<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB-A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: AUGUST 31, 1998
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 (IRS Employer Identi-
of incorporation or organization) fication Number)
4274 INDEPENDENCE COURT
SARASOTA, FLORIDA 34234
(Address of principal executive offices)
(941) 351-2720
(Issuer's telephone number including area code)
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 the filing requirements for the past 90 days.
YES: X NO:
--- ---
Number of shares outstanding as of August 31, 1998: 15,724,213 shares
of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format: YES: NO: X
--- ---
<PAGE> 2
DIVERSIFAX, INC.
INDEX
<TABLE>
<S> <C> <C>
Part I
Item 1. Financial Statements
Consolidated Balance Sheet as of
August 31, 1998 3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended August 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Nine Months Ended August 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Part II
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Diversifax, Inc.
Consolidated Balance Sheet
August 31, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash $ 85,024
Accounts receivable - trade 255,609
Other receivables 31,093
Inventories 782,208
Prepaid expenses 129,069
----------
Total current assets 1,283,003
Fixed assets - net of accumulated depreciation 2,774,503
Other assets:
Deposits 44,207
Other asset 63,554
----------
$4,165,267
==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
Diversifax, Inc.
Consolidated Balance Sheet
August 31, 1998
(Unaudited)
(Continued)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 31,351
Capital leases payable - current portion 37,130
Accounts payable and accrued expenses 786,745
-----------
Total current liabilities 855,226
-----------
Long-term portion of capital leases 200,300
Loans payable - officer/shareholder 1,760,965
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value,
1,500 shares authorized 556 shares issued
and outstanding 1
Common stock, $.001 par value, 40,000,000
shares authorized, 15,724,213 shares
issued and outstanding 15,724
Additional paid in capital 11,650,770
Accumulated deficit (10,049,371)
-----------
1,617,124
Less: Treasury stock, at cost (268,348)
-----------
Total stockholders' equity 1,348,776
-----------
$ 4,165,267
===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
Diversifax, Inc.
Consolidated Statements of Operations
For The Three Months and Nine Months Ended August 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------ -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 1,007,935 $ 1,534,985 $ 3,515,288 $ 4,997,493
Cost of goods sold 638,681 889,181 2,019,340 2,696,275
------------ ------------ ------------ -----------
Gross profit 369,254 645,804 1,495,948 2,301,218
------------ ------------ ------------ -----------
Operating expenses:
Depreciation and amortization 203,575 191,586 609,171 574,758
General and administrative
expenses 901,415 674,441 2,025,047 1,848,197
------------ ------------ ------------ -----------
Total operating expenses 1,104,990 866,027 2,634,218 2,422,955
------------ ------------ ------------ -----------
Income (loss) from operations (735,736) (220,223) (1,138,270) (121,737)
------------ ------------ ------------ -----------
Other (expenses) income:
Interest (10,445) (12,213) (31,840) (23,841)
------------ ------------ ------------ -----------
Net income (loss) $ (746,181) $ (232,436) $ (1,170,110) $ (145,578)
------------ ------------ ------------ -----------
Per share information:
Net (loss) per share: $ (.05) $ (.02) $ (.08) $ (.01)
============ ============ ============ ===========
Weighted average shares: 15,493,000 14,212,000 15,428,000 14,175,000
============ ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
Diversifax, Inc.
Consolidated Statements of Cash Flows
For The Nine Months Ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities $ (265,159) $ (672,969)
---------- ----------
Cash flows from investing activities:
Acquisition of business interests (120,000) --
Purchase of fixed assets (118,223) (38,780)
---------- ----------
Net cash provided by (used in)
investing activities (238,223) (38,780)
---------- ----------
Cash flows from financing activities:
Repayment of capital leases (9,808) (7,880)
Repayment of loan payable -- (7,817)
Proceeds from related party debt -- 328,906
Repayments of related party debt (199,220) (430,800)
Proceeds from the sale of common stock -- 52,000
Proceeds from the sale of preferred stock -- 1,350,000
Purchase of treasury stock (38,848) --
Proceeds from bank borrowings 31,351 --
---------- ----------
Net cash provided by (used in)
financing activities (216,525) 1,284,409
---------- ----------
Net increase (decrease) in cash (719,907) 572,660
Beginning - cash balance 804,931 198,069
---------- ----------
Ending - cash balance $ 85,024 $ 770,729
========== ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
Diversifax, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note A. Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Item 310(b) of Regulation S-B. They do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full year. For further information, refer to the financial
statements of the Company as of November 30, 1997 and for the two years then
ended, including notes thereto included in the Company's Form 10-KSB.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
Inventories
Inventories, consisting principally of parts and supplies are valued at the
lower of cost or market on a first in - first out basis.
