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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 August 31, 1996
Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from ____________________ to _____________________
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, NY 11580
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(Address of principal executive office)
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 14,045,215 shares outstanding of the issuer's common stock, par value
$.001 per share, as of October 11, 1996.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<TABLE>
<CAPTION>
AUGUST 31, November 30,
1 9 9 6 1 9 9 5
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<S> <C> <C>
A S S E T S
CURRENT ASSETS
Cash $ 357,575 $ 1,001,372
Accounts receivable 81,799 53,912
Inventories 280,397 184,397
Prepaid expenses and other 63,975 103,329
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TOTAL CURRENT ASSETS 783,746 1,343,010
Equipment and vehicles, less accumulated depreciation 4,231,404 3,733,837
Intangible assets, net of accumulated amortization 244,000 258,700
Deferred tax benefit 340,000 340,000
Other assets 58,327 58,327
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TOTAL ASSETS $ 5,657,477 $ 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 $ 1,041,868 1,410,763
Due to affiliates 228,670 228,670
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TOTAL CURRENT LIABILITIES 1,270,538 2,596,551
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Loans payable, stockholder 711,893 147,228
Due to affiliates 130,800 130,800
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842,693 278,028
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TOTAL LIABILITIES 2,113,231 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 and 13,351,548 shares 14,040 13,350
Additional paid in capital 9,705,120 8,198,006
Deficit ( 5,697,914) ( 4,800,914)
Unearned compensation ( 74,147)
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4,021,246 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 3,544,246 2,859,295
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,657,477 $5,733,874
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</TABLE>
See Notes to Consolidated Financial Statements.
2
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DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
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AUGUST 31, August 31, AUGUST 31, August 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>
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SALES $3,764,893 $4,293,277 $ 803,220 $ 884,778
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COST AND EXPENSES
Cost of sales, exclusive of
depreciation 2,720,753 2,767,754 483,980 427,294
Depreciation and amortization 454,717 681,572 129,625 197,172
Selling, general and
administrative 1,479,419 1,490,558 457,440 519,897
Interest 7,004 94,365 66 31,194
Write-off of consulting agreement 1,614,973
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4,661,893 6,649,222 1,071,111 1,175,557
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NET LOSS ($ 897,000) ($2,355,945) ($ 267,891) ($ 290,779)
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Weighted average common
shares outstanding 13,963,517 10,633,613 14,040,215 10,633,613
Loss per share of common stock ($.06) ($.22) ($.02) ($.03)
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</TABLE>
See Notes to Consolidated Financial Statements.
3
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DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
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AUGUST 31, August 31,
1 9 9 6 1 9 9 5
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 897,000) ($2,355,945)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization 454,717 681,572
Write-off of consulting agreement 1,614,973
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable ( 27,887) ( 67,553)
Inventories ( 81,000)
Prepaid expenses and other 39,354 43,994
Accounts payable and accrued expenses ( 368,895) 96,726
Other assets 9,907
Due to affiliates ( 224,000)
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NET CASH USED IN OPERATING ACTIVITIES ( 880,711) ( 200,326)
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INVESTING ACTIVITIES
Assets acquired through acquisitions ( 60,000)
Purchases of equipment and accessories ( 818,437) ( 297,741)
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NET CASH USED IN INVESTING ACTIVITIES ( 878,437) ( 297,741)
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FINANCING ACTIVITIES
Repayment of capital lease obligations ( 810,880) ( 188,429)
Repayment of long-term debt and conversion
to capital lease obligation ( 146,238) ( 376,578)
Proceeds from stockholder's loans 564,665 188,828
Proceeds from loan payable, affiliate 229,500
Sale of convertible preferred stock, Series C 2,500
Sale of convertible preferred stock, Series B 887,580
Sale of common stock 60,500
Proceeds of common stock warrants 1,548,304
Proceeds from capital contribution 7,500
Costs incurred in connection with registration of common stock ( 48,000)
Purchase of treasury stock ( 229,500)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,115,351 574,401
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Net (decrease) increase in cash ( 643,797) 76,334
Cash - Beginning of year 1,001,372 166,182
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CASH - END OF PERIOD $ 357,575 $ 242,516
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest $7,004 $94,365
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</TABLE>
See Notes to Consolidated Financial Statements.
4
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DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. BASIS OF PRESENTATION The consolidated balance sheet as of August 31,
1996 and the related consolidated statements of
operations and cash flows for the nine and three
month periods ended August 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 three and nine month periods ended August
31, 1996 are not necessarily indicative of the
operating results for the entire year.
