<PAGE>
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, 1997
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
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Idenfication 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
--------------
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 14,183,009 shares outstanding of the issuer's common stock, par
value $.001 per share, as of July 9, 1997.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
May 31, November 30,
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................. $ 228,598 $ 198,069
Accounts receivable.............................................................. 592,682 108,057
Inventories...................................................................... 710,097 432,696
Prepaid expenses and other....................................................... 31,101 114,801
-------------- ------------
Total Current Assets......................................................... 1,562,478 853,623
Equipment and vehicles, less accumulated depreciation.............................. 3,475,330 3,723,424
Intangible assets (net of accumulated amortization)................................ 72,000 81,000
Deferred tax benefit............................................................... 192,218 210,000
Other assets....................................................................... 48,000 48,000
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Total Assets................................................................. $ 5,350,026 $4,916,047
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses............................................ $ 845,810 $ 939,681
Loan payable..................................................................... 22,247
Capital lease payable............................................................ 17,654
Due to affiliates................................................................ 228,670 528,670
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Total Current Liabilities.................................................... 1,114,381 1,468,351
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Loans payable, officer/stockholder................................................. 1,352,888 1,034,013
Loan payable, net of current portion............................................... 135,114
Capital lease payable, net of current portion...................................... 95,434
Due to affiliates.................................................................. 130,800
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1,583,436 1,164,813
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Total Liabilities............................................................ 2,697,817 2,633,164
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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 14,183,009
and 14,045,093 shares, respectively............................................ 14,183 14,045
Additional paid in capital....................................................... 10,017,731 9,717,619
Deficit.......................................................................... (6,902,705) (6,971,781)
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3,129,209 2,759,883
Less: Treasury stock, at cost (229,500) (229,500)
Subscription receivable...................................................... (247,500) (247,500)
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Total Stockholders' Equity................................................... 2,652,209 2,282,883
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Total Liabilities and Stockholders' Equity................................... $ 5,350,026 $4,916,047
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</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
------------- -------------- ------------- --------------
SALES.............................................. $ 3,462,508 $ 2,961,673 $ 1,908,882 $ 1,622,053
------------- -------------- ------------- --------------
COST AND EXPENSES
Cost of sales, exclusive of depreciation......... 1,807,094 2,236,773 956,421 1,182,384
Depreciation and amortization.................... 383,173 325,092 202,037 126,840
Selling, general and administrative.............. 1,173,755 1,021,979 724,085 574,937
Interest......................................... 11,628 6,938 10,155 582
------------- -------------- ------------- --------------
3,375,650 3,590,782 1,892,698 1,884,743
Income (loss) before provision for income taxes.... 86,858 (629,109) 16,184 (262,690)
Provision for income taxes......................... 17,782 17,782
------------- -------------- ------------- --------------
NET INCOME (LOSS)................................ $ 69,076 $ (629,109) $ (1,598) $ (262,690)
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Weighted average common shares outstanding......... 14,164,887 13,925,169 14,183,009 14,040,036
Income (loss) per share of common stock............ $.01 $(.05) * $(.02)
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
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* less than 1 cent
See Notes to Consolidated Financial Statements.
3
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
<S> <C> <C>
May 31, May 31,
1997 1996
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OPERATING ACTIVITIES
Net income (loss)................................................................... $ 69,076 $(629,109)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation and amortization..................................................... 383,173 325,092
Amortization of marketing agreement............................................... 206,250
Deferred tax benefit.............................................................. 17,782
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable............................................................... (484,625) 5,260
Inventories....................................................................... (117,422) (3,180)
Prepaid expenses and other........................................................ 83,700 42,151
Accounts payable and accrued expenses............................................. (93,871) (297,910)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................... 64,063 (557,696)
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INVESTING ACTIVITIES
Purchases of equipment and vehicles................................................. (7,813) (761,885)
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NET CASH USED IN INVESTING ACTIVITIES......................................... (7,813) (761,885)
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FINANCING ACTIVITIES
Repayment of capital lease obligations.............................................. (5,178) (810,880)
Repayment of loan payable........................................................... (2,618)
Repayment of long-term debt and conversion to capital lease obligation.............. (146,238)
Repayment of affiliate and stockholder's loans payable.............................. (430,800) (63,758)
Proceeds from loan payable, officer/stockholder (net)............................... 318,875
Proceeds of common stock warrants................................................... 1,548,304
Proceeds from capital contribution.................................................. 7,500
Proceeds from sale of common stock.................................................. 94,000
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........................... (25,721) 534,928
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Net increase (decrease) in cash....................................................... 30,529 (784,653)
Cash--Beginning of year............................................................... 198,069 1,001,372
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CASH--END OF PERIOD........................................................... $ 228,598 $216,719
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE PERIOD FOR:
Interest............................................................................ $ 11,628 $6,938
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</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. BASIS OF PRESENTATION The consolidated balance sheet as of May 31,
1997, and the related consolidated statements of
operations and cash flows for the six and three
month periods ended May 31, 1997 and 1996 are
unaudited. In the opinion of management, all
adjustments (which include only normally
recurring adjustments) necessary for a fair
presentation of such financial statements have
been made.