Income taxes
No provision for income taxes has been reflected in the statement of operations
due to operating losses.
Note B. Acquisition of business interests
In February, 1998, the Company acquired the assets of a Company engaged in the
retail sales of copier supplies and the servicing of copier equipment for a
purchase price of $80,000 ($40,000 cash and $40,000 in common stock) plus the
assumption of liabilities.
During June, 1998 the Company acquired the assets of a company engaged in the
retail sales of copier supplies and the servicing of copier equipment for a
purchase price of $160,000 ($80,000 cash and $80,000 in common stock).
7
<PAGE> 8
Note C. Stockholders' equity
During the period ended August 31, 1998 the Company repurchased 100,000 shares
of its common stock for cash aggregating $38,848.
Note D. Related Party Transactions
During March, 1998 the Company repaid a loan from a stockholder aggregating
approximately $179,000.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
The following should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN INVOLVE RISKS AND
UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS
INCLUDING, BUT NOT LIMITED TO, SUCCESSFUL INTEGRATION OF THE NEWLY ACQUIRED
BUSINESSES, THE COMPANY'S CONTINUED ABILITY TO DEVELOP AND INTRODUCE INNOVATIVE
PRODUCTS, CHANGING CONSUMER PREFERENCES, ACTIONS BY COMPETITORS, THE EFFECT OF
ECONOMIC CONDITIONS, DEPENDENCE ON CERTAIN CUSTOMERS AND OTHER RISKS IDENTIFIED
FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
Comparison of the three months ended August 31, 1998 to the three months ended
August 31, 1997
Net sales decreased 34%, from approximately $1.5 million for the three months
ended August 31, 1997 to approximately $1.0 million for the same period in
1998, primarily as a result of a decrease in the revenue generated from
microfiche scanner units combined with a decrease in copier revenues. The
decrease in copier revenues is the result of the loss of contracts with two
major universities.
Gross profit decreased as a percentage of sales, from approximately 42% for the
three months ended August 31, 1997 to approximately 37% for the same period in
1998, primarily as a result of product mix and increased maintenance costs.
General and administrative expenses increased from approximately $674,000 for
the three months ended August 31, 1997 to approximately $901,000 for the same
period in 1998, primarily as a result of expenses incurred related to newly
acquired operations, the Company's efforts to replace customers which
terminated their contracts and the Company's efforts to expand its revenue
base.
9
<PAGE> 10
Comparison of the nine months ended August 31, 1998 to the nine months ended
August 31, 1997
Net sales decreased 30%, from approximately $5.0 million in 1997 to
approximately $3.5 million in 1998, primarily as a result of a decrease in the
revenue generated from microfiche scanner units combined with a decrease in
copier revenues. The decrease in copier revenues is the result of the loss of
contracts with two major universities.
Gross profit decreased as a percentage of sales, from approximately 46% in 1997
to approximately 42% in 1998, primarily as a result of product mix and
increased maintenance costs.
General and administrative expenses increased from approximately $1.8 million
in 1997 to approximately $2.0 million in 1998 primarily as a result of expenses
incurred related to newly acquired operations, the Company's efforts to replace
customers which terminated their contracts and the Company's efforts to expand
its revenue base.
LIQUIDITY AND CAPITAL RESOURCE
At August 31, 1998 the Company had cash and working capital of $85,000 and
$428,000 respectively as compared to $804,000 and $1,015,000 at November 30,
1997.
