U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-20936
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DIVERSIFAX, INC.
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(Name of small business issuer in its charter)
Delaware 13-3637458
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
39 Stringham Avenue, Valley Stream, New York 11580
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(Address of Principal Executive Offices) (Zip Code)
Issuer`s Telephone Number (516) 872-0650
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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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There were 14,040,215 shares outstanding of the issuer's common stock, par value
$.001 per share, as of July 10, 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1996 COMPARED TO THE
SIX MONTHS ENDED MAY 31, 1995
Sales declined approximately $447,000 or 13% for the six months ended May 31,
1996 compared to the six months ended May 31, 1995. This decline was the result
of the loss of certain of the Company's customers, and the elimination of non-
profitable accounts offset 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. In certain areas 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, the Company has 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
unreasonable based on the revenue generated from the customer. In March 1996,
the Company was not successful in its bid for the renewal of its contract with a
major 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
will continue to collect revenue from this library system over the next several
months until such time when all the Company's copiers are removed.
Additionally, in April 1996, the Company's bid for a large university in the
Southeast was accepted. Revenues derived from the Company's Smart Switch
continue to be minimal.
Cost of sales represented 75.6% of sales for the six months ended May 31, 1996
compared to 68.7% of sales for the same period in 1995. The increase is
primarily attributed to an increase in the cost of paper and other supplies, and
additional technical support needed for new equipment purchased. In addition the
Company continued its program to refurbish its copiers 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.
Depreciation and amortization decreased approximately $159,000 for the six
months ended May 31, 1996 compared to the six months ended May 31, 1995 as a
result of certain of the Company's equipment becoming fully depreciated offset
in part by recently purchased equipment. In addition, certain of the Company's
consulting agreements were fully amortized in 1995.
Selling, general and administrative expenses increased to approximately
$1,022,000 or 34.5% of sales for the six months ended May 31, 1996 from
approximately $971,000 or 28.6% of sales for the six months ended May 31, 1995.
Selling, general and administrative expenses for the six months ended May 31,
1996 include certain expenses incurred in connection with the marketing,
promotion, and
<PAGE>
development of the Smart Switch operation, including the opening of an office in
Europe (approximately $244,000).
Interest expense decreased approximately $56,000 for the six months ended May
31, 1996 compared to the six months ended May 31,1995 as a result of the
Company's paying off all outstanding bank indebtedness in December 1995.
During the six months ended May 31, 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.
The above resulted in a net loss of approximately $629,000 for the six months
ended May 31, 1996 compared to a net loss of approximately $2,066,000 for the
six months ended May 31, 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1996 COMPARED TO THE
THREE MONTHS ENDED MAY 31, 1995
Sales declined approximately $278,000 for the three months ended May 31, 1996
($1,622,000) compared to the three months ended May 31, 1995 ($1,900,000). This
is a decrease of approximately 15%. The decrease was attributable to the same
reasons as detailed in the six-months comparisons.
Cost of sales increased approximately 7% for the three month period ended May
31, 1996 compared to 1995 . This is consistent with the increase in costs, as
mentioned previously, over the comparable six month period. The Company is
continually monitoring its purchasing with a view toward obtaining more
competitive pricing and wherever possible using "generic brands" of supplies
instead of "name brands".
Depreciation and amortization decreased approximately $12,000 compared to 1995.
Selling, general and administrative expenses increased as a percentage of sales
from approximately $591,000 in 1995 (31% of sales) to $575,000 (35% of sales).
This increase was mainly due to an increase in professional and consulting fees
and an increase in administrative salaries.
Interest expense decreased approximately $27,000 due to the retirement of bank
debt.
The above resulted in a net loss of approximately $262,700 compared to net loss
$111,700 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1996, the Company had cash and a working capital (deficiency) of
$217,000 and ($827,000) respectively, as compared to $1,001,000 and
($1,254,000), respectively at November 30, 1995.
<PAGE>
The Company's primary need for funds is to finance working capital, capital
expenditures and the further development company's Smart Switch business.
Net cash used in operating activities of approximately $558,000 resulted from
the net loss of approximately $629,000 offset by non-cash items including
depreciation and amortization of $325,000. In addition, net cash used in
operating activities
increased due to a decrease in accounts payable and accrued expenses of
$298,000.
Net cash used in investing activities in the amount of approximately $762,000
resulted from the acquisition of copiers and accessories.
Cash provided by financing activities amounted to approximately $534,000 during
the six-months ended May 31, 1996 primarily as a result of the proceeds from the
exercise of common stock warrants ($1,548,000) offset by the repayment of bank
loans and capital lease obligations ($957,000) and stockholder's loans
($64,000).
The above resulted in a net decrease in cash of approximately $785,000 for the
six months ended May 31, 1996.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIVERSIFAX, INC.
