5,091,917 $ 5,690,982 $ 6,027,096
Net Income (loss)............... $ 70,674 $ (365,499) $(2,170,867) $(3,218,962) $(1,165,627)
Net Income (loss) per share..... $ .01 $ (.03) $ (.15) $ (.30) $ (.12)
Weighted average number
of shares outstanding........... 14,073,353 13,810,301 14,011,980 10,752,349 10,050,821
Consolidated Balance Sheets Data:
<CAPTION>
February 28, 1997(1) November 30, 1996
-------------------- -----------------
<S> <C> <C>
Working capital (deficit).......... $ (181,808) $ (614,728)
Total assets....................... 5,328,281 4,916,047
Long-term debt..................... 1,368,736 1,164,813
Stockholders' equity............... 2,447,557 2,282,883
</TABLE>
- ----------
(1) Does not reflect the net proceeds of $1,329,500 from the sale of the Series
D Preferred Stock in June 1997.
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5
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Only those persons economically able to lose their entire investment
should purchase these securities. Prospective investors, prior to making an
investment decision, should carefully consider, along with other matters
referred to herein, the following risk factors.
1. History of Losses and Accumulated Deficit. The Company incurred net
losses for the fiscal years ended November 30, 1996, 1995 and 1994 of
$2,170,867, $3,218,962 and $1,165,627, respectively. At February 28, 1997, the
Company had an accumulated (deficit) of $(6,901,107). No assurance can be given
that the Company will not continue to report losses on an annual basis or that
the Company's business operations will ultimately prove to be profitable. In the
event such losses continue, the Company may be required to seek to raise
additional financing. If additional funds are not available, the Company may be
required to curtail or discontinue some of its operations.
2. Working Capital Deficit; Need for Additional Funds. At February 28,
1997, the Company had a working capital (deficit) of $(181,808). In view of the
Company's operating losses and need for capital to finance the purchase of
capital equipment and to market the Smart Switch and microfiche scanner units,
such working capital deficiency may increase. Also, the cash requirements needed
to pursue opportunities or to address problems not now anticipated may put a
strain on the Company's available cash resources. Through May 31, 1997, Dr.
Irwin A. Horowitz, Chairman of the Board, Chief Executive Officer and President
of the Company, has loaned a net aggregate amount of approximately $1,352,888 to
the Company (including reduced salary payments). There is no assurance that
additional capital will be available to the Company if required or that capital,
if any, will be available on terms acceptable to the Company.
3. Dependence on Key Personnel. The Company is dependent upon the services
of its Chairman, Chief Executive Officer and President, Dr. Irwin A. Horowitz,
for the successful operation and development of its business. Dr. Horowitz has
an employment contract with the Company through October 1997. The loss of
services of Dr. Horowitz could materially and adversely affect its operations.
In addition, in order to market, produce and upgrade its products, the Company
will have to attract and retain additional technically qualified personnel with
backgrounds in engineering, production and marketing. The Company currently does
not maintain key man life insurance on the life of Dr. Horowitz.
4. Uncertainty of Market Acceptance of Smart Switch. In connection with its
Smart Switch, the Company faces the types of problems, delays, expenses and
difficulties which are frequently encountered by a company trying to introduce a
new line of products to the market. The Company has only limited operating
experience with the Smart Switch and, to date, revenues derived from the Smart
Switch have been minimal. The initial results from the Company's Smart Switch
operations have varied. A number of hotels, airport lounges, libraries and
colleges have installed and are currently utilizing the Smart Switch. Several
other hotels, which primarily installed the Smart Switch on a trial basis, have
canceled or determined not to permanently install such machines, apparently
primarily due to a competitor who was providing in-room fax machines to hotels
free of charge. There can be no assurance that there will not be a material
amount of additional cancellations, or that significant new orders will develop
so as to make the Smart Switch operations of the Company profitable. There can
be no assurance that the Smart Switch services will gain broad market
acceptance. The Company entered into agreements with each of AT&T and Danka with
respect to the joint marketing of the Company's in-room fax services. There can
6
<PAGE>
be no assurance that any material sales or leases will result from these
agreements or that AT&T and/or Danka will not terminate the agreement.
5. Limited Market Research of Potential Demand for Smart Switch. Although
there are results of several market research studies and surveys available which
indicate that over 50% of all business travelers expect hotels to offer fax and
copier services, there has been no research completed in connection with in-room
fax services that gives management sufficient information to estimate potential
demand for its Smart Switch with certainty. There can be no assurance that
sufficient market penetration can be achieved or the planned placement of the
Company's equipment will be absorbed by the market in the event such demand can
be identified.
6. Uncertainty of Market Acceptance of Microfiche Scanner Units. In
connection with its microfiche scanner unit operations, the Company also faces
the types of problems, delays, expenses and difficulties which are encountered
by a company trying to introduce a new line of products to the market. There can
be no assurance that the microfiche scanner units will gain broad market
acceptance.
7. Competition.
Copiers. The Company markets its coin-operated copier services to
those users who need to copy documents, books, and other materials that are
located at the sites where the Company's copiers have been placed. Other
companies that offer similar coin-operated copier services include Continental
Copy Products Limited, Dual Office Supplies, Inc., Boston Copico and Compucopy.
Each of these competitors competes with the Company in a different limited
geographic region. Continental Copy Products Limited principally conducts
operations in Connecticut and downstate New York; Dual Office Supplies
principally conducts operations in Illinois; Boston Copico principally conducts
operations in Massachusetts, Connecticut and downstate New York; and Compucopy
principally conducts operations in southern Florida. Competition between
companies is generally based on price and quality of service offered.
Fax Machines. The public fax business is in an early stage of
development. The Company does not know of any other company that 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, is able to reconfigure a particular model fax machine and
has placed these reconfigured machines at 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 only limited competition and are located 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 from two general areas: (i) other companies
organized to provide public facsimile transmission services and/or equipment;
and (ii) 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
7
<PAGE>
competitors can be expected to be considerably better established and larger
than the Company in total assets and resources.
Microfiche Scanner Units. The Company has recently commenced the marketing
and sale of microfiche scanner units. Competition with respect to the scanning
unit includes a laser scanning machine produced by Canon Corporation, which the
Company believes is of lesser quality and more expensive. There can be no
assurance that additional competition, including from companies with greater
resources than that of the Company, will not occur in the future.
8. Credit Card Regulations. The Company's Fax business is dependent on its
securing processing for its credit card transactions. Credit card companies
establish the rules and regulations for processing eligibility and determine
which businesses may accept their cards, and on what terms. While the Company's
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 on or circumstances under which their credit
cards will be accepted so as to adversely effect the business of the Company.
9. Government Regulation. 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 or that such regulations will not have an adverse effect upon the
Company's profitability.
10. Lack of Patent Protection; Technological Changes; Risk of Product
Obsolescence.
Copiers. The Company does not, in general, rely on patented
technology with respect to its copier operations, although the Company does
purchase and operate 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 currently being used by the Company or that will be
acquired by the Company in the future.
Fax Machines. The Company does not believe that the technology upon
which the Smart Switch systems are based is patentable. Other companies may have
been or may be involved in research and development which may lead to patents
relating to specific aspects of the Company's products and technologies, and the
Company has not engaged counsel to determine whether its products in general are
free from patent infringement. Unless protected by patents or 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
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 itself
against patent claims 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
8
<PAGE>
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.
11. Dependence on Suppliers.
Copiers. The Company currently purchases both new and used copiers
from a variety of sources. The Company has not experienced 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.
Fax Machines. The Company assembles the Smart Switch by programming
the Company's proprietary software into off-the-shelf computers and then leases
the programmed computer together with off-the-shelf fax machines, telephones,
dialers and components all of which are 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 components
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 has not experienced any difficulties in obtaining equipment or
parts and supplies and, although there can be no assurance thereof, does not
anticipate that there will be any problems obtaining any equipment, parts or
supplies in the future.
Microfiche Scanner Units. The Company purchases microfiche scanner
units from a single source, ScreenScan Systems, Inc. ("ScreenScan"), pursuant to
a distribution agreement between the parties. The Company is therefore wholly
dependent upon ScreenScan in connection with this product, and delays or
problems in connection with the supply relationship could adversely affect the
Company.
12. Dependence on Certain Customers; Loss of Large Customer. During the
fiscal year ended November 30, 1996, revenue derived from one of the Company's
copier customers, a large university located in the southeastern United States,
amounted to approximately 11.6% of the Company's revenues. The Company's
contract with this university, which is not terminable at will, was for a term
of one year and is renewable at the parties' option for four additional one year
terms. Another customer, a major library system in the City of New York,
accounted for approximately 4% and 12.3% of the Company's revenues for the
fiscal years ended November 30, 1996 and 1995, respectively. In March 1996, the
Company was not successful in its bid for the renewal of its contract with this
library system. 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.
13. Growth Strategy. The Company currently intends to pursue a strategy of
growth by acquisition of companies involved in the Copier business, fax business
or other businesses which the Company may determine to pursue. Although the
Company may utilize Common Stock covered by this Prospectus to pay all or a
portion of such acquisition costs, there can be no assurance that the Company
will find appropriate candidates for acquisition or that, if found, the Company
shall have sufficient cash available to pay any cash portion for such
acquisitions. In addition, in the event that acquisitions are consummated, there
can be no assurance that the operations acquired will operate profitably or will
not require significant additional operating capital.
9
<PAGE>
14. Minimum Microfiche Scanner Units Purchaser. Pursuant to a Supply and
Distribution Agreement with ScreenScan, the Company has agreed to purchase a
minimum of $2,500,000 of scanner units during the one-year period ended
September 30, 1997. There can be no assurance that the Company will be able to
distribute the full $2,500,000 of scanner units.
15. Seasonality. 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 week 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, due to
the reasons discussed in this paragraph. 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.
16. Potential Depressive Effect on Market Price Due to Future Sales of
Common Stock; Dilution. 8,251,761 shares of the Company's outstanding Common
Stock are "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act")
(excluding, for this purpose, the shares registered hereby). Ordinarily, under
Rule 144, a person holding restricted securities for a period of one year may,
every three months, sell in ordinary brokerage transactions or in transactions
directly with a market maker an amount equal to the greater of one percent of
the Company's then outstanding Common Stock or the average weekly trading volume
during the four calendar weeks prior to such sale. Rule 144 also permits the
sale of shares without any quantity limitation by a person who is not an
affiliate of the Company and who has satisfied a two year holding period.
Substantially all of such shares are currently eligible for sale under Rule 144.
Furthermore, there is an aggregate of 4,663,950 shares of Common Stock
underlying warrants and stock options issued by the Company, which shares may
ultimately be sold into the open market. The sale of a large number of shares in
the open market is likely to have a depressive effect on the market price of the
Common Stock.
17. Possibility of Delisting from NASDAQ. The Company's Common Stock is
listed on the NASDAQ System. To remain listed with NASDAQ, companies are
required to have not less than $2,000,000 in total assets and $1,000,000 in
capital and surplus. As of February 28, 1997, the Company had total assets of
$5,328,281 and $2,447,557 in stockholders' equity. In the event the Company is
unable to continue to meet the NASDAQ requirements for continued listing,
trading, if any, in the Common Stock would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD's "Electronic
Bulletin Board," and it would be more difficult to dispose of the Common Stock
or to obtain as favorable a price for the Common Stock. Thus, the liquidity of
the Common Stock could be impaired, not only in the number of shares of Common
Stock that could be bought and sold at a given price, but also through delays in
the timing of transactions.
18. Penny Stock Regulation. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Commission. Penny stocks generally are equity securities with a
price of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or system). The
10
<PAGE>
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If the Common Stock becomes subject to the penny stock rules,
investors may find it more difficult to sell the Common Stock.
19. Control of the Company. Dr. Irwin Horowitz, President of the Company,
presently owns 6,310,000 shares of Common Stock, representing 44.6% of the
outstanding Common Stock of the Company, holds options to purchase up to an
additional 1,600,000 shares and warrants to purchase up to an additional 877,520
shares, and thus effectively controls the Company. Due to this control, Dr.
Horowitz will be able to control or influence such actions as election of
directors and the authorization of certain transactions that require shareholder
approval and be able to otherwise control the Company's policies without
concurrence of the Company's other shareholders.
20. Company Party to Lawsuits. The Company is involved in the following
legal proceedings: (1) the Company has instituted an action to enforce a
restrictive covenant against a former employee. The employee's current employer
has counterclaimed for $1,750,000 based upon an alleged unfair or trade practice
in seeking to prevent it from employing the employee; (2) the Company is a party
to a suit for $228,670, brought by former creditors to the Company, which amount
the Company believes is payable in Common Stock but the plaintiff is seeking
cash in lieu of Common Stock; and (3) the Company is a party to a suit brought
by Nassau County to obtain an accounting of amounts which it believes are due to
the county pursuant to a contract with IMSG Systems, Inc.
21. Dividends On Common Stock Not Likely. The Company has never paid any
cash dividends on its Common Stock. For the foreseeable future it is anticipated
that earnings, if any, which may be generated from the Company's operations will
be used to finance the growth of the Company and that cash dividends will not be
paid to holders of shares of Common Stock.
USE OF PROCEEDS
No proceeds will be realized by the Company from the issuance of shares of
Common Stock to sellers as all or part of the purchase prices to be paid in
connection with potential future business acquisitions. Proceeds from the
potential exercise of the Private Warrants ($250,000) are expected to be
utilized for working capital purposes. See "Plan of Distribution."
11
<PAGE>
MARKET FOR SECURITIES AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the over-the-counter market with quotations
reported on the National Association of Securities Dealers Automatic Quotation
System (NASDAQ), Small Cap Market, under the symbol "DFAX," and all
corresponding prices represent high and low bid prices for the Common Stock on
NASDAQ for the periods indicated.
Price Range
-----------
High Low
---- ---
Year Ended November 30, 1997
- ----------------------------
1st Quarter 3 1/16 1 3/4
2nd Quarter 3 1 3/4
3rd Quarter (through June 23, 1997) 2 15/16 1 7/8
Year Ended November 30, 1996
- ----------------------------
1st Quarter 9 3/16 7
2nd Quarter 8 1/16 4 5/8
3rd Quarter 5 7/8 2 15/16
4th Quarter 4 11/16 1 3/4
Year Ended November 30, 1995
- ----------------------------
2nd Quarter 2 1/2 13/16
3rd Quarter 4 3/4 13/16
4th Quarter 12 7/8 3 7/8
The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
As of June 11, 1997, there were approximately 154 holders of record of the
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.
The Company has never paid cash dividends on its Common Stock. Holders of
Common Stock are entitled to receive such dividends as may be declared and paid
from time to time by the Board of Directors out of funds legally available
therefor. The Company intends to retain any earnings for the operation and
expansion of its business and does not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the payment of cash dividends
will depend upon future earnings, results of operations, capital requirements,
the Company's financial condition and such other factors as the Board of
Directors may consider.
Holders of Series D Preferred Stock are entitled to a 6% cumulative
dividend, payable in cash or in Common Stock, or any combination thereof, as
determined by the Company.
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SELECTED FINANCIAL DATA
The selected financial data for the years ended November 30, 1996, 1995 and
1994 is derived from the Company's audited consolidated financial statements.
The selected financial data for the three months ended February 28, 1997 and
February 29, 1996 is derived from the unaudited financial statements of the
Company. The financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended Year Ended November 31,
------------------------- ----------------------------------------
February February
28, 1997 29, 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales........................... $1,553,626 $1,339,620 $ 5,091,917 $ 5,690,982 $ 6,027,096
Net Income (loss)............... $ 70,674 $(365,499) $(2,170,867) $(3,218,962) $(1,165,627)
Net Income (loss) per share .... $ .01 $ (.03) $ (.15) $ (.30) $ (.12)
Weighted average number of
shares outstanding.............. 14,073,353 13,810,301 14,011,980 10,752,349 10,050,821
Consolidated Balance Sheets Data:
<CAPTION>
November 30,
February ------------
28, 1997(1) 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Working capital (deficit)..... $ (181,808) $ (614,728) $ (1,253,541)
Total assets.................. 5,328,281 4,916,047 5,733,874
Long-term debt................ 1,368,736 1,164,813 278,028
Stockholders' equity.......... 2,447,557 2,282,883 2,859,295
</TABLE>
- ----------
(1) Does not reflect the net proceeds of $1,329,500 from the sale of the Series
D Preferred Stock.
13
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results from Operations
The three months ended February 28, 1997 compared to the three months ended
February 29, 1996
Sales increased approximately $214,000 or 16% for the three months
ended February 28, 1997 compared to the three months ended February 29, 1996.
Sales are derived primarily from the Company's coin-operated Copier operations.
This increase was a result of the initial sales of microfiche scanner units.
Revenues derived from the Company's Smart Switch continued to be minimal.
Cost of sales represented 55.6% of sales for the three months ended
February 28, 1997 compared to 78.7% for the three months ended February 29,
1996. This decrease is a direct result of management's continued efforts to cut
costs and the renegotiation of commission rates with many of the Company's
larger customers. In addition, the Company realizes a higher gross margin on the
sale of microfiche scanner units than on its photocopy machine business.
Depreciation and amortization increased approximately $54,000 for
the three months ended February 28, 1997 compared to the three months ended
February 29, 1996 as a result of depreciation of recently acquired copiers and
accessories.
Selling, general and administrative expenses decreased to
approximately $450,000 or 28.9% of sales for the three months ended February 28,
1997 from approximately $518,000 or 38.6% of sales for the three months ended
February 29, 1996. The decrease is the result of the fruition of the Company's
cost containment efforts. Selling, general and administrative expenses for the
three months ended February 28, 1997 include certain expenses incurred in
connection with the marketing, promotion and development of the Smart Switch
operation and newly acquired microfiche scanner unit dealership.
Interest expense decreased approximately $5,000 for the three months
ended February 28, 1997 compared to the three months ended February 29, 1996 as
a result of the Company's paying off all outstanding bank indebtedness in
December 1995.
The above resulted in net income of approximately $71,000 for the
three months ended February 28, 1997 compared to a net loss of approximately
$366,000 for the three months ended February 29, 1996.
The fiscal year ended November 30, 1996 compared to the fiscal year ended
November 30, 1995.