The Company's primary need for funds is to finance working capital, capital
expenditures and the possible acquisition of new businesses to broaden and
diversify its revenue source making it less seasonal.
Net cash used in financing activities of $216,525 resulted principally from the
repayment of related party debt ($199,220) and the purchase of treasury stock
($38,848).
Net cash used in investing activities of $238,223 resulted from cash used in
business acquisitions of $120,000 and the acquisition of fixed assets of
$118,223.
The Company anticipates, based on its currently proposed plans, that the net
cash available from operations will be sufficient to satisfy its anticipated
cash requirements for the balance of the 1998 fiscal year.
10
<PAGE> 11
SEASONALITY
The Company anticipates that the seasonality of its business generally will
follow the usage demand for coin operated copiers which typically is heaviest
from September to May.
YEAR 2000
The Year 2000 will have a broad impact on the business environment in which the
Company operates due to the possibility that many computerized systems across
all industries will be unable to process information containing dates beginning
in the Year 2000. The Company is in the process of preparing its computer
systems and applications for the Year 2000 through internal and external
resources to identify, correct and test the Company's systems for Year 2000
compliance. The Company anticipates that the majority of its reprogramming will
be completed by June 30, 1999.
The nature of the Company's business is such that the business risks associated
with the Year 2000 can be reduced by assessing the vendors supplying the Company
products to ensure that they are aware of the Year 2000 business risks and are
appropriately addressing them.
Because third party failures could have a material impact on the Company's
ability to conduct business, the Company will make inquiries of its significant
vendors and business partners to obtain reasonable assurance that plans are
being developed to address the Year 2000 issue. To the extent that vendors and
business partners do not provide the Company with satisfactory evidence of
their readiness to handle Year 2000 issues, contingency plans will be
developed.
The Company anticipates that it will have substantially completed an inventory
of all information technology equipment by June 30, 1999, and will then address
the Year 2000 readiness of such equipment. Also, non-information technology
equipment will be inventoried by June 30, 1999 at which time the Company will
address the Year 2000 readiness of such equipment.
The program costs, including testing and remediation of all of the Company's
systems and applications, is not expected to be material. All estimated costs
have been budgeted and are expected to be funded by existing cash balances and
cash flows from operations.
11
<PAGE> 12
The Company does not believe the costs related to the Year 2000 readiness
project will be material to its financial position or results of operations.
However, the cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans, and
other factors. Unanticipated failures by critical vendors and partners, as well
as the failure by the Company to execute its own remediation efforts, could have
a material adverse effect on the cost of the project and its completion date.
Furthermore, any such unforeseen occurrences, if combined with failures of other
third parties or in the public infrastructure, could have a material adverse
effect on the Company's results of operations, financial condition, and/or cash
flows. Consequently, there can be no assurance that the forward-looking
estimates contained herein will be achieved and the actual cost could differ
materially from the projections contained herein.
12
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K. None.
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DIVERSIFAX, INC.
Dated: February 2, 1999 By: /s/ Irwin A. Horowitz
----------------------------------
Irwin Horowitz
President
(Principal Executive Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 85,024
<SECURITIES> 0
<RECEIVABLES> 286,702
<ALLOWANCES> 0
<INVENTORY> 782,208
<CURRENT-ASSETS> 1,283,003
<PP&E> 7,391,072
<DEPRECIATION> 4,616,569
<TOTAL-ASSETS> 4,165,267
<CURRENT-LIABILITIES> 855,226
<BONDS> 1,961,265
0
1
<COMMON> 15,724
<OTHER-SE> 1,333,051
<TOTAL-LIABILITY-AND-EQUITY> 4,165,267
<SALES> 3,515,288
<TOTAL-REVENUES> 3,515,288
<CGS> 2,019,340
<TOTAL-COSTS> 2,019,340
<OTHER-EXPENSES> 2,634,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,840
<INCOME-PRETAX> (1,170,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,170,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,170,110)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
