U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act Of 1934
For the quarterly period ended May 31, 1996
Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission File Number 0-20936
DIVERSIFAX, INC.
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(Exact Name of Small Business Issuer as Specified 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 office) (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>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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MAY 31, November 30,
1 9 9 6 1 9 9 5
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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
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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
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TOTAL ASSETS $5,413,195 $5,733,874
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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
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TOTAL CURRENT LIABILITIES 1,341,523 2,596,551
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Loans payable, stockholder 83,470 147,228
Due to affiliates 130,800 130,800
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214,270 278,028
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TOTAL LIABILITIES 1,555,793 2,874,579
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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)
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4,334,402 3,336,295
Less: Treasury stock, at cost ( 229,500) ( 229,500)
Subscription receivable ( 247,500) ( 247,500)
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TOTAL STOCKHOLDERS' EQUITY 3,857,402 2,859,295
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,413,195 $5,733,874
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See Notes to Consolidated Financial Statements.
1
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
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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
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<S> <C> <C> <C> <C>
SALES $2,961,673 $3,408,499 $1,622,053 $1,899,747
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COST AND EXPENSES
Cost of sales, exclusive of
depreciation 2,236,773 2,340,460 1,182,384 1,254,130
Depreciation and amortization 325,092 484,400 126,840 138,800
Selling, general and
administrative 1,021,979 970,661 574,937 590,971
Interest 6,938 63,171 582 27,569
Write-off of consulting agreement 1,614,973
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3,590,782 5,473,665 1,884,743 2,011,470
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NET LOSS ($ 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) ($.01)
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</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
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SIX MONTHS ENDED
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MAY 31, May 31,
1 9 9 6 1 9 9 5
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OPERATING ACTIVITIES
<S> <C> <C>
Net loss ($ 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
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
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( 557,696) 82,684
INVESTING ACTIVITIES
Purchases of equipment and vehicles ( 761,885) ( 2,826)
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NET CASH USED IN INVESTING ACTIVITIES ( 761,885) ( 2,826)
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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)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 534,928 ( 225,152)
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Net decrease in cash ( 784,653) ( 145,294)
Cash - Beginning of year 1,001,372 166,182
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CASH - END OF PERIOD $ 216,719 $ 20,888
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest $6,938 $63,171
=======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
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.
<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. 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 development of the Smart Switch operation,including the opening
of an office in Europe.
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.
<PAGE>
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.
<PAGE>
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.
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(Registrant)
Date July 10, 1996 By Irwin A. Horowitz
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Irwin A.Horowitz,President,
Chief Executive Officer and
Principle Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 216,719
<SECURITIES> 0
<RECEIVABLES> 48,652
<ALLOWANCES> 0
<INVENTORY> 187,577
<CURRENT-ASSETS> 514,126
<PP&E> 4,281,842
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,413,195
<CURRENT-LIABILITIES> 1,341,523
<BONDS> 0
0
0
<COMMON> 14,040
<OTHER-SE> 3,843,362
<TOTAL-LIABILITY-AND-EQUITY> 5,413,195
<SALES> 2,961,673
<TOTAL-REVENUES> 2,961,673
<CGS> 2,236,773
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,347,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,938
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (629,109)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
