U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended November 30, 1996
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________ to _________
Commission File Number 0-20936
DIVERSIFAX, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-3637458
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
39 Stringham Avenue, Valley Stream, New York 11580
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(Address of Principal Executive Offices) (Zip Code)
(516) 872-0650
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(Issuer's Telephone Number
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year: $5,091,917.
The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of March 10, 1997 was $18,927,712.
There were 14,145,215 shares outstanding of the issuer's common stock, par
value $.001 per share, as of March 10, 1997.
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
Documents incorporated by reference:
None
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PART I
ITEM 1. Description Of Business
Introduction
DiversiFax, Inc. (the "Company") is engaged in the business of owning and
operating coin and debit card pay-per-copy photocopy machines, microfilm
reader-printers and accessory equipment.
In addition, since April 1995, the Company has been engaged in the
development and 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").
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
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photocopy and microfilm reader-printer business since 1969. The acquisition was
accomplished pursuant to four substantially similar merger agreements (the
"Merger Agreements"), which were deemed effective as of November 1, 1993, by and
among each of IMSG, National, Capital and Advanced and a separate acquisition
subsidiary formed by the Company for each merger.
Pursuant to the terms of the Merger Agreements, the Company issued an
aggregate of 662,000 shares of Convertible Voting Preferred Stock, Series A, par
value $.001 per share (the "Series A Preferred Stock"), of the Company to Dr.
Irwin A. Horowitz, the sole stockholder of IMSG and Affiliates, in exchange for
all of their outstanding securities. The Preferred Stock was automatically
converted into an aggregate of 6,620,000 shares of Common Stock of the Company
in November 1995.
As a result of the Mergers, the Company acquired the self-service
pay-per-copy photocopier and microfilm reader-printers and accessories and the
marketing capacity and customer base of IMSG and Affiliates, which compromises a
substantial portion of the Company's business since November 1, 1993.
Upon the consummation of the acquisition of IMSG and Affiliates, Dr. Irwin
A. Horowitz ("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.
Recent Acquisitions. Since September 1996, the Company, through its
wholly-owned subsidiary JA-Hunt Services, Inc., has acquired two companies
engaged in the servicing of high end copier equipment and the retail sale of
copier supplies and office equipment, for an aggregate purchase price of
$160,000. One of the acquired companies is located in Pennsylvania and the other
in Texas. It is the Company's current intent to acquire a substantial number of
companies in these and other fields related to the Company's businesses. See
"Operations:
Copiers -- Expansion Strategy."
In November 1996, the Company and JA-Hunt Services, Inc. entered into an
agreement for the proposed purchase of Copier Machine Professionals, Inc. (d/b/a
Business Machine Professionals, Inc.) ("BMP"), for a purchase price of
$1,000,000. BMP is in the business of
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servicing copiers and the retail sale of copiers and other office equipment. BMP
has approximate annual sales of $5,000,000. The closing is subject to a number
of conditions and the Company is unable to predict whether or not such purchase
will be consummated.
Agreement with ScreenScan. 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 users' computers. These machines can
be card and coin operated for public use, thereby creating a revenue source for
libraries.
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, Texas and Georgia, in
various sites including libraries, courthouses, colleges, drug stores, office
supply stores and similar high traffic outlets. The Company has over 2,400
Copiers on site. Generally, the Company is responsible for the collection of
payments from each site and, at most locations, site operators share in the
revenues derived from the copy sales at their site. The Company has the ability
to service and repair its Copiers seven days a week. Users can pay per copy by
inserting coins in the Copier or by using a debit access card, which the user
may purchase at the site location.
Products. The Company's Copiers consist of a photocopier or micro-film
reader-printer with an adaption which allows the user to operate the Copier and
pay for the copy by inserting coins or a debit access card. The users can
purchase debit access cards at the site location. If coins are used, the Copier
will return change in excess of the price of the copies. As copies are made
using the debit access card, the price of each copy is deducted from the
aggregate value of the debit access card.
Support Services. The Company provides continuous preventative maintenance
to its Copiers and related equipment based on manufacturer specifications.
Frequency of service will vary depending upon usage of a given machine. Copiers
in high volume locations may require servicing as frequently as once a day. The
Company maintains service centers in Valley Stream
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(Long Island), New York; Albany, New York; Des Plains, Illinois; Jacksonville
and Sarasota, Florida; Harrisburg, Pennsylvania; Austin, Texas; 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. The Company employs a sales staff of eight
people, including four telemarketers, 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, Xerox, Minolta and Konica
photocopiers and Minolta and ScreenScan microfilm reader-printers. The Company
buys these machines from brokers, dealers and the manufacturers.
The Company did not experience any difficulties in obtaining equipment or
parts and supplies and does not anticipate that there will be any problems
obtaining any equipment, parts or supplies in the future.
Expansion 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 year ended
November 30, 1996, Dr. Horowitz loaned the Company a net aggregate amount of
approximately $887,000, a substantial
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portion of which was utilized to finance acquisitions. In addition, the Company
intends to pay all or a portion of the acquisition prices for such acquired
businesses by issuing shares of the Common Stock of the Company to the Sellers.
Since September 1996, the Company, through its wholly-owned subsidiary
JA-Hunt Services, Inc., has acquired two companies engaged in the servicing of
high end copier equipment and the retail sale of copier supplies and office
equipment, for an aggregate purchase price of $160,000. One of the acquired
companies is located in Pennsylvania and the other in Texas. It is the Company's
current intent to acquire a substantial number of companies in these and other
fields related to the Company's businesses, although there can be no assurance
in this regard. See "Operations: Copiers -- Expansion Strategy."
In November 1996, the Company and JA-Hunt Services, Inc. entered into an
agreement for the proposed purchase of BMP, for a purchase price of $1,000,000.
BMP is in the business of servicing copiers and the retail sale of copiers and
other office equipment. BMP has approximate annual sales of $5,000,000. The
closing is subject to a number of conditions and the Company is unable to
predict whether or not such purchase will be consummated.
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.
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
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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 generally avoids 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. Over the past two 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 "Item 12. Certain Relationships and
Related 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.
Operations: Fax Machines (Smart SwitchTM)
General - The Smart Switch. The Company commenced its Smart SwitchTM
operations in April 1995, upon the acquisition of the Smart Switch assets of
Faxit. The Smart Switch is a computerized switching device, which has an
automated switching system, which permits the use of any "off the shelf" Fax
machine as a public Fax machine and facilitates billing of a public Fax message
without the need for human intervention or the incorporation of a high cost
credit card reading device into the Fax machine. When using a Fax machine
equipped with a Smart Switch, the user takes the phone off the hook and hears a
voice prompt directing the user to enter his credit card number and expiration
date. Once verified, the Smart Switch gives the caller a dial tone and allows a
direct call to be placed to the receiving Fax machine. If the Fax number dialed
is busy, the Smart Switch will give the caller a Fax tone and accept and store
the Fax for later retry, allowing the customer the ability to have the Fax sent
to a busy fax at such time as it becomes free, without any human intervention.
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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 a 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 marketing of the Smart Switch in April
1995 and has placed over 150 units under lease at hotels, airport lounges,
libraries and colleges, principally in the northeast, 87 of which have been
placed in the Western Hotel (formerly the Grand Hotel) in Washington D.C., nine
of which have been placed in TWA Ambassador Lounges and nine of which have been
placed in the Hotel Pennsylvania in New York City, and has contracts to place an
additional 14 units at the St. Louis Hilton. The term of the agreements range
from one to four years, and the hotel, lounge or other party is responsible to
pay the Company for the cost of the equipment as well as a per minute usage
charge. Generally, users of Fax machines (e.g., hotel guests) are charged by the
minute per usage, with the amounts collected by the Company, who remits a
portion to the relevant provider of the Fax machine (e.g., the hotel). In some
cases, the hotel collects for usage, and remits the required portion to the
Company.
The Company also has orders to install its new "In-Lobby" fax in twelve
individual hotels nationwide. The Company has also received its first signed
order for the installation of 50 inroom fax machines for the St. James Court in
London, England, marking its entrance into the European market and it expects to
have the units installed by the end of the calendar year.
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, and in November 1996, the Company entered into a
co-marketing agreement with Danka Business Systems, plc.
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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 137 units in hotels, nine units in airport lounges, five units in libraries
and six units in universities. Several other hotels, each of which had primarily
installed one Smart Switch on a trial basis, have canceled or determined not to
permanently install an aggregate of five such machines, apparently primarily due
to insufficient usage by guests. The Company believes that these hotels did not
adequately market to their guests the availability of the Fax machines. While
other customers are generally showing a greater degree of usage, there can be no
assurance that there will not be a material amount of cancellations, or that
significant new orders will develop so as to make the Fax machine operations of
the Company profitable. There can be no assurance that the Smart Switch will
gain broad market acceptance.