Sales declined approximately $599,000 or 10.5% for the fiscal year
ended November 30, 1996 compared to fiscal 1995. This decline was the result of
the loss of certain of the Company's customers and the elimination of
non-profitable accounts, offset in part by the additions of a university and a
major library system to the Company's customer base in March and July of 1995,
respectively. There are two primary reasons for the loss of customers by the
Company. The majority of the Company's customers are maintained pursuant to
contractual agreements, generally ranging from three to five years. Recently,
the Company's business has become increasingly more competitive. Accordingly,
when contracts come up for renewal, the Company may be out bid by its
competitors. Secondly, during fiscal 1996, the Company commenced a critical
review of its customer base and has determined not to renew customer contracts
where the costs of maintaining such customers exceeded the benefits. This often
occurs when the required commission structure is excessive or the customer's
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<PAGE>
demands for equipment are not reasonable based on the revenue generated by the
customer. In March 1996, the Company was not successful in its bid for the
renewal of its contract with a library system in the City of New York, which
provided approximately 12.3% of the Company's sales for the fiscal year ended
November 30, 1995. The Company continued to collect revenue from this library
system through July 1996, when the last of the Company's copiers were removed.
Additionally, in April 1996, the Company's bid for a large University in the
Southeast was accepted. Revenue derived from the Company's Smart Switch were
minimal.
Cost of sales represented 82.2% of sales for the fiscal year 1996 compared
to 78.3% of sales for the fiscal year 1995. The increase is primarily attributed
to an increase in the cost of toner and other supplies, and additional technical
support needed for new equipment purchased. In addition, the Company continued
its program to refurbish its copiers and reader printers which commenced in the
second half of fiscal 1995. Management believes that for certain segments of its
customer base refurbishment represents a less costly alternative to the purchase
of new equipment. The Company is continually monitoring its purchasing with a
view toward obtaining more competitive pricing and wherever possible using
"generic brands" of supplies instead of "name brands." In addition, the
Company's current commission structure as a percentage of revenue is higher than
previous years as a result of increased competition and the loss of a major
library system, which received a flat rate commission irrespective of the amount
of revenue generated.
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, 1996, the Company accrued an additional $200,000.
Depreciation and amortization increased approximately $496,000 for the year
ended November 30, 1996 compared to the year ended November 30, 1995 as a result
of depreciation on recently acquired copiers and accessories, depreciation of
the Company's Smart Switch software and the write off of certain intangible
assets obtained in connection with a prior acquisition.
Selling, general and administrative expenses decreased to approximately
$1,942,000 or 38.1% of sales for the year ended November 30, 1996 from
approximately $2,396,000 or 42.1% of sales for the year ended November 30, 1995.
This decrease is primarily attributable to a reduction in the Chief Executive
Officer's salary of approximately $125,000, a reduction in professional and
consulting fees and the fruition of previously established cost cutting
measures.
Interest expense decreased approximately $124,000 for the year ended
November 30, 1996, compared to the year ended November 30, 1995, as a result of
the Company's paying off all outstanding bank indebtedness in December 1995.
During the year ended November 30, 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 perform his obligations pursuant to the agreement.
As a result of the continued operating losses, the Company further
evaluated the realizability of the deferred tax asset and determined an increase
in the valuation allowance in the amount of $630,000 was required, resulting in
a net deferred tax asset of $210,000 which is equal to the existing deferred tax
liabilities at November 30, 1996.
15
<PAGE>
The above factors resulted in a net loss of approximately $2,171,000 for
the year ended November 30, 1996 compared to a net loss of approximately
$3,219,000 for the year ended November 30, 1995.
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.
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.
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.
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.
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 that the Company's credit
facilities were outstanding for the entire 1995 fiscal year and only part of
fiscal 1994.
16
<PAGE>
During fiscal 1995 the Company determined to write-off the unamortized
portion of the fair market value of shares of Common Stock 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.
Liquidity and Capital Resources
At February 28, 1997, the Company had cash and a working capital
(deficiency) of $441,000 and $(182,000), respectively, as compared to $198,000
and $(615,000), respectively, at November 30, 1996.
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
and ScreenScan dealership and the acquisition of new businesses.
Net cash provided by operating activities of approximately $49,000 during
the three months ended February 28, 1997 resulted from the net income of
approximately $71,000 and depreciation and amortization of $181,000, offset in
part by an increase in accounts receivable of approximately $212,000.
Cash provided by financing activities amounted to approximately $202,000
during the three months ended February 28, 1997 primarily as a result of the
proceeds from the sale of Common Stock $(94,0000) and proceeds from stockholder
loans of $(109,000).
During the three months ended February 28, 1997, the Company incurred
capital lease obligations in the amount of approximately $109,000 in connection
with the acquisition of microfiche scanner units.
The above resulted in a net increase in cash of approximately $243,000 for
the three months ended February 28, 1997.
Net cash used in operating activities of approximately $1,648,000 during
the fiscal year ended November 30, 1996 resulted from the net loss of
approximately $2,171,000 offset by non-cash items including depreciation and
amortization $(1,021,000), unearned compensation $(74,000) and a net decrease in
the deferred tax benefit $(130,000). In addition, net cash used in operating
activities included an increase in inventory of approximately $176,000 and the
pay down of accounts payable and accrued expenses of $471,000.
Net cash used in investing activities in the amount of approximately
$905,000 during the fiscal year ended November 30, 1996 resulted from the
acquisition of copiers and accessories $(725,000) and assets acquired through
acquisitions $(180,000).
17
<PAGE>
Cash provided by financing activities amounted to approximately $1,750,000
during the fiscal year ended November 30, 1996 primarily as a result of the
proceeds from the exercise of common stock warrants of $1,548,000, stockholder's
loans of $887,000 and proceeds from an affiliate's loan of $300,000, offset by
the repayment of bank loans and capital lease obligations of $957,000. The
proceeds from stockholder's loans represent loans from Dr. Irwin A. Horowitz,
the Chairman of the Board, Chief Executive Officer and President of the Company.
For the fiscal year ended November 30, 1996, Dr. Horowitz loaned a net aggregate
amount of approximately $887,000. On December 17, 1996, the Company and Dr.
Horowitz agreed that all of such loans, which are not interest bearing, would
not be payable until December 2, 1997, and, in consideration therefore, the
Company granted to Dr. Horowitz options to purchase 750,000 shares of Common
Stock. Through April 2, 1997, Dr. Horowitz loaned an additional net aggregate
amount of approximately $555,000 (including reduced salary payments). On May 6,
1997, the Company and Dr. Horowitz agreed that all such loans, which are not
interest bearing, would not be payable until December 1, 1997, and, in
consideration therefore, the Company granted to Dr. Horowitz five-year warrants
to purchase 350,000 shares of Common Stock.
The above resulted in a net decrease in cash of approximately $803,000 for
the year ended November 30, 1996.
In June 1997, the Company completed a private placement of 1,500 shares of
Series D Convertible Preferred Stock of the Company (the "Preferred Stock") at a
price of $1,000 per share, for which it received gross proceeds of $1,500,000.
Management believes the expected cash flow from operations, the expected
growth of the newly acquired companies, its microfiche scanner unit dealership,
and the willingness and ability of the Company's Chief Executive Officer to fund
any operating deficit will allow the Company to continue operations over the
next 12 months.
18
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BUSINESS
General
DiversiFax, Inc. (the "Company") has been engaged, since November 1993, in
the business of owning and operating coin and debit card pay-per-copy photocopy
machines, microfilm reader-printers and accessory equipment. The Company
currently intends to pursue a strategy of expanding this business through
acquisitions.
In addition, since April 1995, the Company has been engaged in the
development and 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
stockholders 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
Section (the "Faxit Acquisition Agreement").
Since October 1996, the Company, through an exclusive supply and
distribution agreement, has been engaged in the marketing and sale of scanner
units capable of screening microfilm, microfiche and microcard images and (1)
printing the scanned images onto a printer without the aid of a computer and/or
(2) transferring the images to CD Rom and maintaining the information on the
users' computers.
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 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.
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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 ("Dr. 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.
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 comprises a
substantial portion of the Company's business since November 1, 1993.
Upon the consummation of the acquisition of IMSG and Affiliates, Dr.
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. 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 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 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
General. 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, Pennsylvania, Illinois, Connecticut, Florida, Vermont, New
Hampshire, Wisconsin, North Carolina, South Carolina and Georgia, in various
sites including libraries, courthouses, colleges, drug stores, office supply
stores and similar high traffic outlets. The Company has over 2,500 Copiers and
accessories 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. The Company's Copiers consist of a photocopier or microfilm
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. 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
20
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a day. The Company maintains service centers in Valley Stream (Long Island), New
York; Albany, New York; Des Plains, Illinois; Jacksonville, Florida; Harrisburg,
Pennsylvania; and Norwood, Massachusetts which it utilizes to service regional
accounts including repairing machines and storing supplies and parts. The
Company may also service machines 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 managers. 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. At June 5, 1997, the Company employed a sales
staff of nine people (including two managers) and 71 service/sales technicians,
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. 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 and supplies 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 Strategy. 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 where it currently operates its business, subject to the
availability of requisite financing and the number of Copiers in the Company's
inventory. The Company may seek such additional financing through equity and/or
debt offerings, or through loans from Dr. Horowitz, its Chief Executive Officer,
for which there can be no assurance of obtaining. During the fiscal years ended
November 30, 1995 and November 30, 1996, and during the current fiscal year, Dr.
Horowitz has made loans to the Company to finance acquisitions and for working
capital and has deferred certain salary payments. At May 31, 1997, the Company
owed Dr. Horowitz a balance of $1,352,888. In addition, the Company may pay all
or a portion of the acquisition prices for such acquired businesses by means of
the Common Stock covered in this Prospectus.
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., which then expanded the Company's position in the New York
Metropolitan area.
21
<PAGE>
In June 1996, the Company, through its wholly-owned subsidiary JA-Hunt
Services, Inc., acquired the assets of a Pennsylvania-based company engaged in
the servicing of high end copier equipment and the retail sale of copier
supplies and office equipment. It is the Company's intent to acquire a
substantial number of companies in these and other fields related to the
Company's business.
The Company's planned expansion requires an 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. During the fiscal year ended November 30, 1996,
revenue derived from one of the Company's Copier customers, a large university
located in the southeastern United States, amounted to approximately 11.6% of
the Company's revenues. The Company's contract with this university, which is
not terminable at will, is for a term of one year and is renewable at the
parties' option for four additional one year terms. Another customer, a major
library system in the City of New York, accounted for approximately 4.0% and
12.3% of the Company's revenues for the fiscal years ended November 30, 1996 and
1995, respectively. 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. 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. See "Risk Factors -- Dependence on Certain
Customers; Loss of Large Customer."
Patents and Technology. The Company does not, in general, rely on patented
technology with respect to its Copier operations. 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.
Competition. The Company markets its coin-operated copier services to users
at site locations who need to copy documents, books and other materials located
at the sites where the Company's Copiers have been placed. Other companies that
offer similar coin-operated services include Continental Copy Products Limited,
Dual Office Supplies, 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 principally conducts
operations in Connecticut and downstate New York; Dual Office Supplies
principally conducts operations in Illinois; Boston Copico principally conducts
operations in Massachusetts, Connecticut and downstate New York; and Compucopy
principally conducts operations in southern Florida. Competition between
companies is generally based on price and quality of service offered.
Seasonality. 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, due to
the reasons discussed in this paragraph. Seasonally slow periods are immediately
preceded by periods of high volume of use,
22
<PAGE>
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. Over the past three fiscal
years, Dr. Horowitz, the Chief Executive Officer 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. See "Certain Transactions." Cash flow has also been favorably affected
in that 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. Finally, the Company expects that the addition of its
microfiche scanner operations will offset to some extent the seasonality of
Copier operations, as scanner revenues are expected to be higher during the
summer months, during which period universities and public libraries, the
primary customers of scanners, receive a high proportion of their municipality
funding. See "Microfiche Scanner Operations."
Operations: Fax Machines (Smart Switch TM)
General - The Smart Switch. The Company commenced its Smart SwitchTM
operations in April 1995, upon the acquisition of the Smart Switch. 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 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 or her 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 that
allow users to send and receive faxes directly in a hotel room without
additional costly telephone lines, together with other services which allow
users to make copies and print from lap top computers, all in one unit. These
units are available to 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 an electronic scanning of calls to listen for a Fax tone.
Support Services. 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. The Smart Switch is marketed under the
direction of Mario DiNatale, the President of DiversiFax Information Services,
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 commenced
23
<PAGE>
marketing of the Smart Switch in April 1995 and has placed units under lease at
hotels, airport lounges, libraries and colleges, principally in the Northeast.
The term of the agreements range from one year to 39 months, 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 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 17 units in hotels, 20 units in airport lounges, three units in libraries
and seven units in universities. Several hotels have canceled or determined not
to permanently install a significant number of such machines, apparently
primarily due to a competitor who was providing in-room fax machines to hotels
free of charge. One hotel returned 87 machines which the Company believes is
related to a change in control of such hotel. There can be no assurance that
there will not be a material amount of additional cancellations, or that
significant new orders will develop so as to make the Fax machine operations of
the Company profitable. There can be no assurance that the Smart Switch will
gain broad market acceptance.
In November 1995, the Company entered into an agreement with AT&T to
jointly market the Company's in-room Fax services on an exclusive basis to AT&T
hotel accounts, and in November 1996, the Company entered into a co-marketing
agreement with Danka.
Although there are results of several market research studies and surveys
available to the Company which indicate that over 50% of all business travelers
expect hotels to offer fax and copier services, there has been no research
completed in connection with in-room fax services that gives management
sufficient information to estimate potential demand for its Smart Switch with
certainty. 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. 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 was for an initial term of one
year, absent termination based on breach, and has been renewed by agreement of
the parties for an additional two year term. Under the agreement, the Company
will (a) obtain, install and maintain all individual Fax 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.
Agreement with Danka. In November 1996, the Company entered into a
co-marketing agreement with Danka to jointly market the Company's Smart Switch
Fax services. It is contemplated that Danka will provide hotels with Fax
machines incorporating Smart Switch functionality and utilizing existing AT&T
long distance phone lines as part of Danka's preferred vendor status offered to
Hotel Franchise System, a hotel chain association, whose members include, among
others, Ramada Inn, Travelodge, Days Inn, Howard Johnson and Super 8. Danka is a
leading independent supplier of office imaging equipment and related services.
24
<PAGE>
Supplies and Suppliers. 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, all of which are 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. The Company does not believe that the technology
upon which the Smart Switch systems are based is patentable. Other companies may
have been or may be involved in research and development which may lead to
patents 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 protected by patents or
nondisclosure agreements, the Smart Switch may be 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
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 itself
against patent claims 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.
Government Regulation. 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. The Company's Fax 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 the
Company's 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. 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
25
<PAGE>
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, is able to reconfigure a particular
model fax machine and has placed these reconfigured machines at 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 two general areas: (i) other companies
organized to provide public facsimile transmission services and/or equipment,
and (ii) 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. 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 subject to seasonal fluctuations. Revenues from the Smart
Switch tend to be lower during the summer months due to the vacation patterns of
business travelers. These fluctuations appear to be regular and predictable,
thereby allowing the Company to plan for such low revenue months. Over the past
three fiscal years, Dr. Horowitz, the Chief Executive Officer 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. See "Certain Transactions." 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.
Microfiche Scanner Operations
In October 1996, the Company entered into a Supply and Distribution
Agreement with ScreenScan Systems, Inc. ("ScreenScan"), pursuant to which the
Company is acting as the exclusive distributor of ScreenScan's 100C/200C
Centronics interface scanners in North and South America for a period of five
years. Pursuant to the agreement, the Company has agreed to purchase a minimum
of $2,500,000 of scanner units during the one year period ending September 30,
1997. The Company is currently marketing the scanners to university libraries,
public libraries, insurance companies and banks throughout the United States.
The scanner units are capable of scanning microfilm, microfiche and microcard
images and (1) printing the scanned images onto a printer without the aid of a
computer and/or (2) transferring the images to CD Rom and maintaining the
information on the user's computers. These machines can be card and coin
operated for public use, thereby creating a revenue source for libraries. The
Company offers service contracts to its customers with respect to this product.
The first scanner system sold by the Company was in November 1996.
The scanner units are marketed by the Company through five salespersons
exclusively marketing this device as well as other salespersons at the Company.
The Company also advertises the product in magazines and displays it at library
shows throughout the country. Marketing efforts are also undertaken by
ScreenScan.
26
<PAGE>
Competition with respect to the scanning device includes a laser scanning
machine produced by Canon Corporation, which the Company believes is of lesser
quality and more expensive. There can be no assurance that additional
competition, including from companies with greater resources than that of the
Company, will not occur in the future.
The Company anticipates that sales of microfiche scanner units will be
higher during the summer months. During this season, universities and public
libraries receive a high proportion of their municipal funding, which will
provide them the funds to consummate scanner purchases.
Employees
At June 5, 1997, the Company had 95 full time employees, including one
executive officer, five managers, 71 service technicians, 11 clerical and
administrative employees and nine sales persons (of which two are managers),
none of whom are subject to a collective bargaining agreement.
Properties
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
3,000 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.
The Company also maintains service centers in Norwood, Massachusetts;
Albany, New York; Des Plains, Illinois; Harrisburg, Pennsylvania; and
Jacksonville, 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 $650.
The Albany, New York service center is leased for a monthly rent of $1,219. The
Des Plains, Illinois service center is leased for a monthly rent of $950. The
Harrisburg, Pennsylvania service center is leased for a monthly rent of $1,417.
The Jacksonville, Florida service center is leased for a monthly rent of $1,385.
All space currently utilized by the Company is dedicated to
administrative, marketing, data processing, equipment assembly storage, service,
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,
Pennsylvania, Illinois, Connecticut, Florida, Vermont, New Hampshire, Wisconsin,
North Carolina, South Carolina and Georgia.
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
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
27
<PAGE>
trade practice in seeking to prevent it from hiring Mr. Gallagher. The Court
denied the Company's motion for a permanent injunction. Depositions of the
parties are scheduled for July 1997.
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
to plaintiff pursuant to prior non-interest bearing loans totalling $228,670
(which amount is accrued at February 28, 1997), made to the Company by various
creditors, two 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 creditors have not indicated how the amount was to be allocated (due
to a dispute between the creditors). 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 and the
plaintiff each appealed to the Appellate Division. The Appellate Division has
determined that payment of the debt should be made in cash. The Company has
filed a motion for leave to appeal to the Court of Appeals, which motion is now
pending before the Court.
On December 16, 1996, an action was brought against the Company in the
United States District Court for the District of New Jersey, entitled Gary Stark
v. DiversiFax, Inc. and Irwin A. Horowitz. The plaintiff brought suit against
the Company and Dr. Horowitz claiming that the Company owed and has refused to
pay plaintiff certain amounts due under an alleged oral agreement made with the
plaintiff, to assist the Company in becoming the exclusive distributor for
ScreenScan Systems, Inc. The Company and Mr. Stark have entered into a
settlement agreement pursuant to which Mr. Stark has been made a distributor of
the ScreenScan product in a limited area, subject to a required quota of sales,
and 40,000 shares of Common Stock of the Company was issued to a designee of Mr.