The November 30, 1996 balance sheet data was
derived from audited financial statements but
does not include all disclosures required by
generally accepted accounting principles. The
interim financial statements and notes thereto
should be read in conjunction with the financial
statements and notes included in the Company's
latest annual report on Form 10-KSB. The results
of operations for the three and six month
periods ended May 31, 1997 are not necessarily
indicative of the operating results for the
entire year.
2. LOAN PAYABLE,
OFFICER/STOCKHOLDER During the six months ended May 31, 1997,
Dr. Irwin A. Horowitz, the Chairman of the
Board, Chief Executive Officer and President of
the Company loaned the Company an additional
$318,875, net of any repayments.
On May 6, 1997, in consideration for the
additional interest-free loans made by
Dr. Horowitz, the Company granted to
Dr. Horowitz additional warrants to purchase
350,000 shares of common stock at an exercise
price of $1.935 per share, all of which warrants
are immediately exercisable.
3. STOCKHOLDERS' EQUITY During the six months ended May 31,1997, the
Company sold 37,916 units for a total purchase
price of $94,000 in connection with the
Company's private placement offering of up to
1,000,000 units. Each unit consists of one share
of common stock and one three year warrant to
purchase one share of common stock.
4. SUPPLEMENTAL DISCLOSURE
OF NONCASH OPERATING,
INVESTING AND FINANCING
ACTIVITIES During the six months ended May 31, 1997, the
Company incurred capital lease obligations in
the amount of approximately $118,000 in
connection with the acquisition of microfiche
scanner units for demonstration and rental
purposes. In addition, the Company also entered
into loan agreements in the amount of
approximately $160,000 in connection with the
acquisition of microfiche scanner units for
resale.
5
<PAGE>
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SUBSEQUENT EVENTS
PRIVATE PLACEMENT On June 5, the Company completed a private
placement offering of 1,500 shares of the
Company's series D convertible preferred stock,
pursuant to Rule 506, for which the Company
received gross proceeds of $1,500,000. Each
share of the series D preferred stock is
convertible into such number of shares of
common stock as is determined by dividing $1,000
by the lesser of (A) 80% of the average bid
price of the common stock for the five trading
days immediately preceding the date of notice of
conversion and (B) (i) $2.25 for the first one-
third of the shares of series D preferred stock
converted by a holder; or (ii) $2.50 for the next
one-third of the shares of series D preferred
stock converted by a holder; or (iii) $2.75 for
the balance of the shares of series D preferred
stock converted by a holder. In no event can the
conversion price be less than $.60. The series D
preferred stock unless sooner converted,
automatically converts to shares of common stock
on June 5, 2000. In addition, holders of the
series D preferred stock are entitled to receive
a six percent cumulative dividend on each share
of series D preferred stock for the period that
such share is outstanding. If on the proposed
conversion date, the closing price per share of
the common stock is $1.00 or less, then the
Company can, at its option and in lieu of
conversion, redeem any or all of the series D
preferred stock for an amount equal to the sum
of (1) $1,200 for each share of series D
preferred stock redeemed, plus (ii) all accrued
but unpaid dividends, if any, on each share of
series D preferred stock redeemed. If the
Company chooses to redeem some, but not all of
the series D preferred stock, then the Company
shall redeem a pro-rata amount from each holder
of the series D preferred stock which was to be
converted.