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 Business Systems plc ("Danka"), to jointly
market the Company's Smart Switch Fax services. It is contemplated that Danka
will offer to 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 with the 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.
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
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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 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
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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 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 thermal paper 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
two 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 "Item 12. Certain Relationships and Related 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.
Employees.
At November 30, 1996 the Company had 110 full time employees, including two
executive officers, five managers, 80 service technicians, 15 clerical and
administrative employees and eight sales persons, none of whom are subject to a
collective bargaining agreement.
12
<PAGE>
ITEM 2. Description Of Property
The executive offices of the Company are currently maintained at 39
Stringham Avenue, Valley Stream, New York 11580, which is also the headquarters
of IMSG, one of its wholly-owned subsidiaries. These facilities are comprised of
executive offices, warehouse space and repair facilities covering approximately
1,500 square feet. The Company presently has no formal lease or agreement with
respect to its office facilities, and is on a month to month lease at $2,145 per
month. In the event the month to month lease arrangement is terminated, the
Company does not believe that it will be materially affected since management
believes it will be able to obtain similar facilities.
The Company also maintains service centers in Norwood, Massachusetts;
Albany, New York; Des Plains, Illinois; Harrisburg, Pennsylvania; Austin, Texas;
and Jacksonville and Sarasota, Florida. The Company utilizes these service
centers to service regional accounts including repairing machines and storing
supplies and parts. The Norwood, Massachusetts service center is leased for a
monthly rent of $1,300. The Albany, New York service center is leased for a
monthly rent of $1,218. The Des Plains, Illinois service center is leased for a
monthly rent of $890. The Harrisburg, Pennsylvania service center is leased for
a monthly rent of $1,417. The Austin, Texas service center is leased for a
monthly rent of $875. The Jacksonville and Sarasota, Florida service centers are
leased for an aggregate monthly rent of $1,278.
All space currently utilized by the Company is dedicated to administrative,
marketing, data processing, equipment assembly storage, service and maintenance
and clerical functions. The Company believes that its facilities are adequate
for its present operations. Additionally, the Company believes its facilities
are adequately covered by insurance.
The Company's copiers and fax machines are on site locations throughout New
York, Massachusetts, Pennsylvania, Illinois, Connecticut, Florida, Vermont, New
Hampshire, Wisconsin, North Carolina, South Carolina, Texas and Georgia.
ITEM 3. Legal Proceedings
The Company is not a party to any material legal proceedings, except as
follows:
On October 26, 1995, the Company instituted an action in Supreme Court,
State of New York, Nassau County, entitled IMSG Systems, Inc. v. Kevin T.
Gallagher and LGG Corp. d/b/a Boston Copico. The Company brought the action to
enforce a restrictive covenant against Kevin Gallagher, a former employee of the
Company. LGG Corp. counterclaimed for $1,750,000 based upon an alleged unfair or
trade practice in seeking to prevent it from hiring Mr. Gallagher. The Court
denied the Company's motion for a permanent injunction.
On October 30, 1995, an action was brought against the Company in Supreme
Court, State of New York, New York County, entitled Diversified Investors Corp.
v. DiversiFax, Inc. and
13
<PAGE>
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
November 30, 1996), made to the Company by various creditors, all of whom have
assigned their rights under the loans to Diversified Investors Corp. The Company
has acknowledged the amount due, but has not paid because the plaintiffs have
not indicated how the amount was to be allocated (due to a dispute between the
plaintiffs). Based upon the agreement describing the debt, the Company believes
that the amount is payable in Common Stock of the Company. The plaintiff is
seeking cash in lieu of stock. The Company and the plaintiff have each appealed
the denial of their respective motions for Summary Judgment.
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. ScreenScan Systems, Inc is the developer and
manufacturer of a device that scans and prints microfilm images to a laser
printer without the aid of a computer. The plaintiff is seeking unspecified
compensatory and punitive damages, including cost, attorneys fees and interest.
The Company believes that the outcome of the above actions will not have a
material adverse effect on the Company's financial condition.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
None
14
<PAGE>
PART II
ITEM 5. Market for Common Equity 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, 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
1st Quarter 3 5/16 2 11/16
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 March 10, 1997, there were approximately 148 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.
15
<PAGE>
ITEM 6. Managements Discussion And Analysis Of Financial Condition And Results
of Operations
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. Sales are derived primarily from the
Company's coin-operated Copier operations. 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 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 all 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 continue to be
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. In addition, as a result of the agreement with ScreenScan, the
reader printers needed refurbishment to enable their use with the ScreenScan
interface scanners. The Company is continually monitoring its purchasing with a
view toward obtaining more competitive pricing and wherever possible using
"generic brands" of supplied 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. Management is in the process of renegotiating the
commission rate with many of its larger customers.
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
16
<PAGE>
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 calculation 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.
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
17
<PAGE>
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), 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.
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.
18
<PAGE>
The loss of approximately $3,409,000 resulted in an increase in the
deferred tax benefit of approximately $500,000. Due to the Company's continued
poor operating results, management further evaluated the realizability of the
deferred tax asset and determined to increase the valuation allowance by
$340,000 at November 30, 1995, resulting in a net deferred tax asset of $340,000
at November 30, 1995.
Management believes that the future taxable income generated from the
development of the Smart Switch business coupled with the expected return to
profitability of the Copier business and the reversal of the existing deferred
tax liabilities will be sufficient to utilize the net deferred tax asset at
November 30, 1995.
Liquidity and Capital Resources
At November 30, 1996, the Company had cash and a working capital
(deficiency) of $198,000 and ($614,728), respectively, as compared to $1,001,000
and ($1,254,000), respectively, at November 30, 1995.
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,
its newly acquired ScreenScan dealership, the acquisition of new businesses and
the further growth of recent aquisitions to boarder and diversify its revenue
source making it less seasonal.
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).
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 $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 $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.
19
<PAGE>
The above resulted in a net decrease in cash of approximately $803,000 for
the year ended November 30, 1996.
Management believes the expected cash flow from operations, the expected
growth of the newly acquired companies, its ScreenScan dealership, and the
willingness and ability of the Company's Chief Executive Officer and affiliates
to fund any operating deficit will allow the Company to continue operations over
the next 12 months.
ITEM 7. Financial Statements
The response to this item is submitted as a separate section to this
report on pages F-1 through F-23.
ITEM 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors and Executive Officers
Set forth below are the names, ages, positions and business experience of
the executive officers and directors of the Company and an indication, if
applicable, of since when each has served as a member of the Board of Directors
of the Company.
Name Age Position
- ---- --- --------
Dr. Irwin A. Horowitz 60 Chairman of the Board,
Chief Executive Officer and President
Mario J. DiNatale 41 Director
Eugene Bilotti 47 Director
Kenneth Ross Wolfe 51 Secretary and Director
A more detailed biographical description of each nominee is as follows:
Irwin A. Horowitz has been the Chairman of the Board, Chief Executive
Officer and President of the Company since November 1, 1993. From July through
October 1993, he served as Chief Operating Officer of the Company. For more than
the past five years, Dr. Horowitz has been Chairman of the Board and President
of IMSG Systems, Inc. and certain affiliated companies ("IMSG and Affiliates"),
which were acquired by the Company effective November 1, 1993. Dr. Horowitz is a
director of The Langer Biomechanics Group, Inc., a public company which is
primarily engaged in the business of manufacturing and selling orthotic
products.
Mario J. DiNatale is the President and Chief Operating Officer of the
Company's subsidiary DiversiFax Information 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
21
<PAGE>
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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company's officers, directors and beneficial owners of more than 10% of
any class of its equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 ("Reporting Persons") are required under that
Act to file reports of ownership and changes in beneficial ownership of the
Company's equity securities with the Securities and Exchange Commission (the
"SEC"). Copies of those reports must also be furnished to the Company. Based
solely on a review of the copies of reports furnished to the Company pursuant to
that Act, the Company believes that during fiscal year ended November 30, 1995
all filing requirements applicable to Reporting Persons were complied with,
except that Irwin A. Horowitz failed to timely file a Form 4 with respect to the
grant of warrants to purchase shares of Common Stock.
22
<PAGE>
ITEM 10. Executive Compensation
Executive Compensation
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 $100,000 in compensation in the fiscal year ended November 30, 1996.