Stark (namely, Stern & Greenberg, a Selling Stockholder).
On March 28, 1997, an action was commenced against the Company in the
Supreme Court of Nassau County, entitled The County of Nassau v. IMSG Systems,
Inc., in which the County of Nassau is seeking an accounting at the end of a
contract with IMSG. The Company believes that all appropriate payments were made
to the County and that the County was overpaid. Discovery is now in process.
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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<PAGE>
MANAGEMENT
Directors and Officers
The current directors and executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Dr. Irwin A. Horowitz 61 Chairman of the Board,
Chief Executive Officer and President
Mario J. DiNatale 42 Director
Eugene Bilotti 48 Director
Kenneth Ross Wolfe 51 Secretary and Director
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 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 Dynamics Imaging, Inc., a private company which is primarily engaged
in the development of advanced medical technologies.
Mario J. DiNatale is the President and Chief Operating Officer of the
Company's subsidiary DiversiFax Information Services, Inc. since April 1995 and
a director of the Company since November 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 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.
Eugene Bilotti has been a director of the Company since November 1, 1993.
Since January 1986, 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 1994 to January 1996, and
has served as Secretary of the Company from May 1996 to present. 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.
No family relationship exists between any director or executive officer
and any other director or executive officer.
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<PAGE>
Indemnification of Directors
The Company's Certificate of Incorporation eliminates the liability of a
director of the Company for monetary damages for breach of duty as a director,
subject to certain exceptions. In addition, the Certificate of Incorporation
provides for the Company to indemnify, under certain conditions, directors,
officers, employees and agents of the Company against all expenses, liabilities
and losses reasonably incurred by such persons in connection therewith. The
foregoing provisions may reduce the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from suing
directors for breaches of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its stockholders.
Summary Compensation Table
The following table sets forth information with respect to the
compensation of each of the named executive officers for services provided in
all capacities to the Company and its subsidiaries in the fiscal years ended
November 30, 1996, 1995 and 1994. No other executive officer or former executive
officer received more than $100,000 in compensation in the fiscal year ended
November 30, 1996. For the purposes of this table, warrants are deemed to be
equivalent of stock options.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation ------------
Name and Principal -------------------------------- Securities Underlying
Position Year Salary ($) Bonus ($) Other ($)(1) Options (#)
- ------------------- ---- ---------- --------- ------------ ---------------------
<S> <C> <C> <C> <C>
Dr. Irwin A. Horowitz 1996 126,142 -- 67,200 1,277,520
Chairman of the Board 1995 201,923 -- 65,155 --
of Directors and Chief 1994 250,000 -- 64,200 --
Executive Officer
Mario J. DiNatale 1996 90,000 35,000(2) -- --
President, DiversiFax 1995 72,000 35,000 -- 100,000
Information Services, 1994 -- -- -- --
Inc.
</TABLE>
(1) Represents the fair market value of benefits and perquisites afforded by
the Company to Dr. Horowitz.
(2) This bonus is anticipated to be paid in shares of Common Stock of the
Company.
30
<PAGE>
Option Grants in fiscal 1996
(Individual Grants)
The following table sets forth certain information for each of the named
executive officers with respect to grants of options (for the purposes of this
table, warrants are deemed to be equivalent to stock options) to purchase Common
Stock of the Company made during the fiscal year ended November 30, 1996.
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
No. of % of Total Appreciation for
Securities Options Option Term(1)
Underlying Granted to Exercise ----------------
Options Employees Price Expiration
Name Granted (#) in Year ($/Sh) Date 5% 10%
- ---- ----------- ------- ------ ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Irwin A. Horowitz 427,520 32.7% 2.375(2) 8/16/01 $280,525 $619,887
850,000 65.0% 2.375 10/29/01 $557,743 $1,557,589
Mario J. DiNatale -- -- -- -- -- --
</TABLE>
(1) In accordance with the rules of the Commission, shown are the gains or
"option spreads" that would exist for the respective options granted.
These gains are based on the assumed rates of annually compounded stock
price appreciation of 5% and 10% from the date the option was granted over
the full option term. These assumed annually compounded rates of stock
price appreciation are set forth in the rules of the Commission and do not
represent the Company's estimates or projection of future Common Stock
prices.
(2) The exercise price of these options or warrants was lowered from $3.25 to
$2.375 on December 17, 1996, in consideration of Dr. Horowitz's loans to
the Company. See "Certain Transactions."
Aggregated Option Exercises During Fiscal 1996 and Year End Option Values
The following table provides information related to options exercised by
each of the named executive officers during 1996 and the number and value of
options held at November 30, 1996. The Company does not have any outstanding
stock appreciation rights (for the purposes of this table, warrants are deemed
to be equivalent to stock options).
<TABLE>
<CAPTION>
Value of Unexercised In- le
Shares Value Number of Unexercised the-Money Options at Year
Acquired on Realized Options at Year End(#) End ($)
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Irwin A. Horowitz -- -- 677,520 600,000 0 0
Mario J. DiNatale -- -- 40,000 60,000 0 0
</TABLE>
31
<PAGE>
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). On October 29, 1996,
the Company entered into a renewable one year Employment Agreement with Dr.
Horowitz, pursuant to which the Company agreed to pay Dr. Horowitz a salary of
$125,000, together with an annual incentive bonus equal to a percentage of the
Company's pre-tax profits. Such incentive bonus ranges from 6% to 18% of the
Company's pre-tax profits, based on the level of such pre-tax profits. In
addition, upon execution of the agreement, Dr. Horowitz received options to
purchase 750,000 shares of Common Stock, which options vest as to 150,000 shares
on the date of grant and upon each of the next four anniversary dates thereof.
The Company further agreed to grant Dr. Horowitz options to purchase an
additional 100,000 shares of Common Stock, in consideration of Dr. Horowitz'
prior guaranty of the Company's payments under a certain bank loan agreement.
See "Certain Transactions." 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 1996, 1995 and
1994, these expenses aggregated $67,200, $65,155 and $64,200, respectively.
Stock Option Plans
In October 1996, the Company adopted the 1996 Stock Option Plan (the
"Stock Option Plan"), pursuant to which 3,000,000 shares of Common Stock are
reserved for issuance upon exercise of options. The Stock Option Plan is
designed to serve as an incentive for retaining qualified and competent
employees, directors, advisors and consultants.
The Company's Board of Directors administers the Stock Option Plan and is
authorized, in its discretion, to grant options thereunder to all eligible
employees of the Company, including officers and directors (whether or not
employees) of, and consultants or advisors to, the Company. The Stock Option
Plan provides for the granting of both "incentive stock options" (as defined in
Section 422 of the Internal Revenue Code) and nonstatutory stock options.
Options can be granted under the Stock Option Plan on such terms and at such
prices as determined by the Board of Directors, or a committee thereof, except
that, in the case of an incentive stock option, the per share exercise price of
options will not be less than the fair market value of the Common Stock on the
date of grant. In the case of an incentive stock option granted to a 10%
stockholder, the per share exercise price will not be less than 110% of such
fair market value. The aggregate fair market value of the shares covered by
incentive stock options granted under the Stock Option Plan that become
exercisable by a grantee for the first time in any calendar year is subject to a
$100,000 limit.
Options granted under the Stock Option Plan will be exercisable after the
period or periods specified in each option agreement. Options granted under the
Stock Option Plan are not exercisable after the expiration of ten years from the
date of grant and are not transferable other than by will or by the laws of
descent and distribution.
As of the date of this Prospectus, the Company has granted stock options
to purchase an aggregate of 2,404,000 shares of Common Stock to employees,
officers and directors of, and consultants to the Company, which have a weighted
average exercise price of $2.55 per share.
32
<PAGE>
In addition, in October 1996, the Company amended its two existing stock
option plans, the 1995 Outside Directors Stock Option Plan (the "Directors'
Plan") and the 1995 Incentive Stock Option Plan, so that no further options
could be granted thereunder.
Compensation of Directors
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 Directors' Plan, pursuant to which all
current non-employee directors and non-employees who became directors of the
Company received an option to purchase 100,000 shares of the Common Stock at the
market value thereof at the time of grant. Said options vest at the rate of
20,000 per year (the first 20,000 vested upon grant) and terminate 90 days after
the director ceases to serve as a director. Pursuant to the Directors' Plan, in
September 1995, options to purchase 100,000 shares of Common Stock at an
exercise price of $4.125 were granted to each of Messrs. Bilotti and Wolfe. In
October 1996, the Company amended the Directors' Plan so that no further options
could be granted thereunder. Pursuant to the Stock Option Plan, which allows the
Company to grant options to directors of the Company, in December 1996 Messrs.
Bilotti and Wolfe each received additional options to purchase 100,000 shares of
Common Stock at an exercise price of $2.375 per share. In connection with such
grant, Messrs. Bilotti and Wolfe each agreed to cancel the unvested portion (for
60,000 shares) of their original options.
33
<PAGE>
CERTAIN TRANSACTIONS
Mr. Kenneth Ross Wolfe, a director of the Company, provides legal services
to the Company. Mr. Wolfe has received approximately $33,000 in legal fees in
fiscal year 1996 and $69,000 in fiscal year 1995.
From June 1994 to November 1995, Dr. Irwin A. Horowitz, the Chairman of
the Board, Chief Executive Officer and President of the Company, guaranteed the
Company's payments under certain bank loan agreements. Such loans were in the
aggregate principal amount of $1,185,000, and as of December 1995, were paid in
full, at which time the total balance was $1,007,459. In consideration for such
guaranty, in August 1996, Dr. Horowitz received options to purchase 100,000
shares of Common Stock at an exercise price of $3.25 per share.
During the fiscal year ended November 30, 1996, Dr. Horowitz loaned the
Company funds to cover its working capital needs and to finance acquisitions on
a number of occasions, in the net aggregate principal amount of $887,000. In
consideration thereof, and for Dr. Horowitz's agreement that such loans would
not bear interest, on August 16, 1996, the Company delivered to Dr. Horowitz a
promissory note in the amount of $668,000 (the principal balance on that date),
payable on demand after June 1, 1997, and five year warrants to purchase 427,520
shares of Common Stock at an exercise price of $3.125 per share. On December 17,
1996, Dr. Horowitz agreed to extend to December 2, 1997 the due date of the
loans made on or before November 30, 1996, as well as all subsequent loans, in
the net aggregate principal amount of $887,000. In consideration thereof and for
Dr. Horowitz's agreement that such loans would be interest free, the Company
agreed that the per share exercise price of the warrants granted in August 1996
as well as of the options granted to him in October 1996 pursuant to his
Employment Agreement with the Company, would be reduced to $2.375 per share, the
then current fair market value of the Common Stock. In addition, the Company
granted to Dr. Horowitz additional incentive and non-incentive options, to
purchase an aggregate of 750,000 shares of Common Stock, of which the incentive
options (for 38,270 shares) are exercisable at $2.613 per share and the
non-incentive options (for 711,730 shares) are exercisable at $2.375 per share.
On May 6, 1997, in consideration for additional interest-free loans
aggregating approximately $555,000 (which amount includes reduced salary
payments), made by Dr. Horowitz from December 1, 1996 through April 2, 1997,
which loans shall not become due upon demand until December 1, 1997, the Company
granted to Dr. Horowitz additional warrants to purchase 350,000 shares of Common
Stock, at an exercise price of $1.9375 per share, all of which warrants are
immediately exercisable.
34
<PAGE>
Principal Stockholders
The following table sets forth, based upon information obtained from the
persons named below, certain information regarding beneficial ownership of the
Common Stock as of June 11, 1997 and as adjusted to reflect the sale of all of
the Common Stock offered hereby by (i) each stockholder known by the Company to
be the beneficial owner of 5% or more of the outstanding shares of Common Stock,
(ii) each director of the Company, (iii) each person named in the Summary
Compensation Table above and (iv) all of the Company's current officers and
directors as a group.
Name and Address of Number of Shares
Beneficial Holder Beneficially Owned(1) Percentage of Class
- ----------------- --------------------- -------------------
Dr. Irwin A. Horowitz 8,187,520(2) 51.1
111 Ocean Place
Sarasota, Florida 24242
Mario J. DiNatale 263,427(3)(4) 1.8
Atrium Executive Center
3000 Atrium Way -- Suite 200
Mt. Laurel, New Jersey
08054
Eugene Bilotti 80,000(4) *
111 Broadway
New York, New York 10006
Kenneth Ross Wolfe 80,000(4) *
1325 Franklin Avenue
Garden City, New York
11530
All officers and directors 8,610,947(5) 52.7
as a group (4 persons)
- ------------
* less than 1%.
(1) Unless otherwise indicated below, all shares are owned beneficially and of
record.
(2) Includes 1,000,000 shares of Common Stock underlying options exercisable
within 60 days and 877,520 shares underlying warrants exercisable within
60 days.
(3) Includes 100,000 shares of Common Stock underlying warrants exercisable
within 60 days. Also includes 55,000 shares held of record by Faxit
corporation, of which Mr. DiNatale is the President and sole director.
(4) Includes 80,000 shares of Common Stock underlying options exercisable
within 60 days.
(5) Includes an aggregate of 1,240,000 shares underlying options exercisable
within 60 days and an aggregate of 977,520 shares underlying warrants
exercisable within 60 days.
35
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the present record and beneficial ownership
of securities of the Company owned by the Selling Stockholders as of the date of
this Prospectus.
<TABLE>
<CAPTION>
Percentage of Series D Preferred Stock
--------------------------------------
Name and Address No. of Shares of Before After
of Selling Stockholder Common Stock(1) Offering Offering
- ---------------------- --------------- -------- --------
<S> <C> <C> <C>
Stern & Greenberg 40,000 - 0
Libertyview Fund, LLC
101 Hudson Street
Jersey City, New Jersey 07302 166,667(2) 6.7 0
Libertyview Plus Fund
Hemisphere House
9 Church Street 500,000(2) 20.0 0
Hamilton, Bermuda HMDX
Paresco, Inc.
101 Hudson Street
Jersey City, New Jersey 07302 1,500,000(2) 60.0 0
Van Moer Santerre & Co., NV
Societe de bourse-
Beursvennootschap 333,333(2) 13.3 0
111 Boulevard Anspachlaan,
1000 BX
John Clark 50,000(3) - -
David Cowherd 50,000(3) - -
</TABLE>
(1) The number of shares listed indicated both the amount of securities
beneficially owned by the holder prior to the Offering and the amount to
be offered for the stockholder's account.
(2) Maximum shares of Common Stock to be issued upon conversion of the
Preferred Stock. See "Description of Securities - Preferred Stock."
(3) Represents shares of Common Stock underlying the Private Warrants.
36
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.001 per share and 1,000,000 shares of Preferred Stock, par value $.001
per share. As of June 11, 1997, 14,145,215 shares of Common Stock were
outstanding and there were 154 holders of record of the Common Stock. As of the
date hereof, 1,500 shares of Series D Preferred Stock are outstanding and held
of record by four holders.
Common Stock
The holders of Common Stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate of Incorporation
does not provide for cumulative voting for the election of directors. Holders of
Common Stock will be entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, and will be entitled to receive, pro rata, all assets of the
Company available for distribution to such holders upon liquidation. Holders of
Common Stock have no preemptive, subscription or redemption rights.
Preferred Stock
Pursuant to the Certificate of Incorporation, the Company is authorized to
issue "blank check" preferred stock, which may be issued from time to time in
one or more additional series upon authorization by the Company's Board of
Directors. The Board of Directors, without further approval of the stockholders,
is authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each series of
preferred stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could, among
other things, adversely affect the voting power of the holders of Common Stock
and, under certain circumstances, make it more difficult for a third party to
gain control of the Company, discourage bids for the Company's Common Stock at a
premium or otherwise adversely affect the market price of the Common Stock.
The Company currently has 1,500 shares of Series D Preferred Stock issued
and outstanding. Each share of Series D Preferred Stock is convertible into such
number of shares of Common Stock as is determined by dividing $1,000 by the
lesser of (A) 80% of the average bid price of the Common Stock for the five
trading days immediately preceding the date of notice of conversion and (B) (i)
$2.25 for the first one-third of the shares of Series D Preferred Stock
converted by a holder; or (ii) $2.50 for the next one-third of the shares of
Series D Preferred Stock converted by a holder; and (iii) $2.75 for the balance
of the shares of Series D Preferred Stock converted by a holder. In no event
shall such conversion price be less than $.60. The Series D Preferred Stock
unless sooner converted, shall automatically convert to shares of Common Stock
on June 5, 2000. Until such date, the Series D Preferred Stock may be converted
at any time after the effectiveness of the registration under the Securities Act
of the shares of Common Stock underlying the Series D Preferred Stock, or at
such time as the shares of Common Stock
37
<PAGE>
underlying the Series D Preferred Stock may be sold without registration under
the Securities Act in compliance with Rule 144 promulgated thereunder, as
follows:
0-30 days - one-third of investment
31-60 days - two-thirds of investment
After 61 days - 100% of investment
In addition, holders of the Series D Preferred Stock shall be entitled to
receive a six percent cumulative dividend on each share of Series D Preferred
Stock for the period that such share is outstanding, determined by multiplying
sixty dollars by a fraction, the numerator of which is the number of days in
said period and the denominator of which is 365 days. If on the proposed
conversion date, the closing price per share of the Common Stock is $1.00 or
less, then the Company can, at its option and in lieu of conversion, redeem any
or all of the Series D Preferred Stock for an amount equal to the sum of (i)
$1,200 for each share of Series D Preferred Stock redeemed, plus (ii) all
accrued but unpaid dividends, if any, on each share of Series D Preferred Stock
redeemed. If the Company chooses to redeem some, but not all of the Series D
Preferred Stock, then the Company shall redeem a pro-rata amount from each
holder of the Series D Preferred Stock which was to be converted.
The holders of the Series D Preferred Stock have certain registration
rights and the Prospectus is being utilized in connection with such rights.
Statutory Provisions Affecting Stockholders
The Company is subject to the State of Delaware's "business combination"
statute, Section 203 of the Delaware General Corporation Law. In general, such
statute prohibits a publicly held Delaware corporation from engaging in various
"business combination" transactions with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless (i) the transaction in which the
interested stockholder obtained such status or the business combination is
approved by the Board of Directors prior to the date the interested stockholder
obtained such status; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an "interested stockholder," the "interested
stockholder" owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned by (a) persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date the "business combination" is approved by
the Board of Directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66-2/3% of the outstanding
voting stock which is not owned by the "interested stockholder." A "business
combination" includes mergers, asset sales and other transactions resulting in
financial benefit to a stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act, and is, therefore
unenforceable.