2. ACQUISITIONS During the nine months ended August 31, 1996, the
Company, through its newly formed, wholly-owned
subsidiary, JA-Hunt Service, Inc., acquired two
businesses engaged in the servicing of
reproduction equipment and the providing of
supplies, for the aggregate cost of $60,000. 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.
3. LOAN PAYABLE, BANK
AND CAPITAL LEASE
OBLIGATIONS On December 19, 1995, with the proceeds from the
exercise of its common stock warrants (see Note
5), the Company paid off its loan payable and
capital lease obligations in full.
4. LOANS PAYABLE,
STOCKHOLDER During the nine months ended August 31, 1996 the
Company borrowed approximately $565,000, from its
President, Chief Executive Officer and principal
stockholder (the "Stockholder") pursuant to a note
agreement. The loan is interest free through
December 1, 1997, at which time it becomes due and
payable. Thereafter, the loan bears interest at
the rate of 8% per annum. In accordance with the
note agreement, the Stockholder received a warrant
to purchase 427,520 shares of the Company's common
stock at an exercise price of $3.125 per share.
The warrant expires in August, 2001.
5. 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.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 1996 COMPARED TO THE NINE
MONTHS ENDED AUGUST 31, 1995
Sales declined approximately $528,000 or 12.3% for the nine months
ended August 31, 1996 compared to the nine months ended August 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 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. 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, 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 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 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. Revenues derived from the Company's Smart Switch
continue to be minimal.
Cost of sales represented 72.3% of sales for the nine months ended
August 31, 1996 compared to 64.5% 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. 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".
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Depreciation and amortization decreased approximately $277,000 for the
nine months ended August 31, 1996 compared to the nine months ended August 31,
1995 as a result of certain of the Company's equipment becoming fully
depreciated offset in part by depreciation taken on recently purchased
equipment. In addition, certain of the Company's consulting agreements were
fully amortized in 1995.
Selling, general and administrative expenses decreased to
approximately $1,479,000 or 39.9% of sales for the nine months ended August 31,
1996 from approximately $1,491,000 or 34.7% of sales for the nine months ended
August 31, 1995. Selling, general and administrative expenses for the nine
months ended August 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 (approximately $318,000).
Interest expense decreased approximately $87,000 for the nine months
ended August 31, 1996 compared to the nine months ended August 31, 1995 as a
result of the Company's paying off all outstanding bank indebtedness in December
1995.
During the nine months ended August 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 factors resulted in a net loss of approximately $897,000 for
the nine months ended August 31, 1996 compared to a net loss of approximately
$2,356,000 for the nine months ended August 31, 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1996 COMPARED TO THE
THREE MONTHS ENDED AUGUST 31, 1995
Sales declined approximately $82,000 for the three months ended August
31, 1996 ($803,000) compared to the three months ended August 31, 1995
($885,000). This is a decrease of approximately 9.2%. The decrease was
attributable to the same reasons as detailed in the nine month comparisons.
Cost of sales increased from 48.3% of sales for the three month period
ended August 31, 1995 to 60.3% of sales for the three month period ended August
31, 1996. This is consistent with the increase in costs, as mentioned
previously, over the comparable
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nine 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 for the three months ended August 31,
1996 decreased approximately $68,000 compared to 1995.
Selling, general and administrative expenses decreased from
approximately $520,000 in 1995 (58.8% of sales) to $457,000 (57.0% of sales) in
1996 as certain of the Company's cost cutting measures began to take effect.
Interest expense decreased approximately $31,000 due to the retirement
of bank debt.
The above factors resulted in a net loss of approximately $268,000
compared to a net loss of $291,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1996, the Company had cash and a working capital
(deficiency) of $358,000 and ($478,000), 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.
Net cash used in operating activities of approximately $881,000
resulted primarily from the net loss of approximately $897,000 offset in part
by non-cash items including depreciation and amortization of $455,000. In
addition, net cash used in operating activities increased due to a decrease in
accounts payable and accrued expenses of $369,000.
Net cash used in investing activities in the amount of approximately
$878,000 resulted from the acquisition of copiers and accessories ($818,000) and
assets acquired through acquisitions ($60,000).
Cash provided by financing activities amounted to approximately
$1,115,000 during the nine months ended August 31, 1996 primarily as a result of
the proceeds from the exercise of common stock warrants ($1,548,000) and
proceeds from stockholder's loans ($565,000), offset in part by the repayment of
bank loans and capital lease obligations ($957,000).
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The above resulted in a net decrease in cash of approximately $644,000
for the nine months ended August 31, 1996.
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PART II.
ITEM 6B
There have been no changes in Form 8K filings during the quarter.
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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.
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(Registrant)
Date October 14, 1996 By
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Irwin A. Horowitz, President
and Chief Executive Officer