For the purposes of this table, warrants are deemed to be equivalent to stock
options.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Principal -------------------------------------- Securities Underlying
Position Year Salary ($) 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
of Directors and Chief 1995 201,923 -- 65,155 --
Executive Officer
1994 250,000 -- 64,200 --
Mario J. DiNatale 1996 90,000 35,000 -- --
President, DiversiFax
Information Services, 1995 72,000 35,000 -- 100,000
Inc.
1994 -- -- -- --
</TABLE>
(1) Represents the fair market value of benefits and perquisites afforded by
the Company to Dr. Horowitz.
23
<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
No. of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(1)
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
-- 65.0% 2.375(2) 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 mandated by 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
$2.375 on December 17, 1996, in consideration of Dr. Horowitz's loans to
the Company. See "Item 12. Certain Relationships and Related Transactions."
24
<PAGE>
Aggregated Option Exercises During Fiscal 1996 and Year End Option Values
The following table provides information related to options exercised by
each of the named executive officers during 1996 and the number and value of
options held at November 30, 1996. The Company does not have any outstanding
stock appreciation rights (for the purposes of this table, warrants are deemed
to be equivalent to stock options).
<TABLE>
<CAPTION>
Value of Unexercised In-
Number of Unexercised the-Money Options at Year
Shares Value Options at Year End(#) End ($)
Acquired on Realized ------------------------- -------------------------
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>
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 "Item 12. Certain Relationships and Related 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.
Directors' Remuneration
The directors of the Company are not currently compensated, nor were they
during the last fiscal year, for their services as such, except that in
September 1995, the Company adopted the 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.
25
<PAGE>
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.
26
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
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 March 10, 1997 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.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Name and Address of Number of Shares
Beneficial Holder Beneficially Owned(1) Percentage of Class
- ----------------- --------------------- -------------------
Dr. Irwin A. Horowitz 7,737,520(2) 49.7%
111 Ocean Place
Sarasota, Florida 24242
Mario J. DiNatale 226,000(3)(4) 1.6%
Atrium Executive Center
3000 Atrium Way -- Suite 200
Mt. Laurel, New Jersey 08054
Eugene Bilotti 104,000(4)(5) *
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 as a 8,147,520(6) 51.2%
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 427,520 shares underlying warrants exercisable within 60
days.
(3) Includes 100,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(4) Includes 80,000 shares of Common Stock underlying options exercisable
within 60 days.
27
<PAGE>
(5) Includes 14,000 shares of Common Stock owned by his spouse, for which he
disclaims beneficial ownership.
(6) Includes an aggregate of 1,240,000 shares underlying options exercisable
within 60 days and an aggregate of 527,520 shares underlying warrants
exercisable within 60 days.
28
<PAGE>
ITEM 12. Certain Relationships and Related 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 October 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 on a number of occurrences, to cover its working capital needs and
to finance acquisitions, in the net aggregate principal amount of approximately
$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 August 16, 1996, as well as all
subsequent loans, in the net aggregate principal amount of approximately
$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 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.
29
<PAGE>
ITEM 13. Exhibits, List and Report on Form 8-K
(a) Exhibits. The Exhibits are filed as part of, or incorporated by
reference into this report.
Sequentially Numbered Page
Exhibit # Document Where Located
- --------- -------- --------------------------
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) By-laws* --
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.*
30
<PAGE>
(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 33
18, 1996, between DiversiFax, Inc.
and Irwin A. Horowitz regarding
loans made to the Company
(g) Letter, dated August 16, 1996, from 34
DiversiFax, Inc. to Irwin A. Horowitz
regarding funding of operating
deficiencies of the Company
(h) Employment Agreement between 35
DiversiFax, Inc. and Dr. Irwin A.
Horowitz dated October 29, 1996
(i) Stock Purchase Agreement with --
Copier Machine Professionals, Inc.,
dated November 1, 1996*
(j) Letter Agreement dated November 21, 45
1996 between DiversiFax Information
Service, Inc. and Danka Business
Systems, plc
(k) Agreement dated as of October 1, 46
1996 between Screen Scan Systems,
Inc. and DiversiFax, Inc.
21. Subsidiaries of the Company* --
23. Independent Auditor's Consent 58
The Company filed a Form 8-K with the Securities and Exchange Commission on
November 26, 1996, relating to the Company's proposed acquisition of Copier
Machine Professionals, Inc.
- ----------
*Incorporated by reference.
31
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
YEARS ENDED
NOVEMBER 30, 1996 AND 1995
================================================================================
<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 statements do
not include 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
- --------------------------------------------------------------------------------
ASSETS
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, 1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
YEARS ENDED NOVEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
------------------------------
Preferred Stock 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>
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
================================================================================
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NOVEMBER 30, 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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
===================================================================================================
</TABLE>
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>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIVERSIFAX, INC.
/s/ Irwin A. Horowitz
----------------------------------
Date: March 13, 1997 Dr. Irwin A. Horowitz
Chairman of the Board, Chief
Executive Officer and President
(Principal executive and principal
financial and accounting officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Irwin A. Horowitz Director March 13, 1997
- --------------------------
Irwin A. Horowitz
/s/ Mario DiNatale Director March 13, 1997
- --------------------------
Mario DiNatale
/s/ Kenneth Ross Wolfe Director March 13, 1997
- --------------------------
Kenneth Ross Wolfe
/s/ Eugene Bilotti Director March 13, 1997
- --------------------------
Eugene Bilotti
32
Exhibit 10(f)
DIVERSIFAX, INC.
39 Stringham Avenue
Valley Stream, New York 11580
December 18, 1996
Dr. Irwin A. Horowitz
c/o Diversifax, Inc.
39 Stringham Avenue
Valley Stream, New York 11580
Dear Dr. Horowitz:
Diversifax, Inc. (the "Company") and you hereby confirm and agree that the
loans made by you through November 30, 1996 totalling approximately $1,063,000
shall remain interest free and shall not become due and payable until December
2, 1997, at which time such loans shall become due and payable on demand.
In consideration therefor, the exercise price of the warrants to purchase
427,520 shares of the Common Stock, par value $.001 per share, of the Company
("Common Stock") granted to you on August 16, 1996, as well as of the options to
purchase 750,000 shares of Common Stock granted to you pursuant to your
employment agreement with the Company, have been reduced to $2.375 per share. In
addition, in consideration therefore, the Company granted to you, on December
17, 1996, incentive options to purchase 38,270 shares of Common Stock,
exercisable at $2.613 per share, and non-incentive options to purchase 711,730
shares of Common Stock, exercisable at $2.375 per share.
To the extent that this agreement is inconsistent with that letter
agreement between you and the Company, dated August 15, 1996, the terms of this
agreement shall supersede such prior agreement.
Very truly yours,
DIVERSIFAX, INC.
By: /s/ Kenneth Ross Wolfe
----------------------
Title: Secretary
Agreed to and accepted
as of the date first
set forth above:
/s/ Irwin A. Horowitz
- ---------------------
Irwin A. Horowitz
Exhibit 10(g)
DIVERSIFAX, INC.
39 Stringham Avenue
Valley Stream, New York 11580
August 16, 1996
Dr. Irwin A. Horowitz
c/o Diversifax, Inc.
39 Stringham Avenue
Valley Stream, New York 11580
Dear Dr. Horowitz:
Diversifax, Inc. (the "Company") hereby acknowledges that in the year 1996,
up to and including August 16, 1996, you have made loans to the Company
totalling $668,000. In consideration thereof, the Company hereby delivers to you
a promissory note in the principal amount of $668,000, which note shall bear no
interest and be payable on demand at any time on or after June 1, 1997. Together
with said promissory note and in consideration of such loan, the Corporation is
also hereby delivering to you five year warrants to purchase an aggregate of
427,520 shares of the Corporation's common stock, par value $.001 per share,
which warrant shall have an exercise price of $3.125 per share, the fair market
value of said shares on the date hereof.
Very truly yours,
DIVERSIFAX, INC.
By: /s/ Kenneth Ross Wolfe
--------------------------
Title: Secretary
Exhibit 10(h)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 29th day of October 1996, by and
between DIVERSIFAX, INC., a Delaware corporation, having its principal executive
offices at 39 Stringham Avenue, Valley Stream, New York 11580 (hereinafter
referred to as the "Company"), and DR. IRWIN A. HOROWITZ, with an address at 111
Ocean Place, Sarasota, Florida 34242 (hereinafter referred to as the
"Employee").
WITNESSETH:
WHEREAS, the Employee is presently the President and Chief Executive
Officer of the Company; and
WHEREAS, the parties hereto desire to set forth in this Agreement the terms
and conditions of the Employee's continued employment as the President and Chief
Executive Officer of the Company.