38
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
All shares of Common Stock being offered hereby will be immediately
tradeable without restriction or further registration under the Securities Act.
The outstanding shares of Common Stock include 8,251,761 shares of Common Stock
outstanding deemed to be "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act, in that such shares were
purchased or acquired by such stockholders of the Company in a transaction not
involving a public offering, and, as such, may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144, or pursuant to another exemption under the
Securities Act. Substantially all of such restricted shares of Common Stock are
eligible for sale under Rule 144, subject to the volume limitations prescribed
by the Rule.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the issuer's common stock or the average weekly trading volume during the four
calendar weeks preceding such sale, provided that certain public information
about the issuer as required by Rule 144 is then available and the seller
complies with certain other requirements. Affiliates may sell such shares in
compliance with Rule 144, other than the holding period requirement. A person
who is not an affiliate, has not been an affiliate within three months prior to
sale, and has beneficially owned the restricted shares for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
The possibility that substantial amounts of Common Stock may be sold in
the public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
PLAN OF DISTRIBUTION
5,000,000 of the shares of Common Stock included in this Prospectus may be
issued to sellers as all or part of the purchase price to be paid in connection
with future acquisitions by the Company. Such sellers may include, without
limitation, stockholders of acquiree companies or companies selling their assets
and business. There are currently no agreements or understandings with any
sellers with respect to which shares of Common Stock may be issued pursuant to
this Prospectus. At the time of issuance, in connection with an acquisition by
the Company, it is contemplated that the Company may deliver a prospectus
supplement to the sellers, which supplement shall set forth the acquisition
terms and other specific terms related to the Common Stock.
The Selling Stockholders may offer and sell shares of Common Stock from
time to time as market conditions permit in the over-the-counter market, or
otherwise, at prices and terms then prevailing or at prices related to the
then-current market price, or in negotiated transactions. The shares may be sold
by one or more of the following methods, without limitation: (a) a block trade
in which a broker or dealer so engaged will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchases;
and (d) face-to-face transactions between sellers and purchasers without a
broker or dealer. In effecting sales, brokers or dealers engaged by the Selling
39
<PAGE>
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers, dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales. The Company will
advise all Selling Stockholders that the State of New Jersey requires that all
sales of Common Stock sold in New Jersey must be made through brokers or dealers
registered with New Jersey, or pursuant to an exemption from such requirement.
LEGAL MATTERS
Legal matters in connection with the Securities offered hereby will be
passed upon for the Company by Breslow & Walker, LLP, 767 Third Avenue, New
York, New York 10017.
EXPERTS
The financial statements of the Company as of November 30, 1996, and for
the years ended November 30, 1995 and November 30, 1996, included herein and
elsewhere in the Registration Statement, have been included herein and in the
Registration Statement in reliance upon the reports of Hoberman, Miller,
Goldstein & Lesser, P.C., independent certified public accountants, given upon
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C., a Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, for the registration of the
securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information contained in the Registration
Statement. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be inspected, without charge, at the
Office of the Securities and Exchange Commission, or copies of which may be
obtained from the Commission in Washington, D.C., upon payment of the requisite
fees, or from the Commission's Website at http://www.sec.gov. Statements
contained in this Prospectus as to the content of any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
40
<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, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended November 30,
1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1996 and the consolidated results of their
operations and their cash flows for the years ended November 30, 1996 and 1995,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $2,170,867 for the year ended November 30,
1996 and has incurred substantial net losses for each of the past three years.
At November 30, 1996, current liabilities exceed current assets by $614,728.
These factors, and others discussed in Note 1, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statelude any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C.
New York, New York
March 7, 1997
F-2
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
NOVEMBER 30, 1996
- --------------------------------------------------------------------------------
A S S E T S
Current Assets
Cash (Notes 14 and 16) $ 198,069
Accounts receivable 108,057
Inventories 432,696
Prepaid expenses and other 114,801
- -------------------------------------------------------------------------------
Total Current Assets 853,623
Equipment and vehicles, less accumulated depreciation (Note 3) 3,723,424
Intangible assets (net of accumulated amortization of $9,000)
(Notes 2 and 12) 81,000
Deferred tax benefit 210,000
Other assets 48,000
- -------------------------------------------------------------------------------
Total Assets $ 4,916,047
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 939,681
Due to affiliates (Note 6) 528,670
- -------------------------------------------------------------------------------
Total Current Liabilities 1,468,351
- -------------------------------------------------------------------------------
Loans payable, officer/stockholder (Note 5) 1,034,013
Due to affiliates (Note 6) 130,800
- -------------------------------------------------------------------------------
1,164,813
- -------------------------------------------------------------------------------
Total Liabilities 2,633,164
- -------------------------------------------------------------------------------
Commitments and Contingencies (Notes 6 and 14) 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 14,045,093 shares 14,045
Additional paid in capital 9,717,619
Deficit (6,971,781)
- -------------------------------------------------------------------------------
2,759,883
Less: Treasury stock, at cost (229,500)
Subscription receivable (247,500)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 2,282,883
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 4,916,047
===============================================================================
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 6 1 9 9 5
- --------------------------------------------------------------------------------
Sales $5,091,917 $5,690,982
- --------------------------------------------------------------------------------
Cost and Expenses
Cost of sales, exclusive of depreciation 4,186,631 4,457,209
Depreciation and amortization 1,003,245 507,361
Selling, general and administrative 1,942,240 2,395,963
Write-off of consulting agreement 1,614,973
Interest expense (income) (7,309) 124,438
- --------------------------------------------------------------------------------
7,124,807 9,099,944
- --------------------------------------------------------------------------------
Loss Before Income Taxes (2,032,890) (3,408,962)
Income Taxes (Benefit) (Note 10) 137,977 (190,000)
- --------------------------------------------------------------------------------
Net Loss ($2,170,867) ($3,218,962)
================================================================================
Weighted average common shares outstanding (Note 2) 14,011,980 10,752,349
Loss per share of common stock ($.15) ($.30)
================================================================================
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
=======================================================================================================================
YEARS ENDED NOVEMBER 30, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------
Preferred Stock Additional
---------------------------- Common Paid In Unearned
Series A Series B Series C Stock Capital Deficit Compensation
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1994 662 $ 3,508 $3,384,224 ($1,581,952) ($447,787)
Sale of common stock 36 40,464
Issuance of common stock for services 505 1,477,081 (310,400)
Purchase of treasury stock
Issuance of preferred stock in connection
with the acquisition of Smart Switch $1 400,000
Issuance of preferred stock for services 65,625 (65,625)
Issuance of preferred stock in connection
with the satisfaction of indebtedness $1 229,500
Sales of preferred stock 1 1,105,641
Exercise of common stock warrants 521 1,503,586
Amortization of unearned compensation
and write-off of consulting agreement 749,665
Conversion of preferred stock
to common stock (662) (2) (1) 8,780 (8,115)
Net loss for the year (3,218,962)
- -----------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1995 13,350 8,198,006 (4,800,914) (74,147)
Exercise of common stock warrants 688 1,547,616
Sale of common stock 7 12,497
Capital contribution 7,500
Cost incurred in connection with
registration of common stock (48,000)
Amortization of unearned compensation 74,147
Net loss for the year (2,170,867)
- -----------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1996 $14,045 $9,717,619 ($6,971,781)
=======================================================================================================================
<CAPTION>
===============================================================================
YEARS ENDED NOVEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
Total
Treasury Subscription Stockholders'
Stock Receivable Equity
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 1, 1994 $1,358,655
Sale of common stock 40,500
Issuance of common stock for services 1,167,186
Purchase of treasury stock ($229,500) (229,500)
Issuance of preferred stock in connection
with the acquisition of Smart Switch 400,001
Issuance of preferred stock for services
Issuance of preferred stock in connection
with the satisfaction of indebtedness 229,501
Sales of preferred stock ($247,500) 858,142
Exercise of common stock warrants 1,504,107
Amortization of unearned compensation
and write-off of consulting agreement 749,665
Conversion of preferred stock
to common stock
Net loss for the year (3,218,962)
- -------------------------------------------------------------------------------
Balance, November 30, 1995 (229,500) (247,500) 2,859,295
Exercise of common stock warrants 1,548,304
Sale of common stock 12,504
Capital contribution 7,500
Cost incurred in connection with
registration of common stock (48,000)
Amortization of unearned compensation 74,147
Net loss for the year (2,170,867)
- -------------------------------------------------------------------------------
Balance, November 30, 1996 ($229,500) ($247,500) $2,282,883
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
FOR THE YEARS ENDED NOVEMBER 30, 1 9 9 6 1 9 9 5
- --------------------------------------------------------------------------------
Operating Activities
Net loss ($2,170,867) ($3,218,962)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 1,021,245 507,361
Write-off of consulting agreement 1,614,973
Amortization of unearned compensation 74,147 301,878
Deferred tax debit 130,000 (190,000)
Changes in operating assets and liabilities
Accounts receivable (54,145) (17,774)
Inventories (176,299) (39,303)
Prepaid expenses and other (11,472) (11,241)
Accounts payable and accrued expenses (471,078) 356,942
Other assets 10,327 11,096
Due to affiliates (224,000)
- --------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,648,142) (909,030)
- --------------------------------------------------------------------------------
Investing Activities
Purchases of equipment and vehicles (725,132) (238,842)
Assets acquired through acquisitions (180,000)
- --------------------------------------------------------------------------------
Net Cash Used in Investing Activities (905,132) (238,842)
- --------------------------------------------------------------------------------
Financing Activities
Proceeds from exercise of common stock warrants 1,548,304 1,504,107
Repayment of long term debt and conversion to
capital lease obligations (146,238) (281,372)
Sale of convertible preferred stock, Series C 2,500
Sale of convertible preferred stock, Series B 855,644
Sale of common stock 12,500 40,500
Proceeds from loan payable, affiliate 229,500
Purchase of treasury stock (229,500)
Proceeds from stockholder's loans payable 886,785 75,479
Repayment of capital lease obligations (810,880) (213,796)
Proceeds from affiliate loan 300,000
Proceeds from capital contribution 7,500
Cost incurred in connection with registration
of common stock (48,000)
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,749,971 1,983,062
- --------------------------------------------------------------------------------
Net increase (decrease) in cash (803,303) 835,190
Cash, beginning of year 1,001,372 166,182
- --------------------------------------------------------------------------------
Cash, End of year $ 198,069 $ 1,001,372
================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $130,902
Income taxes $7,977 $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. The preferred stock
was automatically converted into an aggregate of
6,620,000 shares of common stock of the Company in
November, 1995.
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).
On October 1, 1996, the Company entered into a
supply and distribution agreement with ScreenScan
Systems, Inc. ("ScreenScan"), pursuant to which
the Company will act as the exclusive distributor
of ScreenScan's 100c Centronics interface scanners
in North and South America for a period of five
years. (See Note 14). ScreenScan develops and
manufactures devices capable of scanning microfilm
images and printing the scanned images onto a
printer without the aid of a computer.
Going Concern The accompanying financial statements have been
prepared in conformity with generally accepted
accounting principles, which contemplates
continuation of the Company as a going concern.
However, the Company has sustained substantial
operating losses in recent years. In addition, the
Company has used substantial amounts of working
capital in its operations. Further, at November
30, 1996, current liabilities exceed current
assets by $614,728.
F-7
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Going Concern
(Continued) In view of these matters, continuation of the
Company as a going concern is dependent upon the
ability of the Company to return its present
operations to profitability, the future success of
the Company's Smart Switch and ScreenScan
operations, the expected growth from its recent
acquisitions and the willingness and ability of
the Company's chief executive officer and others
to fund any operating deficits.
Management believes that actions presently being
taken to revise the Company's operations and the
willingness and ability of the Company's chief
executive officer to fund any operating deficits
provide the opportunity for the Company to
continue as a going concern.
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.
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
F-8
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
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. During 1996, management determined that the
intangible assets were impaired. See Note 12, for
details regarding the write down of such assets.
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
and options are not included in weighted average
shares outstanding in years where losses are
reported since their inclusion would be
antidilutive.
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 years
ended November 30, 1996 and 1995.
F-9
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Recently Issued
Accounting Standards In March 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This
statement establishes accounting standards for the
impairment of long-lived assets, certain
identifiable intangibles and goodwill related to
those assets to be held and used and for
long-lived assets and certain identifiable
intangibles to be disposed of. This statement is
effective for financial statements for fiscal
years beginning after December 15, 1995. The
Company believes that the adoption of this
standard will not have a material effect on the
Company's consolidated results of operations or
financial position.
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This
statement establishes financial accounting and
reporting standards for stock-based employee
compensation plans and is effective for fiscal
years beginning after December 15, 1995. The
Company expects to continue to apply the
accounting provisions of APB Opinion 25 in
determining its net income. However, additional
disclosures will be made to disclose the estimated
value of compensation expense under the method
established by SFAS No. 123.
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
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.
F-10
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. Acquisitions (Continued)
Smart Switch
(Continued) 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.
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.
Other During the year ended November 30, 1996, the
Company through its newly formed, wholly-owned
subsidiary, J.A. Hunt Service, Inc., acquired
three businesses engaged in the servicing of
reproduction equipment and the providing of
supplies, for the aggregate cost of $180,000. The
acquisitions have been accounted for as purchases.
The cost of the acquisitions have been allocated
on the basis of the estimated fair value of the
assets acquired.
In October, 1996, management determined to
withdraw from one of the acquisitions as a result
of misrepresentations made by the seller. The
Company is presently pursuing legal remedies to
recover the acquisition cost of $20,000.
Pro forma information reflecting results of
operations as though these companies had been
owned for all required periods has not been
presented because the acquisitions did not meet
the materiality parameters as required in
accordance with Regulation S-B.
In November, 1996, J.A. Hunt entered into an
agreement for the purchase of Business Machine
Professionals, Inc. ("BMP"). BMP is in the
business of selling and servicing copiers and
other office equipment and providing supplies in
connection therewith. The aggregate purchase price
is $1,000,000, of which $100,000 was paid in cash
and $900,000 is to be paid in shares of common
stock of the Company. The number of shares is to
be determined based on the closing bid price of
the Company's common stock as listed on NASDAQ as
of the close of trading on the day prior to the
closing of the agreement. The closing is subject
to a number of conditions and at the present time
the Company is unable to determine whether or not
the acquisition will be consummated.
F-11
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. Equipment and
Vehicles Equipment and vehicles consist of the following:
Photocopy machines and accessories $6,373,188
Furniture and fixtures
and computer equipment 99,738
Software 400,000
Vehicles 115,382
------------------------------------------------
6,988,308
Less: Accumulated depreciation 3,264,884
------------------------------------------------
$3,723,424
================================================
4. Loan Payable, Bank
and Capital Lease
Obligations On December 19, 1995, the Company paid off its
bank debt in full and all of its capital lease
obligations with the proceeds from the exercise of
its common stock warrants (See Note 7).
5. Loans Payable
Officer/Stockholder From time to time, Dr Irwin A. Horowitz, the
Chairman of the Board, Chief Executive Officer and
President of the Company, loans the Company funds
to cover its working capital needs and to finance
acquisitions. In consideration thereof, and for
Dr. Horowitz's agreement that such loans would not
bear interest, on August 16, 1996, the Company
delivered to Dr. Horowitz a promissory note in the
amount of $668,000 (the principal balance on that
date), payable on demand after June 1, 1997, and
five year warrants to purchase 427,520 shares of
common stock at an exercise price of $3.125 per
share. On December 17, 1996, Dr. Horowitz agreed
to extend to December 2, 1997 the due date of the
loans made on or before August 16, 1996, as well
as all subsequent loans, in the aggregate
principal amount of $1,034,013. In consideration
thereof, and for Dr. Horowitz's agreement that
such loans would be interest-free, the Company
agreed that the per share exercise price of the
warrants granted to him in August 1996, as well as
of options to purchase 750,000 shares of common
stock granted to him in October 1996 pursuant to
his employment agreement with the Company, would
be reduced to $2.375 per share, the then current
fair market value of the common stock. In
addition, the Company granted to Dr. Horowitz
additional incentive and non-incentive options, to
purchase an aggregate of 750,000 shares of common
stock, of which the incentive options (for 38,270
shares) are exercisable at $2.613 per share and
the non-incentive options (for 711,730 shares) are
exercisable at $2.375 per share.
F-12
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. Loans Payable
Officer/Stockholder
(Continued) The loans payable, officer/shareholder, were
$147,228 at November 30, 1995 and the average loan
balance during the year ended November 30, 1996
was approximately $415,000 computed on a quarterly
basis.
6. 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)
Due to stockholder 300,000 (c)
--------------------------------------------------
659,470
Less: Current portion 528,670
--------------------------------------------------
$130,800
==================================================
(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, 1996. 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, 1996 and 1995.
F-13
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. Due To Affiliates
(Continued) 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. The Company and DIC have
each appealed the denial of their respective
motions for summary judgement. 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. Key has
agreed not to require payment of the $130,800
until after December 1, 1997.
The amount due to Key was $130,800 at November 30,
1995.
(c) In November, 1996, a stockholder loaned the
Company an aggregate of $300,000 pursuant to a
non-interest bearing promissory note due and
payable within three months. In lieu of
interest the Company granted the stockholder
three year warrants to purchase 30,000 shares
of common stock at an exercise price of $3.00
per share. Should the Company fail to repay
the loan on or before the due date, the
Company shall grant the stockholder three year
warrants to purchase 10,000 shares of common
stock at an exercise price of $3.00 per share
each month for as long as the loan remains
outstanding. The loan is guaranteed by Dr.
Irwin A. Horowitz, the Chairman of the Board,
Chief Executive Officer and President of the
Company. As of March 7, 1996 the loan remained
unpaid.
F-14
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. 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 had 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 had 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 of IMSG
and affiliates, 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 was 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 was
increased to 2.02 shares.
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 bore 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 was convertible into 1000
shares of common stock. The Series C Preferred
Stock had a liquidation preference of $1,000 per
share and was 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-15
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. 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-16
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. Stockholders' Equity
(Continued) In October, 1996, the Company commenced another
private placement offering of up to 1,000,000
units, each consisting of one share of common
stock and one three year warrant to purchase one
share of common stock. Each warrant is
exercisable, subject to adjustment, at a price per
share equal to $2.00 above the per unit purchase
price. The purchase price of each unit is equal to
the closing bid price of the common stock as
reported by NASDAQ on the date of receipt by the
Company of each respective subscription. As of
November 30, 1996, 4,878 units were sold for a
total purchase price of $12,500.
8. Stock Options
and Warrants 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 each of two directors.
