UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-QSB
_____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
_____________________
For the Transition Period from to
Commission File Number 1-11034
DIGITRAN SYSTEMS, INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 72-0861671
------------------------------- ----------------
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
2176 North Main, North Logan, UT 84341-1739
---------------------------------------------
(Address of principal executive offices and zip code)
(435) 752-9067
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-----------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
---------------------------- -----------------------------
Common stock, $.01 par value 8,945,869
Class B Common stock, $.01 par value 2,000,000
Transitional Small Business Disclosure Format (Check one)
Yes No X
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet
as of July 31, 1997 1
Unaudited Condensed Consolidated Statements of Operations,
for the three month periods ended July 31, 1997 and 1996 2
Unaudited Condensed Consolidated Statements of Cash Flows,
for the three month periods ended July 31, 1997 and 1996 3
Notes to Unaudited Condensed Consolidated Interim Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 9
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
- -----------------------------
ITEM 1 FINANCIAL STATEMENTS
--------------------------------
DIGITRAN SYSTEMS, INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
July 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 66,000
Accounts receivable 406,000
Inventories 279,000
Costs and Earnings in Excess of Billings on
uncompleted contracts 135,000
Prepaid Expenses 11,000
-------------
Total Current Assets 897,000
Long Term Note Receivable 150,000
Property, Plant, and Equipment (Net) 816,000
-------------
$ 1,863,000
=============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 2,867,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,000
Notes payable 1,077,000
Current portion of long-term debt 226,000
-------------
Total current liabilities 4,171,000
Long-term Debt 749,000
-------------
Commitments and Contingencies -
Shareholders' Deficit
Preferred Stock 4,000
Common Stock 89,000
Class B Common Stock 20,000
Additional Paid-in Capital 6,470,000
Retained Earnings (Deficit) (9,640,000)
-------------
Total Shareholder's Deficit (3,057,000)
-------------
$ 1,863,000
=============
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended July 31,
1997 1996
------------------------
NET SALES $ 818,000 $ 390,000
COST OF GOODS SOLD 475,000 553,000
------------------------
GROSS PROFIT or (LOSS) 343,000 (163,000)
EXPENSES
Depreciation and Amortization 25,000 197,000
Selling, general and administrative
expenses 400,000 340,000
------------------------
OPERATING INCOME (82,000) (700,000)
OTHER INCOME (EXPENSE)
Interest (81,000) (23,000)
Equity in loss from joint venture - (29,000)
Litigation Settlement Cost & Inventory
Write Down (142,000) -
Other 11,000 -
------------------------
INCOME (LOSS) BEFORE INCOME TAXES (294,000) (752,000)
INCOME TAXES - -
NET INCOME (LOSS) $ (294,000)$ (752,000)
========================
LESS CURRENT UNPAID DIVIDENDS ON PREFERRED
STOCK - -
NET LOSS APPLICABLE TO COMMON SHARES $ (294,000)$ (752,000)
========================
LOSS APPLICABLE TO COMMON STOCK $ (0.03)$ (0.07)
========================
WEIGHTED AVERAGE COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING 10,784,000 10,282,000
========================
The accompanying notes are an integral part of these financial statements
2
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended July 31,
1997 1996
------------------------
Cash Flows From Operating Activities
Net Loss $ (294,000)$ (752,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and Amortization 25,000 197,000
Loss in equity in joint venture - 29,000
Issuance of common stock for services
and litigation settlement 163,000 -
(Increase) Decrease in:
Accounts Receivable (178,000) -
Inventory 236,000 12,000
Costs & Earning in excess
bill (135,000) 121,000
Other current assets - 166,000
Increase (Decrease)in:
Accounts Payable and other
current liabilities 142,000 125,000
Billings in excess of costs (266,000) -
------------------------
Net Cash Used in Operating
Activities (307,000) (102,000)
Cash Flows From Investing Activities:
Purchase of property and equipment (4,000) (4,000)
Increase in capitalized simulator costs - (72,000)
------------------------
Net Cash Used in Investing
Activities (4,000) (76,000)
Cash Flows From Financing Activities
Proceeds from short term borrowing 392,000 405,000
Payments on short term borrowing (32,000) (175,000)
Proceeds from long term borrowing 6,000
Payments on long term debt (22,000) (99,000)
------------------------
Net Cash Provided by Financing
Activities 338,000 137,000
Net Increase (Decrease) in Cash 27,000 (41,000)
Cash Beginning of Period 39,000 72,000
------------------------
Cash End of Period $ 66,000 $ 31,000
========================
The accompanying notes are an integral part of these financial statements
3
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all material adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position at July 31, 1997, results of operations
and cash flows at July 31, 1997 and 1996 and for the three month periods
presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's
April 30, 1996 audited financial statements. The results of operations
for the periods ended July 31, 1997 and 1996 are not necessarily
indicative of the operating results for the respective full years.