Date: September 9, 1996 By: /s/ Irwin A. Horowitz
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Irwin A.Horowitz, President
and Chief Executive Officer
(Principle Executive,
Financial, and Accounting
Officer)
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 31, November 30,
1 9 9 6 1 9 9 5
A S S E T S
CURRENT ASSETS
Cash $ 216,719 $1,001,372
Accounts receivable 48,652 53,912
Inventories 187,577 184,397
Prepaid expenses and other 61,178 103,329
TOTAL CURRENT ASSETS 514,126 1,343,010
Equipment and vehicles, less accumulated depreciation 4,281,842 3,733,837
Intangible assets, net of accumulated amortization 218,900 258,700
Deferred tax benefit 340,000 340,000
Other assets 58,327 58,327
TOTAL ASSETS $5,413,195 $5,733,874
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan payable, bank $ 146,238
Capital lease obligations 810,880
Accounts payable and accrued expenses $1,112,853 1,410,763
Due to affiliates 228,670 228,670
TOTAL CURRENT LIABILITIES 1,341,523 2,596,551
Loans payable, stockholder 83,470 147,228
Due to affiliates 130,800 130,800
214,270 278,028
TOTAL LIABILITIES 1,555,793 2,874,579
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series A, $.001
par value, authorized 1,000,000 shares
Convertible preferred stock, Series B, $.001
par value, authorized 2,900 shares
Convertible preferred stock, Series C, $.001
par value, authorized 10,000 shares
Common stock, $.001 par value, authorized 25,000,000
shares, issued 14,040,215 shares 14,040 13,350
Additional paid in capital 9,753,120 8,198,006
Deficit ( 5,430,023) ( 4,800,914)
Unearned compensation ( 2,735) ( 74,147)
4,334,402 3,336,295
Less: Treasury stock, at cost ( 229,500)
( 229,500)
Subscription receivable ( 247,500)
( 247,500)
TOTAL STOCKHOLDERS' EQUITY 3,857,402 2,859,295
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,413,195 $5,733,874
See Notes to Consolidated Financial Statements.
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DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS
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MAY 31, May 31, MAY 31, May 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
SALES $2,961,673 $3,408,499 $1,622,053 $1,899,747
COST AND EXPENSES
Cost of sales, exclusive of
depreciation 2,236,773 2,340,460 1,182,384 1,254,130
Depreciation and amortization 325,092 484,400 126,840 138,800
Selling, general and
administrative 1,021,979 970,661 574,937 590,971
Interest 6,938 63,171 582 27,569
Write-off of consulting agreement 1,614,973
3,590,782 5,473,665 1,884,743 2,011,470
NET LOSS ($ 629,109)($2,065,166) ($ 262,690) ($111,723)
Weighted average common
shares outstanding 13,925,169 10,543,613 14,040,036 10,003,613
Income (loss) per share of
common stock ($.05) ($.20) ($.02) ($.01)
See Notes to Consolidated Financial Statements.
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DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
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MAY 31, May 31,
1 9 9 6 1 9 9 5
OPERATING ACTIVITIES
Net loss ($629,109) ($2,065,166)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 325,092 484,400
Write-off of consulting agreement 1,614,973
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable 5,260 ( 48,631)
Inventories ( 3,180)
Prepaid expenses and other 42,151 232
Accounts payable and accrued expenses ( 297,910) 69,067
Other assets 27,809
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES ( 557,696) 82,684
INVESTING ACTIVITIES
Purchases of equipment and vehicles ( 761,885) (2,826)
NET CASH USED IN INVESTING ACTIVITIES ( 761,885) ( 2,826)
FINANCING ACTIVITIES
Repayment of capital lease obligations ( 810,880) ( 106,523)
Repayment of long-term debt and conversion
to capital lease obligation ( 146,238) ( 118,680)
Repayment of affiliate and stockholder's loans
payable ( 63,758) ( 60,449)
Proceeds from loan payable, affiliate 229,500
Proceeds of common stock warrants 1,548,304 60,500
Proceeds from capital contribution 7,500
Purchase of treasury stock ( 229,500)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 534,928 ( 225,152)
Net decrease in cash ( 784,653) ( 145,294)
Cash - Beginning of year 1,001,372 166,182
CASH - END OF PERIOD $ 216,719 $ 20,888
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest $6,938 $63,171
See Notes to Consolidated Financial Statements.
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DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION The consolidated balance sheet as of May 31,
1996 and the related consolidated statements
of operations and cash flows for the six and
three month periods ended May 31, 1996 and
1995 are unaudited. In the opinion of
management, all adjustments (which include
only normally recurring adjustments)
necessary for a fair presentation of such
financial statements have been made.
The November 30, 1995 balance sheet data was
derived from audited financial statements but
does not include all disclosures required by
generally accepted accounting principles.
The interim financial statements and notes
thereto should be read in conjunction with
the financial statements and notes included
in the Company's latest annual report on Form
10-KSB. The results of operations for the
six month period ended May 31, 1996 are not
necessarily indicative of the operating
results for the entire year.
2. LOAN PAYABLE, BANK
AND CAPITAL LEASE
OBLIGATIONS On December 19, 1995, with the proceeds from
the exercise of its common stock warrants
(See Note 3), the Company paid off its loan
payable and capital lease obligations in
full.
3. STOCKHOLDERS' EQUITY In December, 1995, the Company received
approximately $1,548,000 in connection with
the exercise of its remaining outstanding
common stock warrants, resulting in the
issuance of 688,130 shares of common stock.
