<PAGE> 1
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, 1998
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.
---------------------------------------------------------------
(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) Identification No.)
4274 Independence Court, Sarasota, Florida 34234-2109
- -----------------------------------------------------
(Address of principal executive office)
Issuer's telephone number:
(941)351-2720
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
--- ---
There were 15,724,213 shares outstanding of the issuer's common stock, par value
$.001 per share, as of July 1, 1998
<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 31, 1998 NOVEMBER 30, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 218,835 $ 804,931
Accounts receivable 333,649 273,566
Inventories 813,409 583,202
Prepaid expenses and other 404,444 366,129
Deposit for acquisition 80,000
Other current assets 13,081
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,783,418 2,027,828
Equipment and vehicles, less accumulated depreciation 2,901,376 3,274,851
Intangible assets net of accumulated amortization 76,500 21,000
Deferred tax benefit 180,000 180,000
Other assets 47,980 53,235
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,069,274 $ 5,556,914
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 71,464
Capital lease payable, current portion 32,129 $ 41,937
Accounts payable and accrued expenses 900,429 791,757
Loan payable, stockholder 177 178,877
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 924,199 1,012,571
Capital lease payable, net of current portion 205,300 205,301
Loans payable, officer/stockholder 1,767,975 1,781,308
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,897,474 2,999,180
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series D, $.001 par value,
authorized 1,500 shares, issued and outstanding 566 shares 1 1
Common stock, $.001 par value, authorized 40,000,000
shares, issued 15,724,213 shares 15,724 15,299
Additional paid in capital 11,650,770 11,651,195
Deficit (9,306,347) (8,879,261)
- --------------------------------------------------------------------------------------------------------------------
2,360,148 2,787,234
Less: Treasury stock, at cost (268,348) (229,500)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,091,800 2,557,734
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,069,274 $ 5,556,914
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
-------------------------- --------------------------
MAY 31, May 31, MAY 31, May 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 2,507,356 $ 3,462,508 $ 1,415,637 $ 1,908,882
- ------------------------------------------------------------------------------------------------------------
COST AND EXPENSES
Cost of sales, exclusive of
depreciation 1,380,659 1,807,094 734,034 956,421
Depreciation and amortization 405,596 383,173 223,592 202,037
Selling, general and
administrative 1,126,632 1,173,755 554,865 724,085
Interest expense 21,395 11,628 10,203 10,155
- ------------------------------------------------------------------------------------------------------------
2,934,282 3,375,650 1,522,694 1,892,698
- ------------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes (426,926) 86,858 (107,057) 16,184
Provision for income taxes 17,782 17,782
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (426,926) $ 69,076 $ (107,057) $ (1,598)
============================================================================================================
Weighted average common
shares outstanding 15,493,033 14,164,887 15,682,637 14,183,009
Income (loss) per share
of common stock $ (.03) $ .01 $ (.01) *
============================================================================================================
</TABLE>
* Less than 1 cent
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
DIVERSIFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
MAY 31, May 31,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(426,926) $ 69,076
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 405,596 383,173
Amortization of marketing agreement 206,250
Deferred tax benefit 17,782
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (24,859) (484,625)
Inventories (181,481) (117,422)
Prepaid expenses and other (46,141) 83,700
Accounts payable and accrued expenses 89,698 (93,871)
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (184,113) 64,063
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of equipment and vehicles (15,504) (7,813)
Deposit for acquisition (80,000)
Acquisition of net assets of Copier Specialists
(net of cash acquired of $3,054) (100,053)
- ----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (195,557) (7,813)
- ----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of capital lease obligations (9,809) (5,178)
Repayment of loan payable (2,618)
Proceeds from (repayment of) stockholder's loans (178,700) 318,875
Proceeds of note payable 34,264
Proceeds from sale of common stock 94,000
Repayment of loans payable officer/stockholder (13,333) (430,800)
Purchase of treasury Stock (38,848)
- ----------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (206,426) (25,721)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (586,096) 30,529
Cash - Beginning of year 804,931 198,069
- ----------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 218,835 $ 228,598
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest $ 21,395 $ 11,628
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
DIVERSIFAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION The consolidated balance sheet as of May 31, 1998 and
the related consolidated statements of operations and
cash flows for the six and three month periods ended
May 31, 1998 and 1997 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, 1997 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, 1998 are not
necessarily indicative of the operating results for
the entire year.
2. OTHER ITEMS In February of 1998, the Company, through its
wholly-owned subsidiary, JA-Hunt Services, Inc.,
acquired the assets of a Florida- based company
engaged in the retail sale of copier supplies and the
servicing of copier equipment for a purchase price of
$80,000 ($40,000 in cash and $40,000 in common stock)
plus the assumption of liabilities.
During March of 1998, the Company paid off a loan
payable from a stockholder in the amount of
approximately $179,000.
During the six month period ended May 31, 1998 the
Company repurchased 100,000 shares of its common
stock on the open market for approximately $39,000.
3. SUBSEQUENT EVENTS During June 1998, JA-Hunt Services, Inc. acquired the
assets of a Delaware-based company also engaged in
the retail sale of copier supplies and the servicing
of copier equipment for a purchase price of $160,000
($80,000 in cash and $80,000 in common stock).
During July 1998, the same subsidiary acquired the
assets of an Illinois based company, for $100,000
($30,000 cash and $70,000 in common stock).