The simulator products which are marketed by the Company sell at a very
high price in comparison to the total annual sales of the Company. This
relationship leads to individual sales having a disproportionately large
effect on total sales. Therefore, sales within a quarter can lead to
highly volatile results of operations for individual quarters. The
results for individual quarters may not be indicative of annual results.
All quarterly information should be considered in light of the last
fiscal year and the current year to date operations of the Company.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
Shareholder Litigation
On April 1, 1993, the Securities and Exchange Commission initiated an
investigation of the company. This in turn precipitated litigation by
certain shareholders. The full and complete details of these actions
have been previously reported in prior 10-KSB and 10-QSB filings. As
of July 15, 1997, all actions had been resolved and cash settlement
offer was approved by the court. The cash settlement to the
shareholders is in the amount of $1,000,000 payable in installments of
$300,000 due August 1997, $300,000 due September 1997, $200,000 due
January 1998, and $200,000 due July 1998. As of the date of this
filing the company had paid the first two installments and fully expects
to meet the last two installments.
In the normal course of business, there may be various other legal
actions and proceedings pending which seek damages against the Company.
In the opinion of management the ultimate resolution of these matters
will not have a material adverse impact upon the Company, its business
or property.
Going Concern
The accompanying financial statements have been presented on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has incurred recurring operating losses, has a deficit in
working capital, and has an accumulated earnings deficit.
4
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
The Company has been unable to resume trading and has been denied access
to its traditional lines of credit. However, the Company has been able
to obtain short term borrowings and lines of credit from related
parties, a local government agency, and a financial institution which
have been backed by certain Company receivables.
The Company's continued existence is dependent upon its ability to focus
on operational considerations in order to maintain the growth in sales
opportunities and continue bringing to fruition a number of the sales
proposals currently outstanding to potential customers. Management
plans to continue focusing its time, attention and financial resources
on operational considerations.
In August 1997, the Company initiated a $3,000,000 private offering of
its common stock. The offering consists of 1,500,000 units, each of
which consists of two shares of common stock and one warrant entitling
the holder to acquire one additional share of common stock for $1.50 on
or before February 28, 1999. Each unit sells for $2.00 cash.
Certain broker-dealers will be entitled to a commission of 10% to 13%.
Other Items
In the normal course of business, there may be various other legal
actions and proceedings pending which seek damages against the Company.
In the opinion of management the ultimate resolution of these routine
matters will not have a material adverse impact upon the Company's
consolidated financial statements.
NOTE 3 - CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is with oil companies, port
authorities, training institutions and various other entities, often
outside the United States. Normally, the Company attempts to secure
shipments outside the United States through letters of credit and/or
progress payments.
In cases for which shipments are made on open accounts, the Company
retains title or ownership claims to the equipment shipped by terms of
its contracts or agreements until significant payment has been secured.
NOTE 4 - INVENTORIES
Inventories of $1,023,000 as reported for the previous year (July 31,
1966) were reduced over the twelve month period to $279,000. The
reduction can be accounted for by sale of an older simulator and by a
modification in the method of valuation of stock manufacturing parts.
Only such parts as can be reasonably expected to be used in future
assembly were included. Parts that had even the appearance of
obsolescence were eliminated.