NOW, THEREFORE, in consideration of the terms and conditions hereinafter
set forth, the parties hereto agree as follows:
1. Employment; Position; Responsibilities.
1.1 The Company hereby employs and engages the Employee to serve as
the President and Chief Executive Officer of the Company and to perform the
duties customarily associated with such positions.
1.2 The Employee hereby accepts said employment with the Company on
the terms and conditions herein set forth and agrees to devote his full time,
energy and skill during regular business hours exclusively to such employment.
<PAGE>
2. Term of Employment.
2.1 The term of employment hereunder shall commence as of December 1,
1996, shall continue for a period of one year (the "Term"), and shall be renewed
for additional successive one year periods (each an "Additional Term"), unless
either party terminates this Employment Agreement at the end of the Term or any
Additional Term by 30 days prior written notice, except that the Employee's
employment shall terminate sooner upon the occurrence of any of the following
acts:
(a) The death of the Employee;
(b) The incapacity of the Employee as defined below;
(c) An act or omission to act on the part of the Employee which
would constitute cause, as defined below, for the termination of employment, and
the giving of written notice to the Employee by the Company that the Company
elects to terminate the employment of the Employee; or
(d) The Employee voluntarily leaves the employ of the Company.
2.2 The term "incapacity" as that term is used in Section 2.1 (b)
above shall be deemed to refer to and include the absence of the Employee from
his employment by reason of mental or physical illness, disability or incapacity
for a continuous period of 120 days or for a period of six months in any one
year period, and the Company, at its option, elects to treat such illness,
disability or incapacity as permanent in nature.
2.3 The term "cause" as that term is used in Section 2.1(c) above
shall be defined as being for:
(a) A material default or breach of any of the representations,
warranties, obligations, covenants or agreements made by the Employee herein;
(b) The conviction of the Employee in a court of law of any
felony; or
(c) The misappropriation by the Employee of Company assets.
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3. Compensation: Related Matters.
3.1 The Employee shall be compensated for his services hereunder as
follows:
(a) Upon execution of this Employment Agreement, the Employee
shall receive, under the Company's 1996 Stock Option Plan, five year options to
purchase 750,000 shares of the Company's common stock, par value $.001 per share
(the "Common Stock"), which options shall vest as to 150,000 upon the date of
grant and as to 150,000 on each of the next four anniversary dates hereof. The
option exercise price per share shall be the fair market value of the Common
Stock on the date hereof. Said options shall be deemed "incentive" stock options
to the maximum extent permitted by the Internal Revenue Code of 1986, as
amended.
(b) A base salary at the rate of $125,000 per annum payable in
accordance with the Company's normal payroll procedures for executive employees;
provided, however, that on December 1 of each year during an Additional Term,
commencing December 1, 1997, the base salary shall be adjusted for a cost of
living increase based on the Consumer Price Index for New York City for the
twelve month period immediately preceding such December 1 date. The Employee
shall also be entitled to additional increases in base salary as may be
determined from time to time by the Board of Directors or any compensation
committee appointed by the Board of Directors.
(c) (i) A bonus equal to a percentage of the Pre-tax Profits of
the Company, for each one year period constituting the Term and each Additional
Term during which Employee is employed by the Company under this Agreement, as
follows:
Pre-Tax Profits Bonus
--------------- -----
$150,000-$500,000 6%
$500,001-$1,000,000 12%
$1,000,001-$6,000,000 15%
over $6,000,000 18%
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<PAGE>
(ii) Such bonus shall be paid no later than four months after the
end of the applicable Term or Additional Term. At the option of the Employee,
and subject to compliance with relevant securities and other laws, the bonus
payable in Section 3.1(c)(i) above shall be paid in restricted shares of the
Common Stock, based upon the fair market value of the Common Stock on the last
day of the applicable Term or Additional Term.
(iii) "Pre-tax Profits" as used herein shall mean the pre-tax
profits of the Company as stated in its financial statements (prior to the
computation of Employee's bonus under Section 3.1(c)(i) hereof) for the
appropriate time period without taking into account any extraordinary gains or
losses of the Company.
3.2 The Company shall reimburse the Employee for all reasonable
expenses incurred by him in connection with the business of the Company,
provided the Employee shall submit proper supporting documentation for such
expenses.
3.3 The Employee shall be eligible, to the extent he qualifies, for
participation in any health or other group insurance plan of the Company and
shall also be entitled to participate in any employee benefit programs of the
Company for its key employees or for its employees generally.
3.4 The Employee shall be entitled to a four (4) week paid vacation
per year during the Term, to be taken at such times as are consistent with the
needs of the Company and the convenience of the Employee.
3.5 (a) In the event the Employee's employment by the Company is
terminated for "cause" pursuant to Section 2.1(c) hereof, or by virtue of
Section 2.1(d) hereof because the Employee voluntarily leaves the employ of the
Company, the Employee shall be entitled to (i) the compensation provided for by
Section 3.1(b) only up to and until the date of termination of his employment,
and (ii) a pro rata portion of the compensation provided for by Section
3.1(c)(i), based upon the portion of the Term or Additional Term in which the
Employee was actually employed by the Company under this
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<PAGE>
Agreement; but shall not be entitled to any further compensation pursuant to
Sections 3.1(b) or 3.1(c) for the year in which the Employee's employment is
terminated or any subsequent year.
(b) In the event the Employee's employment by the Company is
terminated for reason other than cause or the Employee voluntarily leaving the
employ of the Company, the Employee (or his estate in the event such termination
is due to the death of the Employee or the Employee dies subsequent to such
termination) shall be entitled (i) to receive the compensation provided for in
Section 3.1(b) hereof for the balance of the Term or Additional Term, as the
case may be, the medical insurance-benefits provided for in Section 3.3 hereof
for the balance of the Term or Additional Term, as the case may be (but only to
the extent legally allowable); and (ii) a pro rata portion of the compensation
provided for by Section 3.1(c)(i), based upon the portion of the Term or
Additional Term in which the Employee was actually employed by the Company under
this Agreement.
4. Restrictive Covenants.
4.1 The Employee acknowledges the Company's vital interest in
retaining its employees. The Employee further acknowledges that if he were to
compete with the Company by organizing, directing, advising, assisting or
becoming an employee of any business entity, as defined below, competing with
the Company, he could do great harm to the Company and would materially diminish
or destroy the value to the Company of its customer relationships and servicing
and marketing arrangements.
Accordingly, during the Term and all Additional Terms and, so long as
Employee is continued to be paid the salary referred to in Section 3.1(b) above,
for a period of one (1) year immediately following the termination thereof (the
Term and all Additional Terms and the subsequent one (1) year period being
collectively referred to as the "Covenant Period"), unless otherwise consented
to by the Company in writing, the Employee shall not, within any region, city,
town or
5
<PAGE>
county in which the Company or any of its affiliates or subsidiaries conducts or
does any business, directly or indirectly, either for himself or as an officer,
director, stockholder, partner, associate, employee, consultant, agent,
independent contractor, or representative, become or be interested in or
associated with any other business or business entity, as defined below (except
an affiliate or subsidiary of the Company), which is engaged directly or
indirectly in any line of business which is competitive with any line of
business in which the Company or any of its affiliates or subsidiaries may be
engaged at the time of termination of the Employee's employment hereunder;
provided, that the Employee shall be permitted after the term of his employment
has terminated but during the Covenant Period to own less than a 3% interest as
a stockholder (and in no other capacity) in a company which is listed on any
national stock exchange and in direct competition with the Company.
As used in this Agreement, the term "business entity" shall include,
but not be limited to, any corporation, firm, partnership, association, trust,
group, joint venture, or individual proprietorship.
4.2 The Employee shall not, during the Covenant Period or thereafter,
directly or indirectly release or disclose to any person or business entity any
confidential information regarding the intellectual property, customers,
suppliers, marketing arrangements or methods of operation of the Company, or any
other confidential information of the Company, except that nothing contained in
this sentence shall be construed to prevent the Employee from using any general
technical knowhow and information that is in the public domain or of a nature
known generally throughout the industry.
4.3 The Employee shall, during the Term and all Additional Terms,
promptly reveal to the Company all matters coming to the Employee's attention
pertaining to the business or interests of the Company or any of its affiliates
or subsidiaries.
4.4 Unless otherwise consented to by the Company in writing, the
Employee shall not, during the Covenant Period, hire or solicit for hiring, on
his own behalf or on behalf of any
6
<PAGE>
business entity, any key employee of the Company or any of its affiliates or
subsidiaries, who was employed by the Company or any of its affiliates or
subsidiaries during the Term or any Additional Term.