F-17
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. Stock Options
and Warrants
(Continued) In October 1996, the Company amended the 1995 Plan
and The Director's Plan so that no further options
could be granted thereunder and adopted the 1996
Stock Option Plan ("the 1996 Plan"). In December
1996, the Company amended the 1996 Plan to
increase the number of common shares reserved for
the issuance upon the exercise of options to
3,000,000. In connection therewith two directors
each received additional options to purchase
100,000 shares of common stock at an exercise
price of $2.375. In connection with such grant,
the two directors each agreed to cancel the
unvested portion (for 60,000 shares) of their
original options.
The 1996 Plan provides that the Company may grant
stock options to officers, employees, directors,
consultants and advisors. Under the Plan, the
purchase price of the common stock underlying each
option shall be determined by the Board of
Directors, provided, however, that in no event
shall the purchase price of incentive stock
options be less than 100% (110% in the case of
optionees who own more than 10% of the total
combining voting power of all classes of stock of
the Company) of the fair market value of the
common stock on the date the option is granted.
At November 30, 1996, the Company has outstanding
options to purchase an aggregate of 2,051,000
shares of common stock at exercise prices of
$2.375 - $4.125 per share.
On January 21, 1997, the Company granted an
additional 353,000 options to purchase common
stock at an exercise price of $2.625 per share.
In addition, the Company has outstanding warrants
to purchase an aggregate of 527,520 shares of
common stock at exercise prices of $2.375 - $4.50
per share.
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-18
<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.
During 1996, as a result of the continued
operating losses, the Company further evaluated
the realizability of the deferred tax asset and
determined an increase in the valuation allowance
in the amount of $630,000 was required, resulting
in a net deferred tax asset equal to the existing
deferred tax liabilities at November 30, 1996.
F-19
<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, 1996 are as
follows:
Total deferred tax assets $1,750,000
Total deferred tax liabilities ( 210,000)
Valuation allowance ( 1,330,000)
-------------------------------------------------
Net Deferred Tax Asset $ 210,000
=================================================
A reconciliation of income tax (benefit) at the
statutory rate to the Company's effective rate is
as follows:
1996 1995
-------------------------------------------------
Computed "expected" tax
expense (benefit) ($690,000) ($1,160,000)
Losses for which no
benefit was provided 220,000 660,000
State income taxes 7,977
Reversal of previously
established deferred
tax liability ( 30,000) ( 30,000)
Change in valuation
allowance 630,000 340,000
-------------------------------------------------
$137,977 ($ 190,000)
=================================================
The Company has a net operating loss carryforward
of approximately$6,200,000 at November 30, 1996
which may be used to reduce taxable income in
future years. The carryforward will expire through
the fiscal year 2011. 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 7).
F-20
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. Fourth Quarter
Adjustments During the fourth quarter of fiscal 1996, the
trademark, covenant not to compete, goodwill and
the customer lists that were acquired in
connection with the purchase of MDM Copying
Services, were deemed to be impaired. Management
determined the impairment as a result of the loss
of the majority of the customers acquired in such
acquisition. Accordingly, these intangible assets
have been written down to zero. The write-down is
included in depreciation and amortization in the
accompanying 1996 consolidated statement of
operations.
During the fourth quarter of fiscal 1996,
management determined that a deposit in the amount
of $50,000 made in connection with a potential
acquisition was not recoverable, and, accordingly,
was written down to zero. The write-down is
included in selling, general and administrative
expenses in the accompanying 1996 consolidated
statement of operations.
13. Related Party
Transactions The Company's general counsel is a director of the
Company. Fees incurred to the general counsel
amounted to approximately $33,000 and $69,000 for
the years ended November 30, 1996 and 1995,
respectively.
14. 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:
1997 $42,000
1998 24,000
1999 19,000
2000 19,000
Other locations are rented on a month-to-month
basis. Rent expense totaled approximately $150,000
and $123,000 for the years ended November 30, 1996
and 1995, 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, 1996 and 1995.
F-21
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. 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 1996
and 1995 to provide for by any other assessments
by any other states that may arise.
Employment
Agreements On October 29, 1996, the Company entered into a
renewable one year employment agreement with Dr.
Horowitz, pursuant to which the Company agreed to
pay Dr. Horowitz a salary of $125,000, together
with an annual incentive bonus equal to a
percentage of the Company's pre-tax profits. Such
incentive bonus ranges from 6% to 18% of the
Company's pre-tax profits, based on the level of
such pre-tax profits. In addition, upon execution
of the agreement, Dr. Horowitz received options to
purchase 750,000 shares of common stock, which
options vest as to 150,000 shares on the date of
grant and upon each of the next four anniversary
dates thereof. The Company further agreed to grant
Dr. Horowitz options to purchase an additional
100,000 shares of common stock, in consideration
of Dr. Horowitz' prior guaranty of the Company's
payments under the bank loan agreement that was
paid in full on December 19, 1995 (See Note 4).
In June, 1996, J.A. Hunt entered into a three year
employment agreement with its president, providing
for an annual salary of $85,000 and certain
incentive compensation based on a percentage of
the net income of J.A. Hunt, as defined in the
agreement.
Purchases On October 1, 1996, the Company entered
into a supply and distribution agreement with
ScreenScan, pursuant to which the Company will act
as the exclusive distributor of ScreenScan's 100c
Centronics interface scanners in North and South
America for a period of five years. In connection
with the agreement the Company agreed to purchase
a minimum of $2,500,000 of scanner units during
the one year period ending September 30, 1997.
F-22
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. Commitments and Contingencies (Continued)
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.
In December, 1996, an action was brought against
the Company and Dr. Horowitz claiming that the
Company owed and has refused to pay certain
amounts due under an alleged oral agreement made
with the plaintiff, to assist the Company in
becoming the exclusive distributor for ScreenScan.
The plaintiff is seeking unspecified compensatory
and punitive damages, including cost, attorney's
fees and interest.
Although the ultimate liability, if any, that
might result from the final resolution of these
matters is not presently determinable, management
and the Company's counsel are of the opinion that
the final outcome of this litigation will not have
a materially adverse effect on the Company's
consolidated financial position.
15. Major Customers During the year ended November 30, 1996, one
customer accounted for 11.6% of the total sales.
During the year ended November 30, 1995, two
customers accounted for 24.7% of total sales.
In March, 1996, the Company was not successful in
its bid for the renewal of its contract with a
major library system. The customer accounted for
approximately 12.3% of the total sales for the
year ended November 30, 1995.
16. Fair Value of Financial
Instruments The carrying amount approximates fair value of
cash and short-term instruments.
F-23
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
================================================================================================================
Three months Three months
Ended Ended
February 28, 1997 February 29, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 70,674 ($ 365,499)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 181,136 126,840
Amortization of unearned compensation 55,006
Changes in operating assets and liabilities
Accounts receivable (212,221) (11,000)
Inventories (12,858) 5,000
Prepaid expenses and other (8,766) 21,281
Accounts payable and accrued expenses 30,811 (360,931)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 48,776 (529,303)
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of equipment and vehicles (7,813) (329,494)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (7,813) (329,494)
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Repayment of loan payable, bank (146,238)
Repayment of capital lease obligations, net (1,190) (810,880)
Proceeds from affiliate and stockholder's
loans payable 108,939 (49,410)
Proceeds of common stock warrants 1,548,304
Proceeds from sale of common stock 94,000
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 201,749 541,776
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 242,712 (317,021)
Cash, beginning of year 198,069 1,001,372
- ----------------------------------------------------------------------------------------------------------------
Cash, End of Period $ 440,781 $ 684,351
================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 1,473 $ 6,356
================================================================================================================
</TABLE>
See notes to Consolidated Financial Statements
F-24
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
================================================================================================================
Three months Three months
Ended Ended
February 28, 1997 February 29, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 1,553,626 $ 1,339,620
- ----------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales, exclusive of depreciation 850,673 1,054,389
Depreciation and amortization 181,136 126,840
Selling, general and administrative 449,670 517,534
Interest expense 1,473 6,356
- ----------------------------------------------------------------------------------------------------------------
1,482,952 1,705,119
- ----------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 70,674 ($ 365,499)
================================================================================================================
Weighted average common shares outstanding 14,073,353 13,810,301
Income (loss) per share of common stock $ .01 ($ .03)
================================================================================================================
</TABLE>
See notes to Consolidated Financial Statements
F-25
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
====================================================================================================
FEBRUARY 28, 1997 NOVEMBER 30, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 440,781 $ 198,069
Accounts receivable 320,278 108,057
Inventories 445,554 432,696
Prepaid expenses and other 123,567 114,801
- ----------------------------------------------------------------------------------------------------
Total Current Assets 1,330,180 853,623
Equipment and vehicles, less accumulated depreciation 3,663,601 3,723,424
Intangible assets, net of accumulated amortization 76,500 81,000
Deferred tax benefit 210,000 210,000
Other assets 48,000 48,000
- ----------------------------------------------------------------------------------------------------
Total Assets $ 5,328,281 $ 4,916,047
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Capital lease payable, current portion $ 12,826
Accounts payable and accrued expenses 970,492 $ 939,681
Due to affiliates 528,670 528,670
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities 1,511,988 1,468,351
Capital lease payable, net of current portion 94,984
Loans payable, officer/stockholder 1,142,952 1,034,013
Due to affiliates 130,800 130,800
- ----------------------------------------------------------------------------------------------------
Total Liabilities 2,880,724 2,633,164
- ----------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity
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 14,077,594 and 14,045,093 shares,
respectively 14,078 14,045
Additional paid in capital 9,811,586 9,717,619
Deficit (6,901,107) (6,971,781)
- ----------------------------------------------------------------------------------------------------
2,924,557 2,759,883
Less: Treasury stock, at cost (229,500) (229,500)
Subscription receivable (247,500) (247,500)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,447,557 2,282,883
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 5,328,281 $ 4,916,047
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-26
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
1. Basis of Presentation The consolidated balance sheet as of February 28,
1997 and the related consolidated statements of
operations and cash flows for the three month
periods ended February 28, 1997 are unaudited. In
the opinion of management, all adjustments (which
include only normally recurring adjustments)
necessary for a fair presentation of such
financial statements have been made.
The November 30, 1996 balance sheet data was
derived from audited financial statements but does
not include all disclosures required by generally
accepted accounting principles. The interim
financial statements and notes thereto should be
read in conjunction with the financial statements
and notes included in the Company's latest annual
report on Form 10-KSB. The results of operations
for the three month period ended February 28, 1997
are not necessarily indicative of the operating
results for the entire year.
2. Loan Payable, During the three months ended February 28, 1997,
Officer/Stock-Holder Dr. Irwin A. Horowitz, the Chairman of the Board,
Chief Executive Officer and President of the
Company loaned the Company an additional $109,000.
3. Stockholders' Equity During the three months ended February 28, 1997,
the Company sold an additional 37,916 units for a
total purchase price of $94,000 in connection with
the Company's private placement offering of up to
1,000,000 units. Each unit consists of one share
of common stock and one three year warrant to
purchase one share common stock.
F-27
<PAGE>
4. Supplemental Disclosure During the three months ended February 28, 1997,
of Noncash Investing the Company incurred capital lease obligations in
and Financing Activities the amount of approximately $109,000 in connection
with the acquisition of ScreenScans.
F-28
<PAGE>
================================================================================
No dealer, salesperson, or other person has been authorized in connection
with this offering to give any information or to make any representations other
than those contained in this Prospectus. This Prospectus does not constitute an
offer or a solicitation in any jurisdiction to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus, nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in the circumstances or the facts herein set forth
since the date hereof.
---------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...........................................................3
Risk Factors.................................................................6
Use of Proceeds.............................................................11
Market for Securities and
Related Stockholder Matters...............................................12
Selected Financial Data.....................................................13
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.................................................14
Business....................................................................19
Management..................................................................29
Certain Transactions........................................................34
Principal Stockholders......................................................35
Description of Securities...................................................37
Shares Eligible for Future Sale.............................................39
Plan of Distribution........................................................39
Legal Matters...............................................................40
Experts.....................................................................40
Additional Information......................................................40
Index to Financial Statements..............................................F-1
---------------------------
================================================================================
================================================================================
DIVERSIFAX, INC.
7,640,000 shares of Common Stock
---------------------------
PROSPECTUS
---------------------------
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law the registrant
may or shall, subject to various exceptions and limitations, indemnify its
directors or officers and may purchase and maintain insurance therefor.
The Company has included in its Certificate of Incorporation pursuant to
Section 102(b)(7) of the Delaware General Corporation Law a provision
eliminating the personal liability of directors to the Company or its
stockholders for damages for breach of fiduciary duty. The principal effect of
this provision in the Company's Certificate of Incorporation is to eliminate
potential monetary damage actions against any director for breach of his duties
as a director except (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the General Corporation Law, which relates to a willful or
negligent violation of Section 160 (regarding the illegal purchase or redemption
of stock by a corporation) or 173 (regarding a corporations illegal declaration
or payment of dividends) of the General Corporation Law, or (d) for any
transaction from which the director derived an improper benefit. This provision
does not affect the liability of any director for acts or omissions occurring
prior to the date of adoption of this provision. In addition, Section 145 of the
Delaware General Corporation Law empowers a corporation (a) to grant
indemnification to any officer or director where it is determined that he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful and
(b) to advance to an officer or director the expenses of defending claims upon
receipt of his undertaking to repay any amount to which it is later determined
he is not entitled. The Company's By-laws provide that the Company will
indemnify and advance expenses of defense to its officers and directors
substantially to the full extent authorized by the Delaware General Corporation
Law.
The foregoing statement is subject to the detailed provisions of Sections
102 and 145 of the Delaware General Corporation Law.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the Registrant in connection with the issuance
and distribution of the securities being registered hereby are as follows:
Registration Fee.....................................................$ 4,630.30
Accounting Fees and Expenses......................................... 2,500.00
Legal Fees and Expenses.............................................. 25,000.00
Blue Sky Fees and Expenses........................................... 1,000.00
Miscellaneous Expenses............................................... 869.70
----------
Total..........................................................$34,000.00
==========
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
On November 4, 1996, the Company commenced a private placement offering of
up to 1,000,000 Units, each consisting of one share of Common Stock and one
warrant to purchase one share of Common Stock, pursuant to Rule 506 as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended ("Rule 506"). As of June 23, 1997, 32,250 Units have been
sold, for which the Company received $64,500 in gross proceeds.
On November 22, 1996, the Company entered into an Advertising and Media
Agreement with Marketing Direct Concepts, Inc., pursuant to which the Company
issued 100,000 shares of Common Stock and warrants to purchase an additional
50,000 shares of Common Stock at an exercise price of $3.50 per share.
On June 5, 1997, the Company completed a private placement offering of
1,500 shares of the Company's Series D Convertible Preferred Stock, pursuant to
Rule 506, for which the Company received gross proceeds, of $1,500,000.
Item 27. Exhibits.
Exhibit # Document
- --------- --------
2. (a) Plan of Reorganization and Agreement of
Merger by and among the Company,
Diversified Acquisition Corp. 1 and IMSG
Systems, Inc.*
(b) Plan of Reorganization and Agreement of
Merger by and among the Company,
Diversified Acquisition Corp. 2 and
National Copy Corp.*
(c) Plan of Reorganization and Agreement of
Merger by and among the Company,
Diversified Acquisition Corp. 3 and
Advanced Business Systems, Inc.*
(d) Plan of Reorganization and Agreement of
Merger by and among the Company,
Diversified Acquisition Corp. 4 and Capital
Copy, Inc.*
3. (a) Restated Certificate of Incorporation*
(b) Amendment to Restated Certificate of
Incorporation*
(c) Certificate of Designations of Series D
Preferred Stock
(d) By-laws*
II-2
<PAGE>
5. Opinion of counsel
10. (a) Payment Deferral Agreement, dated
November 13, 1992, by Diversified
Investors Corporation*
(b) Loan Deferral Agreement, dated November
13, 1992, by Howard Kesslin*
(c) Loan Deferral Agreement, dated November
13, 1992, by Diversified Investors
Corporation*
(d) Loan Deferral Agreement, dated November
13, 1992, by Diversified Distributing &
Marketing, Corp.*
(e) Agreement of Acquisition by and Among
DiversiFax, Inc., a Delaware Corporation,
Faxit Corporation, a Delaware Corporation,
Faxit Corporation, a New Jersey
Corporation, Mario DiNatale, and
DiversiFax Acquisition Corp., a New York
corporation*
(f) Letter Agreement, dated December 18,
1996, between DiversiFax, Inc. and Irwin
A. Horowitz regarding loans made to the
Company*
(g) Letter, dated August 16, 1996, from
DiversiFax, Inc. to Irwin A. Horowitz
regarding funding of operating deficiencies
of the Company*
(h) Employment Agreement between
DiversiFax, Inc. and Dr. Irwin A. Horowitz
dated October 29, 1996*
(i) Letter Agreement dated November 21, 1996
between DiversiFax Information Service,
Inc. and Danka Business Systems, plc*
(j) Agreement dated as of October 1, 1996
between ScreenScan Systems, Inc. and
Diversifax, Inc.*
(k) Form of Series D Preferred Stock Purchase
Agreement, dated May 30, 1997
21. Subsidiaries of the Company*
II-3
<PAGE>
23. (a) Independent Auditor's Consent
(b) Consent of Counsel**
- ----------
* Incorporated by reference.
** Contained in the opinion of counsel filed as part hereof as Exhibit 5.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Valley
Stream, State of New York, on June 24, 1997.
DIVERSIFAX, INC.
By: /s/ Irwin A. Horowitz
-----------------------------------
Dr. Irwin A. Horowitz
President and Chief Executive Officer
(Principal Executive, Financial and Accounting Officer)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Irwin A. Horowitz Director June 24, 1997
- ------------------------------------
Dr. Irwin A. Horowitz
/s/ Eugene Bilotti Director June 24, 1997
- ------------------------------------
Eugene Bilotti
/s/ Mario DiNatale Director June 24, 1997
- ------------------------------------
Mario DiNatale
/s/ Kenneth Ross Wolfe Director June 24, 1997
- ------------------------------------
Kenneth Ross Wolfe
II-5
Exhibit 3(c)
CERTIFICATE OF DESIGNATION
of
SERIES D CONVERTIBLE PREFERRED STOCK
of
DIVERSIFAX, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
------------------------------------
Diversifax, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), hereby certifies
that the following resolutions were adopted by the Board of Directors of the
Corporation as required by Section 151 of the General Corporation Law at a
meeting duly called and held on May 23, 1997:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board") in accordance with the
provisions of the Certificate of Incorporation, the Board hereby creates a
series of preferred stock of the Corporation, par value $.001 per share (the
"Preferred Stock"), and hereby states the designation and number of shares, and
fixes the relative rights, preferences, and limitations thereof as follows:
Section 22. Designation and Amount. The shares of such series shall be
designated as "Series D Convertible Preferred Stock" (the "Series D Preferred
Stock") and the number of shares constituting the Series D Preferred Stock shall
be One Thousand Five Hundred (1,500). Such number of shares may be increased or
decreased by resolution of the Board; provided, however, no decrease shall
reduce the number of shares of Series D Preferred Stock to a number less than
the number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights, or warrants for, or
upon the conversion of any outstanding securities issued by the Corporation
convertible into, Series D Preferred Stock. The stated value of each share of
Series D Preferred Stock shall be $1,000.