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Six Months Ended May 31, 1998 Compared To The Six Months Ended May 31, 1997
Sales decreased approximately $955,000 or 27.6% for the six months ended May 31,
1998 compared to the six months ended May 31, 1997. This decrease was a result
of a decrease in the revenue generated from the sale of microfiche scanner units
coupled with a decrease in copier revenues. The decrease in copier revenue is
the result of the loss of contracts with two universities in the southeast
during fiscal 1997. In addition, during March 1998, the Company was notified
that its proposal for the renewal of its contract with another major university
in the southeast was not accepted. Sales from this university represented 11.5%
of total sales for the year ended November 30, 1997. Revenues derived from the
Company's Smart Switch continue to be minimal.
Cost of sales represented 55.1% of sales for the six months ended May 31, 1998,
compared to 52.2% for the six months ended May 31, 1997. This increase is the
result of lower microfiche scanner product mix.
Depreciation and amortization for the six months ended May 31, 1998 remained
consistent with the comparable prior period.
Selling, general and administrative expenses decreased to approximately
$1,127,000 or 44.9% of sales for the six months ended May 31, 1998 from
approximately $1,174,000 or 33.9% of sales for the six months ended May 31,
1997. The percentage increase was the result of the one time expenses associated
with the relocation of the Company's executive office to Sarasota, Florida, the
continued marketing, promotion and development of the Company's Screenscan
dealership and the fact that included in selling, general and administrative
expenses are certain fixed costs which when compared to a lower revenue base
result in a higher percentage of sales; offset by the 1997 one time amortization
of the consideration paid under a marketing agreement of approximately $206,000.
Interest expense increased approximately $11,000 for the six months ended May
31, 1998 compared to the six months ended May 31, 1997. This increase was the
result of interest related to capital lease obligations being in effect for the
entire six month for the period ended May 31, 1998.
The above resulted in net loss of approximately ($427,000) for the six months
ended May 31, 1998 compared to net income of approximately $69,000 for the six
months ended May 31, 1997.
6
<PAGE> 7
The Three Months Ended May 31, 1998 Compared To The Three Months Ended May 31,
1997
Sales decreased approximately $493,000 or 25.8% for the three months ended May
31, 1998 compared to the three months ended May 31, 1997. The decrease was
attributable to the same reasons as detailed in the six month comparisons.
Cost of sales represented 51.9% of sales for the three months ended May 31, 1998
compared to 50.1% for the three months ended May 31, 1997. This increase is the
result of the lower microfiche scanner product mix.
Depreciation and amortization for the three months ended May 31, 1998 remained
consistent with the comparable prior period.
Selling, general and administrative expenses decreased to approximately $555,000
or 39.2% of sales for the three months ended May 31, 1998 from approximately
$724,000 or 37.9% of sales for the three months ended May 31, 1997. The decrease
was the result of a one time amortization, during 1997, of the consideration
paid under a marketing agreement of approximately $206,000.
Interest expense remained consistent for the three months ended May 31, 1998
compared to the three months ended May 31, 1997.
The above resulted in net loss of approximately ($107,000) for the three months
ended May 31, 1998 compared to a net loss of approximately ($1,600) for the
three months ended May 31, 1997.
7
<PAGE> 8
Liquidity and Capital Resources
At May 31, 1998, the Company had cash and working capital of $218,835 and
$859,219, respectively, as compared to $804,931 and $1,015,257, respectively, at
November 30, 1997.
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 the possible acquisition of new businesses and
the further growth of acquisitions to broaden and diversify it revenue source
making it less seasonal.
Net cash used in operating activities of approximately $264,000 resulted from
the net loss of approximately $427,000, offset by non-cash items including
depreciation and amortization of $406,000. In addition net cash used in
operating activities included increases in inventories of $181,000 and prepaid
expenses of $46,000.
Net cash used in investing activities of approximately $196,000 resulted from
the acquisition of copiers and accessories of $16,000, net cash used in the
acquisition of Copier Specialities in the amount of $100,000, and a deposit made
for $80,000 for a future acquisition.
Net cash used in financing activities in the amount of approximately $206,000
resulted from the repayment of capital lease obligations of $10,000, loans
payable to an officer/stockholder of $13,000, loans payable to a stockholder of
$179,000, and the purchase of treasury stock in the amount of $39,000.
The above resulted in a net decrease in cash of approximately $586,000 for the
six months ended May 31, 1998.
Management continues to believe the expected cash flow from operations, the
expected growth of newly acquired companies, its ScreenScan dealership, and the
willingness and ability of the Company's Chief Executive Officer to fund any
operating deficits will allow the Company to continue operations over the next
12 months. However, no assurance can be given that these factors will
materialize.
The Company faces the potential de-listing of its stock on The Nasdaq Small Cap
Market because it is not in compliance with the new minimum bid/price
requirement. As a result, the Company is exploring trading of its shares via The
Nasdaq Bulletin Board or "pink sheets".
8
<PAGE> 9
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.
- ----------------
(Registrant)
Date July 17, 1998 By /s/ Irwin A. Horowitz
- --------------------------------------------------------------------------------
Irwin A. Horowitz, President
and Chief Executive Officer
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIVERSIFAX, INC. FOR THE PERIOD ENDED MAY 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1998
<CASH> 218,835
<SECURITIES> 0
<RECEIVABLES> 333,649
<ALLOWANCES> 0
<INVENTORY> 813,409
<CURRENT-ASSETS> 1,783,418
<PP&E> 2,901,376
<DEPRECIATION> 405,596
<TOTAL-ASSETS> 4,989,274
<CURRENT-LIABILITIES> 924,199
<BONDS> 0
0
1
<COMMON> 15,724
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,989,274
<SALES> 2,507,356
<TOTAL-REVENUES> 2,507,356
<CGS> 1,380,659
<TOTAL-COSTS> 1,380,659
<OTHER-EXPENSES> 1,542,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,395
<INCOME-PRETAX> (426,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (426,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (426,926)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