4.5 The Employee shall not, during the Term or any Additional Term, or
upon termination thereof, remove from the offices of the Company, any studies,
samples, reports, plans, contracts, publications, customer lists or other
similar items nor copies or facsimiles thereof, except as the same may relate to
the performance of the Employee's duties hereunder, or as otherwise authorized
by the Company.
4.6 During the Covenant Period, the Employee shall not solicit, cause
to be solicited, or assist in the solicitation of any person or business entity
which is a customer or account of the Company or any of its affiliates or
subsidiaries on the date of the Employee's termination, for the purpose of
providing services that are directly competitive with the Company or any of its
affiliates or subsidiaries.
5. Restrictive Covenants Severable.
The provisions of Section 4 of this Agreement contain a number of
separate and divisible covenants, all of which are included respectively in said
Section for the purpose of brevity only, and each of which shall be construed as
a separate covenant and shall be separately enforceable, and if any court of
competent jurisdiction shall determine that any part of said Section, or any
part of any sentence or paragraph thereof, or any such separate covenant therein
contained, is unduly restrictive or void, the remaining part or parts, or the
other separate covenants, shall be considered valid and enforceable,
notwithstanding the voidance of such part or separate covenant.
6. Remedies.
The Employee acknowledges that it will be impossible to measure in
money the damage to the Company of a breach of any of the provisions of Section
4; that any such breach will cause
7
<PAGE>
irreparable injury to the Company and that the Company, in addition to any other
rights and remedies existing at law or equity or by statute, shall be entitled
to an injunction or restraining order restraining the Employee from doing or
continuing to do any such acts and any other violations or threatened violations
of Section 4, and the Employee hereby consents to the issuance of any such
injunction or restraining order without bond or security.
7. Prior Bank Loan Guarantee.
The Company hereby acknowledges that up to November 1995 the Employee
guaranteed the Company's payments under a certain bank loan agreement, for which
guarantee no consideration has yet been provided by the Company to the Employee.
Accordingly, in consideration of such guarantee, the Company hereby grants to
the Employee, under the Company's 1996 Stock Option Plan, five year options to
purchase 100,000 shares of Common Stock, at an exercise price per share equal to
the fair market value of the Common Stock on the date hereof, which options
shall be fully vested as of the date hereof.
8. Notices.
All notices required or permitted to be given by any party hereunder
shall be in writing and delivered in person or mailed by registered or certified
mail, return receipt requested, to the other parties addressed as follows:
(a) If to the Employee to 111 Ocean Place, Sarasota, Florida
34242;
(b) If to the Company to 39 Stringham Avenue, Valley Stream, New
York 11580; or to such other addresses as the parties may direct by notice given
pursuant hereto. Any notice mailed as provided above shall be deemed completed
on the date of receipt.
9. Entire Agreement.
The provisions hereof constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede, replace and
terminate all existing oral or written agreements
8
<PAGE>
concerning such subject matter. No modification, supplement or discharge hereof
shall be effective unless in writing and executed by or on behalf of the parties
hereto.
10. Waiver.
No waiver by any party of any condition, term or provision of this
Agreement shall be deemed to be a waiver of a preceding or succeeding breach of
the same or any other condition, term or provision hereof.
11. Assignability.
This Agreement, and its rights and obligations may not be assigned by
the Employee. This Agreement shall be binding upon the Company and its
successors and assigns.
12. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
13. Arbitration.
Any dispute or controversy arising among or between the parties hereto
regarding any of the terms of this Agreement or the breach hereof, the
determination of which is not otherwise provided for herein, on the written
demand of any of the parties hereto shall be submitted to and determined by
arbitration held in the City of New York in accordance with the rules then
obtaining of the American Arbitration Association. Any award or decision made by
the arbitrators shall be conclusive in the absence of fraud, and judgment upon
said award or decision may be entered in any court having jurisdiction thereof.
[signatures continued on following page]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
DIVERSIFAX, INC.
By: /s/ Irwin A. Horowitz /s/ Irwin A. Horowitz
---------------------- ----------------------
Title: President DR. IRWIN A. HOROWITZ
10
Exhibit 10(j)
DiversiFax, Information Systems Inc.
3000 Atrium Way, Suite 222
Mt. Laurel, New Jersey 08054
DANKA
38 US Highway #46
PO Box 730
Pine Brook, New Jersey 07058
Dear Howard:
It was a pleasure meeting with you and your colleagues the other day. I
believe we made headway in understanding our prospective roles in what we hope
can be a very lucrative hotel market. To recap, DiversiFax has developed
technology that allows any fax machine to be converted into a pay-for-use fax
for the general public's use. As you know, we have an exclusive marketing
agreement with AT&T to market our product to their hotel accounts. DANKA also
markets its fax and copiers to some of these same hotel accounts. It is because
of this synergy we would like to enter into a relationship with DANKA to
co-market our prospective products. DANKA with their Multi-functional fax
machine and DFAX with its billing service that allows your fax machine to be
converted to a payfor-use fax.
I would suggest the following relationship be established on a go forward
basis.
DiversiFax with it's current marketing partner AT&T, will market and sell
the DANKA fax equipment to the hotels that request our "Smart Suites" service
(where applicable). DANKA and DFAX will share in the marketing expenses as well
as the gross margins with respect to the sale of the equipment. A marketing
budget will be presented for your approval covering related marketing expenses
for the period ending March 1997. We will share expenses if we approve the
marketing budget.
If this meets with your approval in principle, please indicate so by
signing the appropriate section below, forwarding a copy to me. In addition,
please forward prices for the 4100 in the following quantities: 0-300, 301-1000,
1001-up along with your leasing rates for multiple unit sales of up to 4, as
well as 10 or more, per hotel. I will need copies of your standard lease form
for the hotels to sign.
Thank you, DANKA
/s/ Mario DiNatale /s/ Robert Arenth
- ------------------------- -------------------------
Mario DiNatale, Vice President
President -------------------------
Exhibit 10(k)
SUPPLY AND DISTRIBUTION AGREEMENT
This Supply Agreement (this "Agreement") is made and entered into as of
October 1, 1996, by and between SCREENSCAN SYSTEMS, INC., ("ScreenScan"); a
Delaware corporation with principal office" at 26200 Town Center Drive, Suite
100, Novi, Michigan 48375 and DIVERSIFAX, INC. ("Purchaser"), a Delaware
corporation with principal offices at 39 Stringham Ave., Valley Stream, NY
11580.
RECITALS
A. ScreenScan develops and manufactures devices capable of scanning
microfilm images and printing the scanned image on a printer.
B. Purchaser desires to purchase, and ScreenScan desires to sell, 1,000
such devices as identified in this Agreement. On the terms and conditions set
forth in this Agreement, to be resold by Purchaser to Customers.
NOW, THEREFORE, in consideration of the mutual covenants and promises
hereinafter set forth, ScreenScan and Purchaser agree as follows:
1. DEFINITIONS.
1.1 "Customer" means an end user or a dealer or distributor to which
Purchaser sells the Product.
1.2 "Effective Date" means the date first written above.
1.3 "Purchase Price" means US$2,500 per unit of the Product: sold by
ScreenScan to Purchaser hereunder, subject to adjustment with respect to units
in excess of 1,000 purchased hereunder as set forth in Section 4.1.
1.4 "Purchaser" means Diversifax, Inc., a Delaware corporation.
1.5 "Product" means the device labeled in ScreenScan's product
literature as the model 100C Centronics interface scanner, or any similar
scanner produced or marketed by ScreenScan which retrofits existing microfilm
readers or reader/printers to perform scan and print functions only. "Product"
shall not include any device manufactured or developed by ScreenScan for any
other use or application, and specifically excludes scanning, and imaging
devices or products.
1.6 "ScreenScan" means ScreenScan Systems, Inc., a Delaware
corporation.
1.7 "Territory" means the continents of North America and South
America.
<PAGE>
2. AGREEMENT TO SUPPLY AND PURCHASE.
2.1 Units. Upon the terms and subject to the conditions of this
Agreement, ScreenScan agrees to sell units of the Product to Purchaser, and
Purchaser agrees to purchase units of the Product from ScreenScan. Purchaser
shall purchase, and ScreenScan shall sell, a minimum of 1,000 units pursuant to
this Agreement.
2.2 Parts. During the term of this Agreement ScreenScan also agrees to
sell to Purchaser (a) coinbox interfaces at a price of US$100 per item, factory
installed, for the first 1,000 items, (b) additional screens for the price of
US$225 per item for the first 1,000 items and (c) spare parts at prices
established by ScreenScan from time to time, Prices specified in clauses (a) and
(b) of this Section 2.2 may be increased for items in excess of 1,000 in
accordance with a formula set forth in Section 4.l(a) below.