Section 23. Dividends.
a. Subject to the limitations set forth below, the holders of
the Series D Preferred Stock shall be entitled to receive, from funds of the
Corporation legally available therefor pursuant to the General Corporation Law
of the State of Delaware (the "Legally Available Funds"), a six percent (6%)
cumulative dividend on each share of Series D Preferred Stock for the period
that such share of Series D Preferred Stock is outstanding (the "Period"),
determined by multiplying sixty dollars ($60) times a fraction, the numerator of
which is the number of days in the Period and the denominator of which is 365.
b. Subject to the limitations set forth herein and by
applicable state law, dividends on each share of Series D Preferred Stock shall
be due and payable on or before the fifth business day following the Conversion
Date (as defined below) with respect to such share or the Anniversary Date (as
defined below), whichever is applicable,
1
<PAGE>
and shall paid to the holder of record of such share as such holder appears on
the stock register of the Corporation on the Conversion Date with respect to
such share or the Anniversary Date, whichever is applicable.
c. Dividends on shares of Series D Preferred Stock shall be
fully cumulative and shall accrue without regard to whether or not such
dividends have been declared and whether or not there are any Legally Available
Funds available for the payment of dividends.
d. Dividends on the shares of Series D Preferred Stock shall
be payable in cash, common stock of the Corporation, $0.001 par value per share
(the "Common Stock"), or any combination thereof, as determined by the Board.
Any Common Stock so issued as a dividend shall be deemed to have a value equal
to the average closing bid prices of the Common Stock as reported on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
(or on the principal national securities exchange on which the Common Stock is
admitted to trading or listed or, if not listed or admitted to trading on NASDAQ
or a national securities exchange, as reported by the National Quotation Bureau,
Inc. or other similar organization) for the five (5) trading days immediately
prior to the date such dividend is payable.
e. No share of Series D Preferred Stock shall be entitled to
participate with respect to any dividend (in any form) declared, accrued, or
paid on any other class, or series thereof, of the capital stock of the
Corporation.
Section 24. Conversion.
a. Subject to the provisions of Sections 3c and 4 below, the
holder of any share or shares of Series D Preferred Stock shall have the right,
without the payment of any additional consideration, to convert any share of
Series D Preferred Stock held by such holder into that number of fully paid and
non-assessable shares of Common Stock as is determined by dividing $1,000 by the
Conversion Price. As used herein, the Conversion Price shall mean the lesser of
(i) a price equal to 80% of the Average Bid Price (as hereinafter defined), and
(ii) the Applicable Price (as defined below); provided, however, in no event
shall the Conversion Price be less than $0.60, subject to adjustment as provided
in Section 3 hereof (the "Floor Price"). Each conversion shall be effected by
surrendering to the Corporation the stock certificate or certificates for the
Series D Preferred Stock to be converted, accompanied by a written notice of
such holder's election to convert his share(s) of Series D Preferred Stock into
Common Stock and the number of whole shares of Series D Preferred Stock to be so
converted (the "Conversion Notice"). Promptly after receipt of such stock
certificate or certificates and the Conversion Notice, the Corporation shall
issue and deliver to such holder a stock certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled. As used
herein, Average Bid Price shall mean the average of the closing bid prices for
the Common Stock as reported on NASDAQ (or on the principal national securities
exchange on which the Common Stock is admitted to trading or listed or, if not
listed or admitted to trading on NASDAQ or a national securities exchange, as
reported by the National Quotation Bureau, Inc. or other similar organization)
for the five (5) trading days immediately preceding the date upon which the
holder sends, by facsimile transmission or otherwise, the Conversion Notice to
the Corporation at its executive offices (the "Conversion Date"). As used
herein, the Applicable Price shall mean, subject to adjustment as provided in
Section 3 hereof, $2.25 per share for one-third of the shares of Series D
Preferred Stock, $2.50 per share for the next one-third of the shares of Series
D Preferred Stock, and $2.75 per share for the balance of the shares of Series D
Preferred Stock. Each certificate evidencing shares of Series D Preferred Stock
shall bear a legend identifying the Applicable Price with respect to such
shares.
b. Subject to Section 4 hereof, any shares of Series D
Preferred Stock outstanding on the third anniversary of the date on which the
Series D Preferred Stock was first issued by the Corporation (the "Anniversary
2
<PAGE>
Date") automatically shall be converted into Common Stock on the same basis as
the holder of such shares of Series D Preferred Stock may convert such shares
pursuant to Section 3a above. The Corporation shall not be obligated to deliver
the certificate(s) evidencing such shares of Common Stock unless the
certificate(s) evidencing the Series D Preferred Stock so converted are
delivered to the Corporation.
c. The shares of Series D Preferred Stock may be converted as
provided herein only after a registration statement (the "Registration
Statement") covering the resale of the shares of Common Stock underlying the
Series D Preferred Stock (the "Underlying Shares") has been declared effective
under the Securities Act of 1933, as amended (the "Act"), or at such time as the
Underlying Shares may be sold without registration under the Act in compliance
with Rule 144 promulgated under the Act.
d. (1) If the Corporation shall, at any time or from time to
time, declare and pay to the holders of Common Stock a dividend in shares of
Common Stock, or the Corporation shall subdivide the outstanding shares of
Common Stock into a greater number of shares of Common Stock, or combine the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then the Floor Price, the Applicable Price, and the Redemption Trigger
Price (as defined below) each shall be adjusted so that the same shall equal the
price determined by multiplying the Floor Price, the Applicable Price, and the
Redemption Trigger Price, as the case may be, in effect immediately prior to the
happening of such event by a fraction, the numerator of which shall be the
number of shares of Common Stock issued and outstanding immediately prior to the
happening of such event and the denominator of which shall be the number of
shares of Common Stock issued and outstanding immediately after the happening of
such event. Such adjustment shall become effective immediately after the opening
of business of the day following the record date, in the event of a stock
dividend, or the day upon which the subdivision or combination becomes
effective, as the case may be.
(2) If the Corporation shall, at any time or from time to
time after the date on which the Series D Preferred Stock was first issued by
the Corporation, make or issue, or fix a record date for the determination of
holders of shares of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Corporation, including a distribution
of evidence of indebtedness of the Corporation, other than shares of Common
Stock, then, and in each such event, provision shall be made by the Corporation
so that the holders of shares of Series D Preferred Stock shall receive, upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of those securities of the Corporation that
such holders would have received had their shares of Series D Preferred Stock
been converted on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such period.
(3) If the shares of Common Stock issuable upon the
conversion of shares of Series D Preferred Stock shall be changed into the same
or any different number of shares of any class or any series of any class of
capital stock, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination of shares or a stock dividend provided
for above, or a reorganization, merger, consolidation or sale of assets provided
for in Section 8 hereof), then, and in each such event, the holder of shares of
Series D Preferred Stock shall have the right thereafter to convert such shares
of Series D Preferred Stock into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such shares of Series D Preferred Stock might have been
converted immediately prior to such reorganization, reclassification or change.
e. At all times, the Corporation shall reserve and keep
available out of its authorized but unissued Common Stock, solely for issuance
upon the conversion of shares of the Series D Preferred Stock as herein
3
<PAGE>
provided, such number of shares of Common Stock as, from time to time, shall be
issuable upon the conversion of all of the shares of the Series D Preferred
Stock at the time outstanding.
f. No fractional shares of Common Stock shall be issued. In
lieu of the issuance of any fractional share of Common Stock that would, but for
the foregoing, be issued to a holder of Series D Preferred Stock on conversion
thereof, the Corporation shall pay to such holder, in cash, the value of such
fractional share, which value shall be based upon the closing sale price of the
Common Stock as reported on NASDAQ (or on the principal national securities
exchange on which the Common Stock is admitted to trading or listed or, if not
listed or admitted to trading on NASDAQ or a national securities exchange, as
reported by the National Quotation Bureau, Inc. or other similar organization)
for the trading day immediately preceding the effective date of such conversion.
Section 25. Redemption.
a. If, on any Conversion Date or the Anniversary Date, the
Fair Market Value of the Common Stock (as defined below) is, subject to
adjustment as provided in Section 3 hereof, $1.00 or less (the "Redemption
Trigger Price"), then the Corporation, at its sole option and in lieu of the
conversion, may elect to redeem, in cash, any or all of the Series D Preferred
Stock submitted for conversion or to be automatically converted on such date
(the "To Be Converted Shares") for an amount equal to the sum of (1) $1,200 for
each share of Series D Preferred Stock so redeemed, plus (2) all accrued but
unpaid dividends, if any, on each share of Series D Preferred Stock so redeemed.
b. If, pursuant to Section 4a hereof, the Corporation desires
to redeem some, but not all, of the To Be Converted Shares, then the Corporation
shall redeem a pro-rata amount from each holder of the To Be Converted Shares.
c. The Corporation shall effect each such redemption by giving
the holder notice (the "Redemption Notice") of its election to redeem within
three (3) business days following the Conversion Date or the Anniversary Date,
as the case may be. In addition, the Redemption Notice shall indicate whether
the Corporation will redeem all or part of the To Be Converted Shares.
d. Each holder whose Series D Preferred Stock is being
redeemed pursuant to this Section 4 shall send (if not already sent) the
certificates evidencing their Series D Preferred Stock to be redeemed to the
Corporation, and the Corporation promptly shall pay the applicable redemption
price to such holder. The Corporation shall not be obligated to deliver the
redemption price unless the certificate(s) evidencing the Series D Preferred
Stock so redeemed are delivered to the Corporation.
e. As used in Section 4a, the term Fair Market Value per share
of Common Stock on a particular day shall mean (i) the last sale price of the
Common Stock on such day or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices on such day, on
NASDAQ (or on the principal national securities exchange on which the Common
Stock is admitted to trading or listed), (ii) if not listed or admitted to
trading on NASDAQ or a national securities exchange, the average of the highest
reported bid and lowest reported asked prices on such day as reported by the
National Quotation Bureau, Inc. or other similar organization, or (iii) if no
such market price information is so available, the fair market price of the
Common Stock as reasonably determined by the Board.
Section 26. Voting Rights. Except as required by applicable law, the
holders of shares of Series D Preferred Stock shall not have the right or power
to vote on any question or in any proceeding or to be represented at, or to
receive notice of, any meeting of the Corporation's stockholders.
4
<PAGE>
Section 27. Reacquired Shares. Any shares of Series D Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designation
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 28. Liquidation, Dissolution or Winding Up. In the event of any
liquidation, dissolution, or winding up of the Corporation, the holders of
shares of the Series D Preferred Stock are entitled to receive out of assets of
the Corporation available for distribution to stockholders, after satisfaction
of indebtedness, but before any distribution of assets is made to holders of
Common Stock or to holders of any other class of stock of the Corporation
ranking junior to the Series D Preferred Stock upon liquidation, liquidating
distributions on each share of Series D Preferred Stock held by such holder in
the per share amount of $1,000 plus all dividends accrued and unpaid, if any, on
each such share pursuant to Section 2 hereof (the "Liquidation Preference"). If,
upon any liquidation, dissolution, or winding up of the Corporation, the amounts
payable with respect to the Series D Preferred Stock or any other shares of
stock of the Corporation ranking as to any such distribution on a parity with
the Series D Preferred Stock are not paid in full, the holders of the Series D
Preferred Stock and of such other shares will share ratably in any such
distribution of assets of the Corporation in proportion to the full
distributable amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of the Series D Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation.
Section 29. Consolidation, Merger, etc. If the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash, and/or any other property, then, in any such case, the
Corporation, as a condition precedent to such transaction, shall cause effective
provisions to be made so that each holder of Series D Preferred Stock then
outstanding shall have the right, by converting such share(s) of Series D
Preferred Stock, to acquire the kind and amount of shares of stock, securities,
cash and/or other property receivable upon such consolidation, merger,
combination or other transaction by a holder of the number of shares of Common
Stock which might have been acquired upon conversion of such Series D Preferred
Stock immediately prior to such consolidation, merger, combination, or other
transaction.
Section 30. No Redemption. Except as set forth in Section 4 hereof, the
shares of Series D Preferred Stock shall not be redeemable.
Section 31. Amendment. This Certificate of Designation shall not be
amended in any manner which would materially alter or change the powers,
preferences, or special rights of the Series D Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series D Preferred Stock, voting
together as a single class.
RESOLVED, FURTHER, that the appropriate officers of the Corporation hereby
are authorized to execute and acknowledge a certificate setting forth these
resolutions and to cause such certificate to be filed and recorded, all in
accordance with the requirements of Section 151 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation by its President & Chief Executive Officer this 27th day of
May, 1997.
/s/ Dr. Irwin A. Horowitz
-------------------------------------
Dr. Irwin A. Horowitz, President and
Chief Executive Officer
5
Exhibit 5
June 24, 1997
Board of Directors
Diversifax, Inc.
39 Stringham Avenue
Valley Stream, New York 11580
Gentlemen:
It is our opinion that the securities being registered with the Securities
and Exchange Commission pursuant to the Registration Statement of Diversifax,
Inc. on Form SB-2 will, when sold, be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the aforesaid
Registration Statement and further consent to the reference made to us under the
caption "Legal Matters" in the Prospectus constituting part of such Registration
Statement.
Very truly yours,
/s/ Breslow & Walker, LLP
Breslow & Walker, LLP
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THIS SUBSCRIPTION AGREEMENT
SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM.
SERIES D PREFERRED STOCK
SECURITIES PURCHASE AGREEMENT
DIVERSIFAX, INC.
THIS AGREEMENT is made as of the ____ day of May, 1997, between
DIVERSIFAX, INC., Nasdaq Symbol "DFAX" (the "Company"), a Delaware corporation,
with its principal office at 39 Stringham Avenue, Valley Stream, NY 11580, and
_____________________ (the "Purchaser"), with its principal office at __________
__________________________.
IN CONSIDERATION of the mutual covenants contained in this
Agreement, the Company and the Purchaser agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement:
"Closing Date" means the date agreed to by the parties for the
delivery of the stock certificate against a wire transfer of the funds to the
Company.
"Closing" means the completion of the purchase and sale of the
Shares on the Closing Date.
"Common Stock" means the common stock of the Company, $.001par value
per share.
"Conversion Date" means the date on which the Purchaser has
telecopied the Notice of Conversion to the Company.
"Convertible Preferred Stock" means the shares of Series D Preferred
Stock of the Company, the terms of which are set forth in the Certificate of
Designation filed with the Secretary of State of the State of Delaware (a copy
of which is attached hereto as Exhibit A, the
<PAGE>
"Certificate of Designation").
"Conversion Price" shall have the meaning as set forth in the
Certificate of Designation.
"Purchase Price" means the aggregate purchase price of the Shares
purchased.
"Shares" means the shares of Convertible Preferred Stock purchased
hereunder.
Section 2. Authorization and Sale of Shares.
2.1 Authorization. Subject to the terms and conditions of this
Agreement, the Company has authorized the sale and issuance of the Shares.
2.2 Agreement to Sell and Purchase the Shares. In reliance upon the
representations and warranties of the Company and Purchaser contained in this
Agreement, and upon the terms and conditions hereinafter set forth, the Company
hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to buy
from the Company __________ Shares for an aggregate purchase price of
________________ Dollars based on U.S. $1,000 per share. The Shares shall pay a
6% cumulative dividend, payable in cash or Common Stock, at the discretion of
the Company, all as set forth in the Certificate of Designation. Such purchase
and sale shall occur on the Closing Date.
2.3 Time and Place of Closing. The Closing shall be held at the
offices of Sheldon E. Goldstein, P.C. ("Escrow Agent"), 65 Broadway, New York,
NY 10006, as promptly as practicable as agreed to by the parties to this
Agreement.
2.4 Payment and Delivery. At or prior to the Closing, the following
shall occur:
(a) Purchaser shall remit by wire transfer the Purchase Price to
Escrow Agent as per a separate escrow agreement (a copy of which is attached
hereto as Exhibit B, the "Escrow Agreement"), as payment in full for the Shares.
(b) The Company shall deliver or cause to be delivered to Escrow
Agent a certificate representing the Shares, registered in the name of the
Purchaser (or any nominee designated by the Purchaser at least three days before
the Closing Date), free and clear of all liens, claims, charges and
encumbrances.
(c) Wire instructions for Escrow Agent are as follows:
Chase Manhattan Bank, N.A.
ABA #021000021
For the Account of
United States Trust Company of New York
2
<PAGE>
Account #920-1-073195
In Favor of
Sheldon E. Goldstein, P.C. Attorney Trust Account
Account #59-02347
(d) At the closing, the Escrow Agent shall remit the monies
received in payment of the Purchase Price to the Company, and shall deliver the
certificate evidencing the Shares to the Purchaser (or the Purchaser's
designee), all in accordance with the provisions of the Escrow Agreement.
Section 3. General Representations and Warranties of the Company.
The Company hereby represents and warrants to, and covenants with, the Purchaser
that the following are true and correct as of the date hereof .
3.1 Organization; Qualification. The Company is a corporation duly
organized and validly existing under the laws of the State of Delaware and is in
good standing under such laws. The Company has all requisite corporate power and
authority to own, lease and operate its properties and assets, and to carry on
its business as presently conducted. The Company is qualified to do business as
a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Capitalization. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock, 1,000,000 shares of Series A
Convertible Preferred Stock, 2,900 shares of Series B Convertible Preferred
Stock, and 1,500 shares of Series D Convertible Preferred Stock. All issued and
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable. The Company will reserve from its
authorized but unissued shares of Common Stock a sufficient number of shares of
Common Stock to permit the conversion in full of the Shares.