LITIGATION In June, 1997, the Company entered into a
settlement agreement in connection with an
action 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. Pursuant to the
settlement agreement, the plaintiff has been
made a distributor of the ScreenScan product in
a limited area, subject to a required quota of
sales, and 40,000 shares of common stock of the
Company were issued to a designee of the
plaintiff.
There is presently an action pending against the
Company in Supreme Court, State of New York,
New York County, entitled DIVERSIFIED INVESTORS
CORP. V. DIVERSIFAX, INC. AND JUDD ROTHMAN. The
suit was brought seeking payment owed to
plaintiff pursuant to prior non-interest bearing
loans totaling $228,670 (which amount is accrued
at May 31, 1997), made to the Company by various
creditors, two of whom have assigned their
rights under the loans to Diversified Investors
Corp. The Company has acknowledged the amount
due, but has not paid because the creditors have
not indicated how the amount was to be allocated
(due to a dispute between the creditors). Based
upon the agreement describing the debt, the
Company believes that the amount is payable in
Common Stock of the Company. The plaintiff is
seeking cash in lieu of stock. The Company and
the plaintiff each appealed to the Appellate
Division. In June, 1997 the Appellate Division
has determined that payment of the debt should
be made in cash. The Company has filed a motion
for leave to appeal to the Court of Appeals,
which motion is now pending before the Court.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Six Months Ended May 31, 1997 Compared To The Six Months
Ended May 31, 1996
Sales increased approximately $501,000 or 16.9% for the six months ended May
31, 1997 compared to the six months ended May 31, 1996. This increase was a
result of the sales of microfiche scanner units under a recently formed
dealership arrangement with ScreenScan Systems. Revenues derived from the
Company's Smart Switch continue to be minimal.
Cost of sales represented 52.2% of sales for the six months ended May 31,
1997 compared to 75.5% for the six months ended May 31, 1996. This decrease
is a direct result of management's continued efforts to cut costs and the
renegotiation of commission rates with many of the Company's larger
customers. In addition, the Company realizes a higher gross margin on the
sale of microfiche scanner units than on its photocopy machine business.
Depreciation and amortization increased approximately $58,000 for the six
months ended May 31, 1997 compared to the six months ended May 31, 1996 as a
result of depreciation of recently acquired copiers, accessories and
microfiche scanner units used for demonstration purposes.
Selling, general and administrative expenses increased to approximately
$1,174,000 for the six months ended May 31, 1997 from approximately
$1,022,000 for the six months ended May 31, 1996. However, selling, general
and administrative expenses decreased as a percentage of sales during the
same period from 34.5% in 1996 to 33.9% in 1997. This decrease as a
percentage of sales is due primarily to management's continued efforts to
monitor its costs. Selling, general and administrative expenses for the six
months ended May 31, 1997 include the amortization of the consideration paId
under a marketing agreement of approximately $206,000 and expenses incurred
in connection with the marketing, promotion and development of the newly
acquired ScreenScan dealership.
Interest expense increased approximately $4,700 for the six months ended May
31, 1997 compared to the six months ended May 31, 1996 as a result of the
interest incurred on recently acquired capital lease obligations.
The above resulted in net income of approximately $70,000 for the six months
ended May 31, 1997 compared to a net loss of approximately $629,000 for the
six months ended May 31, 1996.
The Three Months Ended May 31, 1997 Compared To The Three Months Ended May
31, 1996
Sales increased approximately $287,000 or 17.7% for the three months ended
May 31, 1997 compared to the three months ended May 31, 1996. This increase
was a result of the sales of microfiche scanner units under a recently formed
dealership arrangement with ScreenScan Systems.
Cost of sales represented 50.1% of sales for the three months ended May 31,
1997 compared to 72.9% for the three months ended May 31, 1996. This
decrease is a direct result of management's continued efforts to cut costs
and the renegotiation of commission rates with many of the Company's larger
customers. In addition, the Company realizes a higher gross margin on the
sale of microfiche scanner units than on its photocopy machine business.
Depreciation and amortization increased approximately $75,000 for the three
months ended May 31, 1997 compared to the three months ended May 31, 1996 as
a result of depreciation of recently acquired copiers, accessories and
microfiche scanner units used for demonstration purposes.