3. PURCHASE AND DELIVERY
3.1 Schedule. The first 1,000 units of the Product sold and purchased
hereunder shall be shipped under the one year period following the effective
date bi-weekly shipments in accordance with Schedule 3.1 attached hereto. It
shall not be necessary for Purchaser to issue purchase orders for such
shipments. Subsequent units shall be shipped in accordance with Purchaser's
purchase orders; provided, that no such purchase order shall contain any term or
provision inconsistent or in conflict with the terms of this Agreement, and any
such term shall be deemed to be null and void, absent the express written
consent of ScreenScan to such term or provision.
4. PAYMENT OF PURCHASE PRICE.
4.1 Adjustment to Purchase Price.
(a) With respect to units of the Product purchased hereunder in excess
of 1,000, the Purchase Price may be increased once in each calendar year by an
amount equal to the increase the United States Consumer Price Index, all urban
consumers, published by the United States Department of Labor with respect to
the calendar year most recently ended.
(b) In addition, with respect to units of the Product purchased
hereunder in excess of 1,000, to the extent that SceenScan is unable to procure
production of the Product at a cost at or below US$1,500 per unit, the Purchase
Price may be increased to an amount equal to the unit cost of the Product to
ScreenScan plus US$1,000; provided, that in the event the Purchase Price exceeds
US$2,500 (as adjusted pursuant to Section 4.1(a)), Purchaser shall not be
obligated to accept delivery or purchase units.
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<PAGE>
4.2 Time of Payment.
(a) With respect to units shipped within 90 days after the Effective
Date, it shall be a condition to ScreenScan's obligation to ship units that
Purchaser shall have delivered the Purchase Price therefor to ScreenScan in
immediately available funds. Upon execution of this agreement, Purchaser will
deliver to SceenScan a check in payment of the first month's shipment described
on Schedule 3.1 as well as postdated checks for the second and third month's
shipments.
(b) With respect to units shipped more than 90 days but within 180
days after the Effective Date, it shall be a condition to delivery of units that
Purchaser shall have delivered Purchase Price therefor to SceenScan in
immediately available funds.
(c) With respect to units shipped more than 180 days after the
Effective Date, Purchaser shall deliver the Purchase Price therefor units to
ScreenScan in immediately available funds within thirty (30) days after delivery
of the units.
5. DELIVERY AND SHIPMENT.
The Product in each shipment shall be shipped by ScreenScan F.O.B. the
plant ln Schaan, Liechtenstein at which the Product is assembled. Costs of
shipment and risk of goods in transit shall be the responsibility of Purchaser.
6. EXCUSABLE DELAYS.
Neither party shall be liable to the other for any delay in the
purchase or sale of the Product or the performance of other obligations pursuant
to the provisions hereof, or for any damages suffered by ScreenScan hereto by
reason of such delay, when such delay is, directly or indirectly, caused by, or
in any manner arises from, fires, floods, accidents, riots, acts of God, war,
governmental interference or restrictions, strikes, labor difficulties, shortage
of labor, fuel, power, material or supplies, transportation delays, or any other
cause or causes, similar or dissimilar to the foregoing, beyond the reasonable
control of such party.
7. DISTRIBUTION BY PURCHASER
7.1 Appointment of Purchaser.
(a) ScreenScan appoints Purchaser as its exclusive distributor in the
Territory for the promotion and sale of the Product and Purchaser accepts such
appointment. It is agreed and understood that this appointment, and the
exclusive nature thereof, relates only to the Product encompassing devices used
to retrofit existing microfilm readers or reader/printers to enable them to scan
and print displayed material.
(b) No commission, royalty or other compensation shall be owing by
Purchaser to ScreenScan on account of any sales of such units by Purchaser.
(c) ScreenScan agrees that during the term of this Agreement it shall
not appoint any other distributors or sales representatives to market or sell
the Product to Customers nor shall
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<PAGE>
ScreenScan market or sell the Product to Customers. Purchaser agrees to assume
the obligation of ScreenScan to provide units of the Product pursuant to the
distribution arrangements existing with other parties on the Effective Date.
Purchaser will pay to ScreenScan an amount equal to the positive difference, if
any, between the per unit amount at which units of the Product are sold by
Purchaser to such parties and US$2,500. Such payments shall be made promptly
upon receipt of payment by Purchaser for all such units sold by it.
(d) ScreenScan provision of devices performing the same functions as
the Product, as supplier to an original equipment manufacturer ("OEM"), to be
incorporated into OEM products, shall not be a violation of the exclusivity
provisions of this Section 7.1 or any other provision of this Agreement, so long
as ScreenScan first enters into an agreement or arrangement to supply devices
for such purposes within two years after the Effective Date. If no such
agreement or arrangement is entered or established within such period, the
exclusivity of Purchaser's appointment (subject to Section 7.1 (e)) shall be
deemed to include any application of the Product limited to scanning and
printing, whether incorporated into OEM products or otherwise. In the event
ScreenScan enters into any arrangement for the provision of devices as OEM
equipment, then during the term of this Agreement ScreenScan shall provide to
Purchaser an opportunity to purchase OEM products which incorporate the devices
and whose application is limited to scan and print functions, at a cost equal to
the cost paid by ScreenScan to acquire such products from the OEM, ScreenScan
shall use its reasonable efforts to negotiate such cost so that it is not
materially higher than the price paid by the OEM's distributors at similar
purchase volumes.
(e) The exclusivity of Purchasers' appointment hereunder may be
terminated by ScreenScan, in its sole discretion for any reason or no reason,
upon not less than five days' prior written notice to Purchaser if (i) Purchaser
fails to take delivery of units of Product during any calendar quarter in
accordance with the schedule set forth in Schedule 3.1 and does not, by the end
of the subsequent calendar quarter, cure such failure and take delivery of such
units as well as the units scheduled for deliver in such subsequent quarter; or
(ii) Purchaser fails to pay for units of the Product delivered hereunder in
accordance with the provisions of this Agreement. This Section shall not limit
the right of ScreenScan to terminate this Agreement and Purchaser's appointment
hereunder in accordance with Section 12.1.
(f) The provisions of this Section 7.1 apply only to the Product for
applications limited to retrofitting microfilm readers or reader/printers for
scanning and printing and do not apply to any other product designed,
manufactured or sold by ScreenScan. Without limiting the foregoing, products
capable of scanning and imaging are not covered by Purchaser's appointment and
are not within the scope of this Agreement.
7.2 Purchaser's Obligations. Purchaser shall acquire and devote such
time, capital, and personnel as required to continuously promote and to maximize
the sale of the Product in a commercially reasonable manner and to maintain the
business reputation of ScreenScan and its products, including the provision of
appropriate service and technical support.
7.3 Use of Name. In connection with its activities in marketing the
units pursuant to the authority granted in Section 7.1, ScreenScan hereby
licenses Purchaser during the term of this Agreement to market the units under
the name "ScreenScan." This license shall include the right to affix
identification to the units identifying them as ScreenScan products, to refer to
the name
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<PAGE>
"ScreenScan" in product or promotional literature used for the purpose of
marketing the units and to refer to Purchaser as an authorized ScreenScan
distributor of the Product. Purchaser shall not be entitled to use the name
"ScreenScan" or any other confusingly similar name for any other purpose.
7.4 Non-Competition. During the term of this Agreement, and for a
period of two years after the termination or expiration hereof for any reason
other than a breach or default by Seller of its obligations under this
Agreement, Purchaser will not, and will not permit any corporate affiliate to,
directly or indirectly (i) market or sell in the Territory any product or device
which has the primary function or application of scanning and printing microfilm
images or (ii) engage in, manage, operate, be connected with or acquire any
interest in, as a consultant, advisor, agent, owner, partner, co-venturer,
principal, director, shareholder, lender or otherwise, any business engaged in
any such activity. The parties hereto agree that the duration and geographic
scope of the non-competition provisions set forth in this Section 7.4 are
reasonable. In the event that any court determines that the duration or the
geographic scope, or both, are unreasonable and that such provision is to that
extent unenforceable, the parties hereto agree that the provision shall remain
in full force and effect for the greatest time period and in the greatest
geographic area that would not render it unenforceable. Purchasers agrees that
damages are an inadequate remedy for any breach of the provisions of this
Section 7.4 and that ScreenScan shall, whether or not it is pursuing any
potential remedies at law, be entitled to equitable relief in the form of
preliminary and permanent injunctions without bond or other security upon any
actual or threatened breach of this non-competition provision. If Purchaser
shall violate this Section 7.4, the duration of the prohibitions contained
herein automatically shall be extended for a period equal to the period during
which Purchaser shall have been in violation. The covenants contained in this
Section 7.4 are deemed to be material and ScreenScan is entering into this
Agreement relying on such covenants.