3.3 Authorization. The Company has all requisite corporate right,
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement by the Company, the
authorization, sale, issuance and delivery of the Shares and the performance of
the Company's obligations hereunder has been taken. This Agreement has been duly
executed and delivered by the Company and constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies, and to limitations of public policy as they may apply
to the indemnification provisions set forth in Sections 7.8 and 7.11 of this
Agreement. Upon their issuance and delivery pursuant to this Agreement, the
Shares will be validly issued, fully paid and nonassessable and will be free of
any liens or encumbrances; provided, however, the Shares are subject to
restrictions on transfer under state and/or federal securities laws. The
issuance and sale of the Shares will not give rise to any preemptive right or
3
<PAGE>
right of first refusal or right of participation on behalf of any person.
3.4 No Conflict. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Certificate of Incorporation, Bylaws, or any stockholders
agreements and any amendments thereto of the Company or any material mortgage,
indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree statute, law, ordinance, rule or
regulation applicable to the Company, its properties or assets.
3.5 Accuracy of Reports and Information.
(a) The Company is in full compliance, to the extent applicable,
with all reporting obligations under either Section 12(b), 12 (g) or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has registered its Common Stock pursuant to Section 12 of the Exchange
Act and the Common Stock is listed and trades on Nasdaq.
(b) The Company has filed all material required to be filed pursuant
to all reporting obligations, under either Section 13(a) or 15(d) of the
Exchange Act for a period of at least twelve (12) months immediately preceding
the offer to sale of the Shares (or for such shorter period that the Company has
been required to file such material).
3.6 SEC Filings/Full Disclosure.
(a) None of the Company's filings with the Securities and Exchange
Commission since January 1, 1996 contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made, not misleading. Except for the Company's Form 10-Q for the quarter ended
August 31, 1996, the Company has, since January 1, 1996, timely filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
(b) There is no fact known to the Company (other than information in
the public domain) that has not been disclosed to the Purchaser that could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), earnings, business affairs, properties or assets of
the Company, or could reasonably be expected to materially and adversely affect
the ability of the Company to perform its obligations pursuant to this
Agreement.
3.7 Absence of Undisclosed Liabilities. Except as set forth in
Schedule 3.7 hereto, the Company has no material liabilities or obligations,
absolute or contingent (individually or in the aggregate), except as set forth
in the Financial Statements (as defined in Section 4.6 hereof) or as incurred in
the ordinary course of business after the date of the
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Financial Statements.
3.8 Governmental Consent, etc. No consent, approval or authorization
of, or designation, declaration or filing with, any governmental authority on
the part of the Company is required in connection with the valid execution and
delivery of this Agreement, or the offer, sale or issuance of the Shares, or the
consummation of any other transaction contemplated hereby, except (a) the filing
with the SEC of a registration statement on Form S-3 (or other appropriate form)
for the purpose of registering the Common Stock underlying the Shares (the
"Underlying Shares"), (b) the filing of a Form D with the Securities and
Exchange Commission in reliance of Regulation D promulgated under the Securities
Act, and (c) that the offer and sale of the Shares in certain jurisdictions may
be subject to the provisions of, and/or require filings under, the securities or
Blue Sky laws of such jurisdictions.
3.9 Intellectual Property Rights. Except as disclosed in the
Company's Form 10-K for the fiscal year ended November 30, 1996 (the "Form
10-K"), the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as contemplated in the Form
10-K. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which could have a material adverse effect on the condition
(financial or otherwise), business, or results of operations of the Company.
3.10 Material Contracts. Except as set forth in the Form 10-K, the
agreements to which the Company is a party described in the Form 10-K are valid
agreements, in full force and effect, the Company is not in material breach or
material default (with or without notice or lapse of time, or both) under any of
such agreements, and, to the Company's knowledge, the other contracting party or
parties thereto are not in material breach or material default (with or without
notice or lapse of time, or both) under any of such agreements.
3.11 Litigation. Except as set forth in the Form 10-K, there is no
action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, conditions,
affairs or operations of the Company. Except as set forth in the Form 10-K or in
Schedule 3.11 hereto, the Company is not a party to or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. Except for litigation commenced in the ordinary
course of business or as set forth in the Form 10-K, there is no material
action, suit, proceeding or investigation by the Company currently pending or
which the Company currently intends to initiate.
3.12 Title to Assets. Except as set forth in Form 10-K, the Company
has good and marketable title to all properties and material assets described in
the Form 10-K as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest other than such as are not
material to the business of the Company.
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3.13 Subsidiaries. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, partnership,
association or other business entity, except as stated in the Form 10-K.
3.14 Required Governmental Permits. The Company is in possession of
and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect.
3.15 Listing. The Company will use its best efforts to maintain the
listing of its Common Stock on the Nasdaq Small Cap Market or other organized
United States market or quotation system.
3.16 Financing Restrictions.
(a) There are no other outstanding securities debt or equity
presently convertible into Common Shares.
(b) The Company cannot, without the prior approval in writing from a
majority in interest of the holders of the Convertible Preferred Stock, obtain
convertible debt or equity financing for a period of one hundred eighty (180)
days following the Closing Date; however, the Company will not require prior
approval if (i) the Company's share price at the time of such financing is
greater than 200% of the closing price of the Common Stock on the Closing Date,
(ii) the financing is with a company or entity with which the Company has a
business or strategic relationship, or (iii) the financing is made in accordance
with Section 3.17.
3.17 Right of First Refusal. If within one hundred and eighty (180)
days from the Closing Date, the Company wishes to complete a financing involving
the issuance of securities with similar characteristics to the Shares, then the
Purchaser shall have the right of first refusal to participate in such offering
and shall have three (3) business days to reply in writing after receipt of
written notice of such proposed financing from the Company. In the event a
writing is not received by the Company, this will be deemed a refusal by the
Purchaser.
3.18 Legal Opinion. Purchaser shall, upon purchase of the Shares,
receive an opinion letter from counsel to the Company, to the effect that:
(a) The Company is duly incorporated and validly existing in
the jurisdiction of its incorporation.
(b) To such counsel's knowledge, except as set forth in the
Form 10-K, there is no action, proceeding or investigation pending or
threatened against the Company which might result, either individually or
in the aggregate, in any material adverse change in the business,
conditions, affairs or operations of the Company.
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(c) To such counsel's knowledge, except as set forth in Section
3.11 the Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government
agency or instrumentality.
(d) To such counsel's knowledge, except for litigation
commenced in the ordinary course of business or as set forth in the Form
10-K, there is no material action, suit, proceeding or investigation by
the Company currently pending or which the Company currently intends to
initiate.
(e) This Agreement, the issuance of the Shares and the issuance
of Underlying Shares upon conversion of the Shares, have been duly
approved by all required corporate action and that all such securities,
upon delivery in accordance with the terms of this Agreement and the
related Escrow Agreement, shall be validly issued and outstanding, fully
paid and nonassessable.
3.19 Use of Proceeds. The Company represents that the net proceeds
from this offering will be used to fund the possible acquisitions, strategic
alliances, working capital and general corporate purposes.
Section 4. Representations, Warranties and Covenants of the
Purchaser. The Purchaser represents and warrants to, and covenants with, the
Company that the following are true and correct as of the date hereof.
4.1 Authority. The Purchaser's signatory has all right, power,
authority and capacity to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Purchaser and will constitute the legal, valid and binding
obligations of the Purchaser, enforceable in accordance with its terms, subject
to laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies, and to limitations of public policy as they may apply
to the indemnification provisions set forth in Sections 7.8 and 7.11 of this
Agreement.
4.2 Investment Experience. Purchaser is an "accredited investor" as
defined in Rule 501(a) under the Securities Act, based upon Purchaser being a
corporation, Massachusetts or similar business trust or partnership, not formed
for the specific purpose of acquiring the Shares, with assets in excess of Five
Million ($5,000,000) Dollars. Purchaser is aware of the Company's business
affairs and financial condition and has had access to and has acquired
sufficient information about the Company, including the Form 10-K and the
Company's Form 10-Q for the three months ended February 28, 1997 (the "SEC
Reports"), to reach an informed and knowledgeable decision to acquire the
Shares. Purchaser has such business and financial experience as is required to
give it the capacity to protect its own interests in connection with the
purchase of the Shares.
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4.3 Investment Intent. Without limiting its ability to resell the
Shares and underlying Common Stock pursuant to an effective registration
statement, Purchaser represents that it is purchasing the Shares for its own
account as principal for investment purposes. Purchaser understands that its
acquisition of the Shares has not been registered under the Securities Act or
registered or qualified under any state securities law in reliance on specific
exemptions therefrom, which exemptions may depend upon, among other things, the
bona fide nature of Purchaser's investment intent as expressed herein. Purchaser
will not, directly or indirectly, offer, sell, pledge, transfer or otherwise
dispose of (or solicit any offers to buy, purchaser or otherwise acquire or take
a pledge of) any of the Shares except in compliance with the Securities Act and
any applicable state securities laws, and the rules and regulations promulgated
thereunder.
4.4 Registration or Exemption Requirements. Purchaser further
acknowledges and understands that the Shares may not be resold or otherwise
transferred except in a transaction registered under the Securities Act and any
applicable state securities laws or unless an exemption from such registration
is available. Purchaser understands that the certificate(s) evidencing the
Shares will be imprinted with a legend that prohibits the transfer of the Shares
unless (i) they are registered or such registration is not required, and (ii) if
the transfer is pursuant to an exemption from registration under the Securities
Act and, if the Company shall so request in writing, an opinion of counsel
reasonably satisfactory to the Company is obtained to the effect that the
transaction is so exempt.
4.5 No Legal, Tax or Investment Advice. Purchaser understands that
nothing in this Agreement or any other materials presented to Purchaser in
connection with the purchase and sale of the Shares constitutes legal, tax or
investment advice. Purchaser has consulted such legal, tax and investment
advisors as it, in its sole discretion, has deemed necessary or appropriate in
connection with its purchase of the Shares.
4.6 Purchaser Review. Purchaser hereby represents and warrants that
the Purchaser has carefully examined the SEC Reports and the financial
statements contained therein (the "Financial Statements"). The Purchaser
acknowledges that the Company has made available to the Purchaser all documents
and information that it has requested relating to the Company and has provided
answers to all of its questions concerning the Company and the Shares. More
specifically, the Purchaser has had an opportunity to ask questions of and speak
with representatives of the Company, including, without limitation, the
President of the Company. Nothing stated in the previous two sentences, however,
shall be deemed to affect the representations and warranties of the Company
contained in this Agreement.
4.7 Legend.
(a) In addition to any other legends which may be necessary to
reflect the maximum conversion prices of the Shares, or the time at which the
Shares become convertible, the certificate or certificates representing the
Shares shall be subject to a legend restricting transfer under the Securities
Act, such legend to be substantially as follows:
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"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMP-TION THEREFROM UNDER SAID ACT WHICH IS CONFIRMED
IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The certificates shall also include any legends required by any applicable state
securities laws.
(b) Subject to this section, prior to any transfer or sale of any of
the Shares, the holder desiring to effect such transfer or sale shall deliver to
the Company (i) a written notice briefly describing the manner of such transfer
or sale, (ii) if requested by the Company, a written opinion of counsel for such
holder (provided that such counsel, and the form and substance of such opinion,
are reasonably satisfactory to the Company) to the effect that such transfer or
sale may be effected without the registration of such Shares under the
Securities Act and applicable state law, and (iii) the agreement of the
transferee to the provisions of this Section 4.7, and the Company shall
thereupon permit or cause its transfer agent (if any) to permit such transfer or
sale to be effective.
(c) The legend(s) endorsed on a stock certificate pursuant to this
Section 4.7 shall be removed and the Company shall issue a replacement
certificate without such legend to the holder of such certificate if (1) the
Shares represented by such certificate are registered under the Securities Act,
and sold by the holder thereof in accordance with such registration, (2) a
written opinion to the effect that such restrictions are no longer required or
necessary under any federal or state securities law or regulation has been
received from counsel for the holder thereof (provided that such counsel, and
the form and substance of such opinion, are reasonably satisfactory to the
Company) or counsel for the Company, (3) such Shares have been sold without
registration under the Securities Act in compliance with Rule 144 or Rule 144A
promulgated under the Securities Act, or (4) the Company is reasonably satisfied
that the holder of such Shares, in accordance with the terms of Subsection (k)
of Rule 144 or of Rule 144A promulgated under the Securities Act, shall be
entitled to sell such Shares pursuant to such Subsection.
Section 5. Conditions to the Purchaser's Obligation to Purchase. The
Company understands that the Purchaser's obligation to purchase the Shares is
conditioned upon:
(a) Acceptance by Purchaser of this Agreement for the sale of
the Shares, as evidenced by the execution of this Agreement by its authorized
officers;
(b) Delivery of the Shares into Escrow;
(c) A filed Certificate of Designation.
Section 6. Conditions to Company's Obligation to Sell. Purchaser
understands that the Company's obligation to sell the Shares is conditioned
upon:
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(a) The receipt and acceptance by the Company of this Agreement for the sale of
the Shares as evidenced by execution of this Agreement by an officer of the
Company;
(b) Delivery into escrow by Purchaser of good funds as payment
in full for the purchase of the Shares.
Section 7. Registration Rights of the Shares; Compliance with the
Securities Act.
7.1 On or before thirty (30) days after the Closing Date, the
Company shall file, at its own expense, a Registration Statement under the
Securities Act, covering the resale of the Underlying Shares (the "Registrable
Securities"), and shall use its best efforts to cause such Registration
Statement to become effective. The Company promptly shall give the Purchaser
written notification of the effectiveness of such Registration Statement under
the Securities Act, and, when determined, each state where registered.
7.2 The number of Registrable Securities to be registered shall be
two hundred (200%) percent of the number of shares that would be required if all
of the Registrable Securities were converted on the date two days prior to the
date of the initial filing of the Registration Statement, but not to exceed the
maximum number of shares obtainable upon conversion.
(a) The Company will maintain any Registration Statement or
post-effective amendment filed under this Section 7 current under the Securities
Act until the earlier of (i) the date that all of the Registrable Securities
have been sold pursuant to the Registration Statement, (ii) the date the
Purchaser receives an opinion of counsel that the Registrable Securities may be
sold under the provisions of Rule 144, or (iii) the second anniversary of the
effective date of the Registration Statement.
(b) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of any
Registration Statement under subparagraph 7.1 and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys'
fees) shall be borne by the Company. The Purchaser shall bear the cost of
underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and the fees and expenses of its counsel. The
Company shall use its best efforts to qualify the Registrable Securities for
sale in such states as the Purchaser reasonably designates and shall furnish
indemnification in the manner provided in Section 7.8 hereof. However, the
Company shall not be required to qualify in any state which will require an
escrow or other restriction relating to the Company and/or the Purchaser. The
Company at its expense will supply the Purchaser with copies of such
Registration Statement and the prospectus or offering circular included therein
and other related documents in such quantities as may be reasonably requested by
the Purchaser.
(c) The Company shall not be required by this Section to include the
Registrable Securities in any Registration Statement which is to be filed if, in
the opinion of counsel for both the Purchaser and the Company (or, should they
not agree, in the opinion of another counsel experienced in securities law
matters acceptable to counsel for the Purchaser and
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the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in the Purchaser obtaining securities which are not
"restricted securities", as defined in Rule 144 under the Securities Act.
(d) In the event the Registration Statement to be filed by the
Company pursuant to Section 7(a) above is not declared effective by the SEC
within ninety (90) days of the Closing Date, then the Company will pay Purchaser
by wire transfer, as liquidated damages for such failure and not as a penalty,
one (1%) percent of the principal amount of the Shares for the first month and
two (2%) percent of the principal amount of the Shares each month thereafter
until the Company procures registration of the Registrable Securities. These
liquidated damages shall be pro-rated based upon the number of days in each
month that the Registration Statement is not effective. If the Company does not
remit the damages to the Purchaser as set forth above, the Company will pay the
Purchaser reasonable costs of collection, including reasonable attorneys fees,
in addition to the liquidated damages. Such payment shall be made to the
Purchaser immediately if the registration of the Registrable Securities is not
effected; provided, however, that the payment of such liquidated damages shall
not relieve the Company from its obligations to register the Registrable
Securities pursuant to this Section. The registration of the Registrable
Securities pursuant to this provision shall not affect or limit the Purchaser's
other rights or remedies as set forth in this Agreement.
7.4 Cooperation with Company. The Purchaser will cooperate with the
Company in all respects in connection with this Agreement, including, timely
supplying all information reasonably requested by the Company and executing and
returning all documents reasonably requested in connection with the registration
and sale of the Registrable Securities.
7.5 Registration Procedures. If and whenever the Company is required
by any of the provisions of this Agreement to effect the registration of any of
the Registrable Securities under the Securities Act, the Company shall (except
as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep the Registration Statement effective and
to comply with the provisions of the Securities Act with respect to the sale or
other disposition of the Registrable Securities whenever the Purchaser shall
desire to sell or otherwise dispose of the same;
(b) furnish to the Purchaser such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as the Purchaser may reasonably
request in order to facilitate the public sale or other disposition of the
Registrable Securities;
(c) use its best efforts to register and qualify the Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
the Purchaser shall reasonably
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request, and do any and all other acts and things which may be necessary or
advisable to enable the Purchaser to consummate the public sale or other
disposition in such jurisdiction of the Registrable Securities, except that the
Company shall not for any such purpose be required to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list the Registrable Securities on the
NASDAQ National Market System or Small Cap Market or any securities exchange on
which any securities of the Company is then listed, if the listing of the
Registrable Securities is then permitted under the rules of such exchange or
NASDAQ Small Cap Market or National Market System;
(e) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering;
(f) notify the Purchaser of Registrable Securities covered by the
Registration Statement, at any time when a prospectus relating thereto covered
by the Registration Statement is required to be delivered under the Securities
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
7.6 Temporary Cessation of Offers and Sales by Purchaser. The
Purchaser acknowledges that there may occasionally be times when the Company may
be required to suspend the use of the prospectus forming part of the
Registration Statement until such time as an amendment to the Registration
Statement has been filed by the Company and declared effective by the
Commission, until the prospectus is supplemented or amended to comply with the
Securities Act, or until such time as the Company has filed an appropriate
report with the Commission pursuant to the Exchange Act. The Company agrees to
file any necessary amendments, supplements and reports as soon as practicable
under the circumstances. Purchaser hereby covenants that it will not sell any
Registrable Securities pursuant to said prospectus during a period of not more
than 45 days commencing at the time at which the Company gives the Purchaser
notice of the suspension of the use of said prospectus and ending at the time
the Company gives the Purchaser notice that Purchaser may thereafter effect
sales pursuant to said prospectus, as the same may have been supplemented or
amended.
7.7 Information by Purchaser. The Purchaser of Registrable
Securities included in the Registration Statement shall furnish to the Company
such information regarding the Purchaser and the distribution proposed by the
Purchaser as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section 7.
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7.8 Indemnification.