7
<PAGE>
Selling, general and administrative expenses increased to approximately
$724,000 or 37.9% of sales for the three months ended May 31, 1997 from
approximately $575,000 or 35.5% of sales for the three months ended May 31,
1996. The increase is a result of amortization of the consideration paid
under a marketing agreement of approximately $206,000.
Interest expense increased approximately $10,000 for the three months ended
May 31, 1997 compared to the three months ended May 31, 1996 as a result of
the interest incurred on recently acquired capital lease obligations.
The above resulted in a net loss of approximately $2,000 for the three months
ended May 31, 1997 compared to a net loss of approximately $263,000 for the
three months ended May 31, 1996.
Liquidity and Capital Resources
At May 31, 1997, the Company had cash and a working capital (deficiency) of
$229,000 and $448,000 respectively, as compared to $198,000 and ($615,000)
respectively, at November 30 1996.
The Company's primary need for funds is to finance working capital, capital
expenditures and the further development of the Company's Smart Switch
business and ScreenScan dealership, and possible acquisitions.
Net cash provided by operating activities of approximately $64,000 during the
six months ended May 31, 1997 resulted from net income of $69,000 and
depreciation and amortization of $589,000, offset in part by an increase in
accounts receivable of approximately $485,000 and a decrease in accounts
payable and accrued expenses of approximately $94,000.
Net cash used in financing activities amounted to approximately $25,000
during the six months ended May 31, 1997 primarily as a result of the
repayment of loans to affiliates ($431,000) offset in part by the proceeds
from the sale of common stock ($94,000) and the net proceeds from
officer/stockholder's loans ($319,000).
During the six months ended May 31, 1997, the Company incurred capital lease
obligations in the amount of approximately $118,000 in connection with the
acquisition of microfiche scanner units for demonstration and rental
purposes. In addition, the Company also entered into loan agreements in the
amount of approximately $160,000 in connection with the acquisition of
microfiche scanner units for resale.
The above resulted in a net increase in cash of approximately $31,000 for the
six months ended May 31, 1997.
In June, 1997, the Company successfully completed a private placement
offering of 1,500 shares of its series D convertible preferred stock for
which the Company received net proceeds of approximately $1,300,000. Each
share of the series D preferred stock is convertible into such number of
shares of common stock as is determined by dividing $1,000 by the lesser of
(A) 80% of the average bid price of the common stock for the five trading
days immediately preceding the date of notice of conversion and (B) (i) $2.25
for the first one-third of the shares of series D preferred stock converted
by a holder; or (ii) $2.50 for the next one-third of the shares of series D
preferred stock converted by a holder; or (iii) $2.75 for the balance of the
shares of series D preferred stock converted by a holder.
8
<PAGE>
In no event can the conversion price be less than $.60. The series D
preferred stock unless sooner converted, automatically converts to shares of
common stock on June 5, 2000. In addition, holders of the series D preferred
stock are entitled to receive a six percent cumulative dividend on each share
of series D preferred stock for the period that such share is outstanding. If
on the proposed conversion date, the closing price per share of the common
stock is $1.00 or less, then the Company can, at its option and in lieu of
conversion, redeem any or all of the series D preferred stock for an amount
equal to the sum of (1) $1,200 for each share of series D preferred stock
redeemed, plus (ii) all accrued but unpaid dividends, if any, on each share
of series D preferred stock redeemed. If the Company chooses to redeem some,
but not all of the series D preferred stock, then the Company shall redeem a
pro-rata amount from each holder of the series D preferred stock which was to
be converted.
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 228,598
<SECURITIES> 0
<RECEIVABLES> 592,682
<ALLOWANCES> 0
<INVENTORY> 710,097
<CURRENT-ASSETS> 1,562,478
<PP&E> 3,475,330
<DEPRECIATION> 383,173
<TOTAL-ASSETS> 5,350,026
<CURRENT-LIABILITIES> 1,114,381
<BONDS> 0
0
0
<COMMON> 14,183
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,350,026
<SALES> 3,462,508
<TOTAL-REVENUES> 3,462,508
<CGS> 1,807,094
<TOTAL-COSTS> 1,807,094
<OTHER-EXPENSES> 1,556,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,628
<INCOME-PRETAX> 86,858
<INCOME-TAX> 17,782
<INCOME-CONTINUING> 69,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,076
<EPS-PRIMARY> $.01
<EPS-DILUTED> $.01
</TABLE>