8. PRODUCT CHARACTERISTICS.
8.1 Limitation on Number of Scans. Each unit of the Product will
contain a scan chip which will enable the unit to make no more than 100,000
scans. ScreenScan will make available to Purchaser, for resale to Customers,
scan chips to enable units to make up to 200,000 additional scans. Such chips
shall be made available at a price of US$250 per item for the first 1,000 items
and may be increased for items in excess of 1,000 in accordance with the formula
set forth in Section 4.1(a) above.
8.2 Product Changes.
(a) ScreenScan reserves the right to modify the design or
manufacturing process of the Product during the term of this Agreement. This
Agreement shall cover the sale of the Product as it may be modified, altered,
improved, or otherwise changed; provided that no such modification shall impair
the functionality of the Product nor impose upon Purchaser the obligation to pay
any amount in excess of the Purchase Price for the units purchased. Purchaser
agrees and acknowledges that ScreenScan may develop, produce or market other
scanning machines with additional features, functions or capabilities nor
present in the Product, and that Purchaser's obligations hereunder will not be
affected by any such event or occurrence, notwithstanding that no upgrade or
improvement is made to the Product; provided, that during the term of this
Agreement no product or device whose functions are limited to scanning and
printing shall be sold or marketed within the Territory except pursuant to the
exclusive appointment of Purchaser under Section 7.1.
5
<PAGE>
(b) Without the written consent of ScreenScan, Purchaser shall make no
modifications, changes or alterations to any unit of the Product before or after
the sale of same to a Customer; provided that ScreenScan will not unreasonably
withhold its consent to any proposed modification so long as the function of the
Product after such modification remains limited to scanning and printing.
Purchaser acknowledges that this restriction is necessary for the protection of
the business reputation of ScreenScan and for compliance with laws regulating
the use of intellectual property, and that in the event of any violation of this
section by Purchaser, ScreenScan shall be entitled to an injunction or other
equitable relief to enjoin or prevent such violation; which shall be in addition
to any other remedies which ScreenScan may have.
(c) Purchaser agrees that no upgrades will be made to any units except
by ScreenScan. Purchaser will immediately notify ScreenScan if it becomes aware
that any other person or entity has caused or attempted to cause any upgrade to
be made to any unit and will indemnify ScreenScan for any damages or loss
arising from its failure to so notify ScreenScan.
9. WARRANTY.
9.1 Warranty. ScreenScan hereby warrants that each unit of the Product
supplied to Purchaser at the time of shipment shall be of good workmanship and
material and free from defects and shall conform to the specifications
applicable thereto (as the same may be modified from time to time). The warranty
set forth herewith, is made to Purchaser and the initial Customer only and is
not transferable. This warranty is in lieu of all other warranties, expressed or
implied. This warranty shall not apply to any Product which has been subjected
to misuse; improper modification, assembly, installation, repair, or alteration,
improper shipping or transport; or neglect, accident, inundations, fire or
operation outside its published maximum rating, unless same shall occur while
the Product is under the physical possession and control of ScreenScan.
SCREENSCAN MAKES NO WARRANTIES REGARDING THE PRODUCT, OR ANY PORTION
THEREOF, MANUFACTURED BY IT OR OTHERS (INCLUDING WITHOUT LIMITATION WARRANTIES
AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE) EITHER EXPRESS OR
IMPLIED, EXCEPT AS PROVIDED HEREIN.
9.2 Breach of Warranty. ScreenScan's liability under the warranty set
forth in Section 9.1 is limited to replacing or repairing, at ScreenScan's
option, any unit of the Product found to be defective in such respect prior to
the earlier of one year after sale to the original Customer or such time as the
unit shall have performed 100,000 scans.
10. PRODUCTS LIABILITY; COOPERATION; INDEMNITY.
10.1 Products Liability. Should any claim be made against either
Purchaser or ScreenScan alleging that personal injury or property damage to a
nonparty to this Agreement was caused by an alleged breach of the warranty set
forth in Section 9.1, regardless of whether such claim is based upon strict
liability, implied warranty, negligence, warranty, or otherwise, ScreenScan and
Purchaser will provide to the other party prompt notice of such claim and every
formal claim document received by either of them relating to such claim.
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10.2 Cooperation. With respect to any such claim as described in
Section 10.1 which may relate to the Product, ScreenScan and Purchaser agree to
communicate and cooperate with each other and, if necessary, any appropriate
insurance carrier, to the extent possible in the defence of the claim.
ScreenScan and Purchaser will make available to each other the services of
knowledgeable personnel and information necessary to the defense of the claim.
During the pendency of any lawsuit involving such a claim, ScreenScan and
Purchaser will not take any adverse action including third party claims or
cross-claims, against each other.
10.3 Indemnification. ScreenScan shall defend, indemnify and hold
harmless Purchaser for all fees and expenses, including but not limited to,
reasonable attorneys' fees and costs, consulting expert fees, settlements and
judgments, incurred because of an allegation by a Customer or third party that
the Product failed to comply with the warranty set forth in Section 9.1. Each
party shall retain the right to conduct its own defense of the case. ScreenScan
does not agree to indemnify Purchaser for a claim that the Product was
improperly installed by Purchaser. If it cannot be determined whether a
settlement or judgment was based on an alleged breach of the warranty set forth
in Section 9.1, then either party may submit the matter to the binding
arbitration procedure described ln Section 9.1 in order to determine the
relative percentage that such alleged breach of warranty caused the personal
injury or property damage.
11. INTELLECTUAL PROPERTY
11.1 Representation. ScreenScan has the right to cause the manufacture
and sale of the Product, and to license Purchaser to market and sell the
Product, free and clear of all claims, restriction, patents, trade secrets and
intellectual property rights which in any way might impair its right to the
design, manufacture or sale of the Product. ScreenScan has received no notice
of, and has no knowledge of any basis for, any claim that the Product infringes
on any patent, trademark, trade name, copyright or other property right of a
third party.
11.2 Patent Indemnification. ScreenScan shall defend, indemnify and
hold harmless Purchaser for fees and expenses, including but not limited to,
reasonable attorney's fees and costs, consulting expert fees, settlements and
judgments, incurred by Purchaser because of an alleged breach of the
representations set forth in Section 11.1.
12. TERM AND TERMINATION.
This Agreement shall become effective as of the Effective Date and
shall terminate upon the first anniversary of the Effective Date, except that
this Agreement may be terminated prior to the fifth anniversary of the Effective
Date as follows:
12.1 Failure to Purchase. By ScreenScan upon not less than five days'
prior written notice to Purchaser if Purchaser fails to take delivery of units
of Product during any calendar quarter in accordance with the schedule set forth
in Schedule 3.1 and does not, by the end of the subsequent calendar quarter,
cure such failure and take delivery of such units as well as the units scheduled
for delivery in such subsequent quarter. ScreenScan shall give written notice of
termination. This Section 12.1 shall not prevent ScreenScan from terminating the
exclusivity of Purchaser's appointment upon such occurrence as set forth in
Section 7.1(e), it being understood that the provisions of Section 7.1(e) and
this Section 12.1 are cumulative.
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12.2 Default. By either party upon giving written notice to the other
party if the other party is otherwise in default hereunder and such default is
not cured within sixty (60) days of written notice of such default. In the event
this Agreement is terminated pursuant to this Section 12.2, the non-defaulting
party may pursue any legal or equitable remedies which it may possess under
applicable law.
12.3 Bankruptcy, Insolvency, etc. By either party upon the appointment
of a receiver for any property of the other party, the commission of any act of
bankruptcy, the initiation of any bankruptcy, insolvency, reorganization, or
other debtor-relief proceeding by or against the other party, or the insolvency
of such other party.
12.4 Patent Infringement. By either party upon not less than thirty
(30) days' prior written notice to the other party in the event the parties are
unable to manufacture or sell the Product without infringing any third party's
patent.
12.5 Dicontinuence. By ScreenScan upon not less than ninety (90) days'
prior written notice to Purchaser if, subsequent to the delivery of the initial
1,000 units of the Product to be sold and purchased hereunder. ScreenScan should
determine to discontinue production of the Product. If ScreenScan shall deliver
such a notice and Purchaser is not otherwise in default hereunder, ScreenScan
and Purchaser shall negotiate a license agreement under which Purchaser is
granted an exclusive license to produce a product whose function is limited to
scanning and printing, using ScreenScan's technology and manufacturing processes
applicable to the Product, in return for payment by Purchaser to ScreenScan of a
royalty or other compensation equal to US$1,000 per unit produced, increased
annually in the manner set forth in Section 4.1. Such agreement shall provide
for a term of five years with automatic one-year renewals absent notice of
termination from either party.