(a) In the event of the filing of any Registration Statement with
respect to Registrable Securities pursuant to Section 7 hereof, the Company
agrees to indemnify and hold harmless the Purchaser and each person, if any, who
controls the Purchaser within the meaning of the Securities Act ("Distributing
Purchasers") against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), to which the Distributing Purchasers may become subject, under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such Registration Statement, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
information furnished to the Company by any Distributing Purchasers. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Purchaser agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees) to which the
Company or any such officer, director or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in a Registration Statement in which Registrable Securities are included, or any
related preliminary prospectus, final prospectus, offering circular,
notification or amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in such
Registration Statement, preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto in reliance upon, and
in conformity with, information furnished to the Company by such Distributing
Purchaser and, provided further, that the indemnity agreement contained in this
Section 7.8(b) shall not inure to the benefit of the Company with respect to any
person asserting such loss, claim, damage or liability who purchased the
Registrable Securities which are the subject thereof if the Company failed to
send or give (in violation of the Securities Act or the rules and regulations
promulgated thereunder) a copy of the prospectus contained in such Registration
Statement to such person at or prior to the written confirmation to such person
of the sale of such Registrable Securities, where the
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Company was obligated to do so under the Securities Act or the rules and
regulations promulgated thereunder. This indemnity agreement will be in addition
to any liability which the Distributing Purchasers may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the reasonable fees and
expenses of such counsel shall not be at the expense of the indemnifying party
if the indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that if the
indemnified party is the Distributing Purchaser, the reasonable fees and
expenses of such counsel shall be at the expense of the indemnifying party if
(i) the employment of such counsel has been specifically authorized in writing
by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Purchaser and
the indemnifying party and the Distributing Purchaser shall have been advised by
such counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Purchaser (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Distributing Purchaser, it being understood, however, that the indemnifying
party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing
Purchaser, which firm shall be designated in writing by the Distributing
Purchaser). No settlement of any action against an indemnified party shall be
made without the prior written consent of the indemnified party, which consent
shall not be unreasonably withheld.
7.9 Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the Distributing
Purchaser makes a claim for indemnification pursuant to Section 7.8 hereof but
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that the express provisions of Section 7.8 hereof
provide for
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indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any Distributing Purchaser, then the Company and the
applicable Distributing Purchaser shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees), in
either such case (after contribution from others) on the basis of relative fault
as well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the applicable Distributing Purchaser, on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Distributing Purchaser
agree that it would not be just and equitable if contribution pursuant to this
Section were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7.10 Underwriter. The Company understands that the Purchaser
disclaims being an "underwriter" (as such term is defined under the Securities
Act and the rules and regulations promulgated thereunder (an "Underwriter")),
but Purchaser being deemed an Underwriter shall not relieve the Company of any
obligation it has hereunder.
7.11 Indemnification. Each of the Company and the Purchaser agrees
to indemnify the other and to hold the other harmless from and against any and
all losses, damages, liabilities, costs and expenses (including reasonable
attorneys' fees) which the other may sustain or incur in connection with the
breach by the indemnifying party of any representation, warranty or covenant
made by it in this Agreement.
7.12 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Shares to the public without registration, the Company
agrees to use its best efforts to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, for as long as
the Company is subject to the reporting requirements of the Securities Act or
the Exchange Act;
(b) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act;
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(c) to furnish to Purchaser forthwith upon request a written
statement by the Company as to its compliance with the reporting requirements of
said Rule 144, and of the Securities Act and the Exchange Act, a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents of the Company and other information in the possession of or
reasonably obtainable by the Company as Purchaser may reasonably request in
availing itself of any rule or regulation of the SEC allowing Purchaser to sell
any such Shares without registration.
Section 8. Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby. The parties acknowledge that Malachi
Group, Inc. shall receive a placement fee of 10%.
Section 9. Conversion.
(a) Conversion of the Shares may be made at the Conversion Price
after effectiveness of registration under the Securities Act of the Underlying
Shares, or at such time as the Underlying Shares may be sold without
registration under the Securities Act in compliance with Rule 144 promulgated
under the Securities Act, as follows:
0 - 30 days - One-third of investment
31 - 60 days - Two-thirds of investment
After 61 days - 100% of investment
(b) Subject to the Corporation's right to redeem the Shares in
certain instances as described in the Certificate of Designation, any and all
Shares outstanding on the third anniversary of the Closing Date shall
automatically convert into Common Stock as provided in the Certificate of
Designation.
(c) Purchaser shall convert the Shares to Common Stock, in whole or
in part by telecopying an executed and completed Notice of Conversion (in the
form annexed hereto as Exhibit C, the "Notice of Conversion") to the Company and
delivering the original Notice of Conversion and the certificate representing
the Shares to be converted to the Company within three (3) business days of
exercise. Each date on which a Notice of Conversion is telecopied to and
received by the Company in accordance with the provisions hereof shall be deemed
a Conversion Date. The Company will transmit the certificates representing the
Common Stock issuable upon conversion of all or any part of the Shares (together
with the certificates representing portions of the Shares not so converted) to
the Purchaser within three (3) business days after the Company has received the
original Notice of Conversion and the certificate evidencing the Shares being so
converted. The Notice of Conversion and certificate representing the Shares
being converted shall be delivered to the Company at the address provided in
Section 11 hereof.
(d) In the event Purchaser converts the Shares subject to the
"ceiling" formula of $2.25 per share on the first one-third of the Shares
converted; $2.50 per share on the second
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one-third of the Shares converted; and $2.75 per share on the third one-third of
the Shares converted, Purchaser agrees to convert at $2.25 first, $2.50 next and
$2.75 last.
In the event that the Shares are not converted within ten (10)
business days of receipt by the Company of a valid Conversion Notice and
certificates representing the Shares to be converted (such date of receipt
referred to as the "Applicable Date") due to the failure of the Company to
timely process the Conversion Notice, as opposed to the failure to timely
process by the transfer agent, the Company shall pay to the Purchaser, by wire
transfer, as liquidated damages for such failure and not as a penalty, an amount
in cash equal to one (1%) percent per day of the purchase price of the Shares to
be converted which shall run from the Applicable Date; provided, however, that
the liquidated damages for a failure to deliver certificates of Common Stock
shall equal only 15% per month of the purchase price of the Shares to be
converted for the first two months from the Applicable Date that the
certificates of Common Stock are not delivered, and 25% per month for each month
thereafter, if both of the following conditions are satisfied by the Company:
(i) the failure to deliver certificates of Common Stock is the result of a lack
of available authorized shares of Common Stock, and (ii) the Company commences,
within 15 business days after the Applicable Date, the process to obtain
stockholder approval to amend its Certificate of Incorporation to increase the
number of authorized shares of Common Stock by an amount sufficient to permit
conversion of all shares of Convertible Preferred Stock then outstanding;
provided, further, in no event shall the liquidated damages paid hereunder
exceed the fair market value of the shares of Common Stock underlying the Shares
to be converted on the Applicable Date.
Section 10. Covenant of Purchaser. Purchaser agrees that it will not
at any time sell the Common Stock short.
Section 11. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first class
registered or certified airmail, postage prepaid, and shall be deemed given when
so mailed:
(a) if to the Company, to
Diversifax, Inc.
39 Stringham Avenue
Valley Stream, NY 11580
Attn: Irwin A. Horowitz, President
(Tele) (516) 872-0650
(Fax) (516) 872-0904
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copy to:
Breslow & Walker, LLP
767 Third Avenue
New York, NY 10017
Attn: Gary T. Moomjian
(Tele) (212) 832-1930
(Fax) (212) 888-4955
or to such other person at such other place as the Company shall designate to
the Purchaser in writing;
(b) if to the Purchaser, to
copy to:
Sheldon E. Goldstein, P.C.
65 Broadway
New York, NY 10006
Attn: Sheldon E. Goldstein, Esq.
or at such other address or addresses as may have been furnished to the Company
in writing; or
(c) if to any transferee or transferees of a Purchaser, at such
address or addresses as shall have been furnished to the Company at the time of
the transfer or transfers, or at such other address or addresses as may have
been furnished by such transferee or transferees to the Company in writing.
Section 12. Miscellaneous.
12.1 Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral or written agreements and understandings
relating to the subject matter hereof. No statement, representation, warranty,
covenant or agreement or any kind not expressly set forth in this Agreement
shall affect, or be used to interpret, change or restrict, the express terms and
provisions of this Agreement.
12.2 Amendments. This Agreement may not be modified or amended
except
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pursuant to an instrument in writing signed by the Company and by a majority in
interest of the holders of the Convertible Preferred Stock.
12.3 Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
12.4 Severability. In case any provision contained in this Agreement
should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
12.5 Governing Law/Jurisdiction. This Agreement will be construed
and enforced in accordance with and governed by the laws of the State of New
York, except for matters arising under the 1933 Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the courts of or located in the State of New York, specifically the Southern
District of New York and/or the Supreme Court of the State of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions. Each party hereby agrees that if another party to this Agreement
obtains a judgment against it in such a proceeding, the party which obtained
such judgment may enforce same by summary judgment in the courts of any country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
12.6 Recovery of Attorney's Fees. Should any party bring an action
to enforce the terms of this Agreement then, if Purchaser prevails in such
action it should be entitled to recovery of its reasonable attorney's fees from
the Company, and if the Company prevails in such action it shall be entitled to
recovery of its reasonable attorney's fees from the Purchaser.
12.7 Fees. Except as provided in Section 12.6, the Company
acknowledges that Purchaser shall have no responsibility for the payment of any
of the Company's fees in connection with this offering.
12.8 Counterparts/Facsimile. This Agreement may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which, when taken together, shall constitute but one instrument, and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other party. In lieu of the original, a facsimile
transmission or copy of the original shall be as effective and enforceable as
the original.
12.9 Publicity. The Purchaser shall not issue any press releases or
otherwise
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make any public statement with respect to the transactions contemplated by this
Agreement without the prior written consent of the Company, except as may be
required by applicable law or regulation.
12.10 Assignment. The rights granted to Purchaser under this
Agreement shall not be assigned without the agreement of the transferee to
assume all of the rights and obligations of the Purchaser under this Agreement.
12.11 Survival. The representations and warranties in this Agreement
shall survive Closing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their duly authorized representatives the day and year first above
written.
DIVERSIFAX, INC.
By
-------------------------------
Officer
----------------------------------
By
-------------------------------
Officer
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EXHIBIT C
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
Series D Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of Series D
Preferred Stock (the "Preferred Stock") of DIVERSIFAX, INC. (the "Company")
evidenced by Certificate No. ____ into shares of common stock of the Company
(the "Common Stock"), according to the conditions hereof, as of the date written
below.
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Preferred Stock shall be made in compliance with Regulation D,
pursuant to an exemption from registration under the Act, or pursuant to
registration of the Common Stock under the Securities Act of 1933, as amended
(the "Securities Act"), subject to any restrictions on sale or transfer set
forth in the Preferred Stock Securities Purchase Agreement between the Company
and the undersigned.
----------------------------------- ---------------------------
Date of Conversion Applicable Conversion Price
----------------------------------- ---------------------------
Number of Common Shares upon $ Amount of Conversion
Conversion
----------------------------------- ---------------------------
Signature Name
Address: Delivery of Shares to:
<PAGE>
EXHIBIT B
ESCROW AGREEMENT
THIS AGREEMENT is made as of the ____ day of May, 1997 by and
between DIVERSIFAX, INC., with its principal office at 39 Stringham Avenue,
Valley Stream, NY 11580 (hereinafter the "Company"), __________________ LLC (the
"Purchaser"), with its principal office at _____________________________________
(hereinafter the "Purchaser") and SHELDON E. GOLDSTEIN, P.C., 65 Broadway, 10th
Fl., New York, NY 10006 (hereinafter the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, pursuant to the Securities Purchase Agreement dated May __,
1997 by and between the Company and the Purchaser (the "Agreement"), Purchaser
has agreed to purchase shares of the Series D Preferred Stock of the Company
(the "Securities") at a purchase price as set forth in the Agreement, signed by
the Company and Purchaser; and
WHEREAS, the Company and the Purchaser desire that the Escrow Agent
hold the funds remitted by Purchaser in payment of the Purchase Price (the
"Funds") in escrow, subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the covenants and mutual
promises contained herein and other good and valuable consideration, the receipt
and legal sufficiency of which are hereby acknowledged and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE 1
TERMS OF THE ESCROW
1.1 The parties hereby establish an escrow account (the "Escrow
Account") with the Escrow Agent whereby the Escrow Agent shall hold the Funds
for the purchase of the Securities.
1.2 Upon the Escrow Agent's receipt of the Funds into the Escrow
Account, he shall notify the Company, or the Company's designated attorney or
agent, of the receipt and the amount thereof.
1.3 The Company, upon receipt of said notice and acceptance of the
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<PAGE>
Agreement, as evidenced by the Company's execution thereof, shall deliver to
Escrow Agent the Securities being purchased. Escrow Agent shall then communicate
with the Company to confirm the confirmation of receipt.
1.4 Once the Escrow Agent has received the Securities, he shall
immediately wire the Funds to the Company, per the written instructions of the
Company. Once the Funds have been received per the Company's instructions, the
Escrow Agent shall then arrange to have the Securities delivered as per
instructions from the Purchaser.
1.5 Should the Company attempt to change this Agreement in a manner
which, in the Escrow Agent's discretion, shall be undesirable, the Escrow Agent
may resign as Escrow Agent by notifying the Company and the Purchaser in
writing. In the case of the Escrow Agent's resignation or removal pursuant to
the foregoing, his only duty, until receipt of notice from the Company and the
Purchaser or its agent that a successor escrow agent shall have been appointed,
shall be to hold and preserve the Securities and the Funds. Upon receipt by the
Escrow Agent of said notice from the Company and the Purchaser of the
appointment of a successor escrow agent, the name of a successor escrow account
and a direction to transfer the Securities and/or the Funds, the Escrow Agent
shall promptly thereafter transfer all of the Securities and/or the Funds held
in the Escrow Account to said successor escrow agent. Immediately after said
transfer of Securities, the Escrow Agent shall furnish the Company and the
Purchaser with proof of such transfer. The Escrow Agent is authorized to
disregard any notices, requests, instructions or demands received by it from the
Company or the Purchaser after notice of resignation or removal shall have been
given, unless the same shall be the aforementioned notice from the Company and
the Purchaser to transfer the Securities and/or the Funds to a successor escrow
agent or joint instructions from the Company and the Purchaser to return the
funds to the Purchaser and/or the Securities to the Company.
1.6 The Escrow Agent shall be reimbursed by the Company and the
Purchaser for any reasonable expenses incurred in the event there is a conflict
between the parties and the Escrow Agent shall deem it necessary to retain
counsel.
1.7 The Escrow Agent shall not be liable for any action taken or
omitted by him in good faith in accordance with the advice of the Escrow Agent's
counsel; and in no event shall the Escrow Agent be liable or responsible except
for the Escrow Agent's own gross negligence or willful misconduct.
1.8 The Company and the Purchaser warrant to and agree with the
Escrow Agent that, unless otherwise expressly set forth in this Agreement:
(i) there is no security interest in the Securities or any part
thereof;
(ii) no financing statement under the Uniform Commercial Code is
on file in any jurisdiction claiming a security interest or
in describing (whether
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<PAGE>
specifically or generally) the Securities or any part thereof;
and
(iii) the Escrow Agent shall have no responsibility at any time
to ascertain whether or not any security interest exists in
the Securities or any part thereof or to file any financing
statement under the Uniform Commercial Code with respect to
the Securities or any part thereof.
1.9 The Escrow Agent has no liability hereunder to either party
other than to hold the Securities and the Funds and to deliver them under the
terms hereof. Each party hereto agrees to indemnify and hold harmless the Escrow
Agent from and with respect to any suits, claims, actions or liabilities arising
in any way out of this transaction including the obligation to defend any legal
action brought which in any way arises out of or is related to this Agreement,
unless such liability is the result of the gross negligence or willful
misconduct of the Escrow Agent.
ARTICLE 2
MISCELLANEOUS
2.1 No waiver or any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed any extension of
the time for performance of any other obligation or act.
2.2 All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by fax, overnight courier,
registered or certified mail, postage prepaid, return receipt requested, and
shall be deemed received upon receipt thereof, as follows:
(i) Diversifax, Inc.
39 Stringham Avenue
Valley Stream, NY 11580
Attn: Irwin A. Horowitz, President
(Tele) (516) 872-0650
(Fax) (516) 872-0904
(ii) Libertyview Fund, LLC
101 Hudson Street
Jersey City, NJ 07302
Attn: George Hartigan
Tele: (201) 200-9093
Fax: (201) 200-1982
(iii) Sheldon E. Goldstein, P.C.
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<PAGE>
65 Broadway
New York, NY 10006
Attn: Sheldon E. Goldstein, Esq.
Tele: (212) 809-4220
Fax: (212) 809-4228
2.3 This Agreement shall be binding upon and shall inure to the
benefit of the permitted successors and assigns of the parties hereto.
2.4 This Agreement is the final expression of, and contains the
entire agreement between, the parties with respect to the subject matter hereof
and supersedes all prior understandings with respect thereto. This Agreement may
not be modified, changed, supplemented or terminated, nor may any obligations
hereunder be waived, except by written instrument signed by all of the parties
hereto.
2.5 Whenever required by the context of this Agreement, the singular
shall include the plural and masculine shall include the feminine. This
Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same.
2.6 The Company acknowledges and confirms that it is not being
represented in a legal capacity by Sheldon E. Goldstein, P.C. and it has had the
opportunity to consult with its own legal advisors prior to the signing of this
Agreement.
2.7 The parties hereto expressly agree that this Agreement shall be
governed by, interpreted under and construed and enforced in accordance with the
laws of the State of New York. Any action to enforce, existing out of, or
relating in any way to, any provisions of this Agreement shall be brought
through the American Arbitration Association at the designated locale of New
York, New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the ____ day of May, 1997.
DIVERSIFAX, INC.
By
------------------------------
Officer
--------------------------------
By
------------------------------
Officer
SHELDON E. GOLDSTEIN, P.C.,
Escrow Agent
By
------------------------------
Sheldon E. Goldstein
4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement and Prospectus of
DiversiFax, Inc. and Subsidiaries on Form SB-2 relating to the registration of
7,640,000 shares of common stock, of our report dated March 7, 1997, appearing
in the Annual Report on Form 10-KSB of DiversiFax, Inc. and Subsidiaries for the
year ended November 30, 1996, and the use of our name, and the statements with
respect to us, under the heading "Experts" in the Prospectus.
HOBERMAN, MILLER, GOLDSTEIN & LESSER, P.C.
June 20, 1997