12.6 No Waiver. No failure of any party to exercise a right of
termination pursuant to this Article 12 shall be deemed a waiver of such right
of termination absent a written waiver signed by such party. No written waiver
shall be deemed to constitute a waiver of any subsequent occurrence giving rise
to a right to terminate unless such written waiver expressly so states.
12.7 Notice Delivery. Notwithstanding the provisions of Section 17,
any notice of termination or default to be delivered hereunder shall be
delivered by certified mail, return receipt requested, with postage thereon
prepaid.
13. CONFIDENTIAL OBLIGATIONS.
Each party shall safeguard, preserve and maintain the confidential
nature of all know-how, trade secrets and other confidential information
disclosed to it as such by the other party pursuant to this Agreement, and shall
otherwise treat all such information in the same manner as it would treat its
own valuable, confidential and proprietary information of like importance.
Neither party shall use any such information, nor disclose or permit disclosure
of any such information to any third party or parties, except as expressly
provided in this Agreement; provided, however, that the party receiving such
information may use or disclose information that (a) was already in its
possession, without restriction as to further disclosure or use, as of the date
first written above; (b) has entered the public domain through no fault of the
receiving party; (c) has been disclosed to it by a third party entitled to
disclose the information; or (d) has been developed by the receiving party
independently of any
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information disclosed to it pursuant to this Agreement or otherwise in
connection with its relationship with the other party.
14. EFFECT OF TERMINATION.
Termination of this Agreement shall not extinguish debts and other
obligations created or arising between the parties by virtue of this Agreement
or by virtue of contracts entered into hereunder before the date of termination.
Without limiting the generality of the foregoing, upon termination of this
Agreement, (a) Purchaser shall not be relieved of its obligations to pay for
Product received by Purchaser or shipped by ScreenScan before the effective date
of termination, (b) ScreenScan shall be obligated to complete all shipments
scheduled to be made before the effective date of termination and (c) the
parties shall not be relieved of their respective obligations pursuant to
Section 7.4, 8, 9, 10, 11 and 13. Termination will terminate the obligation of
ScreenScan to sell, and the obligation of Purchaser to purchase, units which
have not been shipped, provided, that nothing herein shall relieve any party for
liability for any breach of this Agreement; provided further, that after
completion of the purchase and sale of 1,000 units hereunder, ScreenScan's sole
remedies for the failure of Purchaser to accept or pay for units in accordance
with the Schedule set forth in Section 3.1 shall be to terminate this Agreement
in accordance with the provisions hereof and to collect payments owing for units
delivered prior to termination (but ScreenScan shall remain entitled to enforce
Purchaser's continuing obligations pursuant to Sections 7.4, 8, 9, 10, 11 and
13).
15. REPRESENTATIONS AND WARRANTIES.
Each party represents and warrants to the other as follows:
15.1 Power and Authority. It is a corporation duly incorporated and
validly subsisting under the laws of the jurisdiction of its incorporation, and
has full corporate power and authority to enter into this Agreement and to
perform its obligations hereunder.
15.2 Authorization. The execution and delivery of this Agreement by it
and the performance of its obligations hereunder have been duly authorized by
all necessary corporate action, and this Agreement constitutes its valid and
binding agreement, enforceable in accordance with its terms.
15.3 No Violation. The execution and delivery of this Agreement by it
and the performance of its obligations hereunder do not and will nor constitute
a violation of any agreement to which it is a party or any judgment, order or
decree by which it is bound.
16. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of, and be binding upon, the
respective successors and assigns of the parties hereto; provided that neither
party shall have the right to assign any of its rights under this Agreement
without the prior written consent of the other party (which consent shall not be
unreasonably withheld); and provided, further, that neither ScreenScan nor
Purchaser shall be relieved of their respective obligations hereunder upon any
assignment, whether voluntary or by operation of law, of their rights under this
Agreement. Notwithstanding the foregoing, either party shall have the right,
without the prior written consent of the other, to assign its rights and
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obligations under this Agreement to an affiliate or subsidiary of such party,
provided that no such assignment shall relieve the assigning party of its
obligations hereunder in the event of any breach or failure to observe such
obligations by the assignee.
17. NOTICES.
Any and all notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given (except as otherwise
provided in Article 12) (i) when delivered personally, or (ii) if mailed, when
actually received, or (iii) when transmitted, if transmitted by fax to the fax
numbers given below and confirmed by letter to the addresses set forth below, or
to such other addresses as either party may direct by notice given in accordance
with this section.
Notices to ScreenScan: ScreenScan Systems, Inc.
26200 Town Center Drive, Suite 100
Novi, Michigan 48375 ("Purchaser"),
Fax: (810) 380-6464
Attn: Ernst F. Seyr, President
Notices to Purchaser: Diversifax, Inc.
39 Stringham Ave.
Valley Stream, NY 11580
Fax: (516) 872-0904
Attn: Dr. Irwin A. Horowitz, President
18. TRAINING.
ScreenScan agrees to provide training regarding the product to up to
four employees designated by Purchaser at the facilities of ScreenScan's parent
company, Nanomach AG, in Liechtenstein, for a period of up to two weeks. Such
training shall be provided free of charge but Purchaser shall be responsible for
all other costs relating to such training, including travel, lodging and meals
for such trainees. Training shall begin subsequent to delivery of the initial
payment for the units of the product scheduled in the first quarterly period as
set forth on Exhibit 3.1.
19. SALE OF OTHER PRODUCTS.
ScreenScan agrees that during the term of this Agreement it shall
extend to Purchaser "best dealer" conditions for the purchase of ScreenScan's
model 3500 product or any replacement thereof, pursuant to which it shall sell
units thereof to Purchaser on terms no less favorable than that provided other
dealers purchasing comparable volumes of the product.
20. GOVERNING LAW.
This Agreement shall be governed by the internal laws of the State of
Michigan without regard to any choice of law principles which would require the
application of the law of any other jurisdiction.
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21. ARBITRATION OF DISPUTES.
All disputes arising between the parties relating to this Agreement
shall be settled by arbitration, in accordance with the Rules of the American
Arbitration Association and judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. Arbitration proceedings
shall be invoked upon the written notice of either party delivered to the other
party pursuant to the notice provisions herein (the "Dispute Notice"). The place
of arbitration shall be Detroit, Michigan.
22. ENTIRE AGREEMENT.
This Agreement incorporates the complete and entire Agreement between
ScreenScan and Purchaser with reference to the subject matter hereof and
supersedes all prior or contemporaneous agreements, understandings,
arrangements, representations or warranties, express or implied, relating
thereto between the parties. No modification or amendment of this Agreement
shall be binding upon the parties unless executed in writing by the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SCREENSCAN SYSTEMS, INC., a Delaware corporation
By: /s/ Ernst Seyr
---------------------------------------------
Its: President
--------------------------------------------
DIVERSIFAX, INC., a Delaware corporation
By: /s/ Irwin A. Horowitz
---------------------------------------------
Its: President
--------------------------------------------
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EXHIBIT 3.1
DELIVERY SCHEDULE
A. Units of the Product shall be delivered to Purchaser during the
one-year period commencing on the date this Agreement in bi-weekly shipments
each month in accordance with the following Schedule:
Month Number of Units
October 1996 35
November 1996 40
December 1996 50
First Quarter Total 125
-----
January 1997 50
February 1997 50
March 1997 50
Second Quarter Total 180
-----
April 1997 80
May 1997 80
June 1997 120
Third Quarter Total 280
-----
July 1997 120
August 1997 140
September 1997 155
Fourth Quarter Total 415
-----
First Year Total 1,000
=====
B. Thereafter, units shall be delivered at the rate of 250 per calendar
quarter, in bi-weekly shipments each month in accordance with the following
schedule:
Month Number of Units
First Month of Quarter 83
Second Month of Quarter 83
Third Month of Quarter 84
--
Quarterly Total 250
===
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Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Nos. 333- 19567,333-15183, 333-03122, 333-15023, 333-08803, 333-03122,
33-90498, 33-87820, 33- 87920, 33-86360) of DiversiFax, Inc. and Subsidiaries on
Form S-8, 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.
HOBERMAN, MILLER, GOLDSTEIN & LESSER, CPA'S, P.C.
March 7, 1997