5
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTE 5 - CAPITAL STOCK
The Company's capital stock consists of common stock, Class B common
stock, and preferred stock. The common stock provides for a
noncumulative, $.05 per share annual dividend and a $.01 per share
liquidation preference over Class B common. In addition, the Company
must pay the holders of the common stock a dividend per share at least
equal to any dividend paid to the holders of Class B common. Holders of
the common stock are entitled to one-tenth of a vote for each share
held.
Class B common may not receive a dividend until an annual dividend of at
least $.05 is paid on the common stock. Holders of Class B common have
preemptive rights with respect to the Class B common stock and may
convert each share of Class B common into one share of the common stock
at any time. Holders of Class B common are entitled to one vote per
share held.
The Series 1 Class A 8% Cumulative Convertible Preferred Stock has a par
value of $.01 per share. As of July 31, 1997 there were 358,795 shares
outstanding. Holders of preferred shares are entitled to cumulative
dividends of 8% per annum on the stated value of the stock, designated
as $7 per share. Holders of Preferred Stock are entitled to receive
cumulative dividends at the annual rate of $.56 per share, payable semi-
annually on September 15 and March 15. The Company paid dividends of
$27,362 for September 15, 1992 and $136,682 for March 15, 1993. No
dividends have been paid since March 15, 1993 resulting in dividends in
arrears of approximately $804,000. The future payment of dividends on
the Preferred Stock is dependent on cash flow from operations and
potential reduction in dividend liability through conversion of
preferred shares for common shares. There may be legal restrictions on
the payment of dividends for periods in which losses are incurred and/or
the Company has an accumulated deficit. Dividends are not payable on
any other class of stock ranking junior to the preferred stock until the
full cumulative dividend requirements of the preferred stock have been
satisfied. The preferred stock carries a liquidation preference equal
to its stated value plus any unpaid dividends. Subject to certain
registration requirements, convertibility of any preferred stock issued
may be exercised at the option of the holder thereof at two shares of
common stock for each preferred share converted. Holders of the
preferred stock are entitled to one tenth of a vote for each share of
preferred stock held. The Company may, at its option, redeem at any
time all shares of the preferred stock or some of them on notice to each
holder of preferred stock at a per share price equal to the stated value
($7.00) plus all accrued and unpaid dividends thereon (whether or not
declared) to the date fixed for redemption, subject to certain other
provisions and requirements.
6
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Company relied almost exclusively on proceeds from sales and short term
borrowings on sales contracts for operating capital during the first
quarter of 1997. The Company continued to be without access to traditional
lines of credit with the Company's bank or capital markets during the first
quarter of 1997, however, the Company was able to rely on alternative lines
of credit to partially fund operations.
The Company has substantially reduced the inventory levels in the past
year and thus will need to rely almost exclusively on proceeds from sales
to finance the cost of those sales. The ability of management to obtain
favorable terms with customers which will facilitate the payment of the
materials for the simulators during the construction phase will be
important in cash utilization.
Accounts payable increased by approximately $142,000 during the first
quarter of 1997. This increase is attributable in part to the negative
cash flow from operations and to an agreement with a major supplier who has
agreed to provide costly key components on an installment payment basis.
The Company currently has no material commitments for capital expenditures.
Cash used by operations for the three months ended July 31, 1997 was
approximately $307,000 as compared to $102,000 during the same quarter
last year. The increase over the last year is attributable primarily to
the timing of cash invested in sales contracts construction cost relative
to collections thereon. Net borrowings for the current quarter decreased
nominally from that of the same quarter last year but a comparable
reduction in payments on debt of $220,000 resulted in an increase of
$201,000 in cash provided by financing activities.
Results of Operations
Quarter ended July 31, 1997 vs. quarter ended July 31, 1996
Net sales increased by approximately $428,000 (over 100%) for the current
quarter over the same period last year. Due to the nature of the Company's
product and market, and because a relatively small number of large
individual sales comprise the majority of the Company's revenues, results
of operations for any one quarter may vary significantly from other
quarters based on even a small change in the number of units sold in any
given quarter.
7
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
Gross profits as a percentage of net sales increased from a negative 77%
last year to a positive 42% this year. The absence of amortization of
capitalized software and depreciation of demonstration units accounts for a
significant portion of the reduction in the cost of goods sold ratio.
Also due to the fact that margins inherent in contracts may vary from
customer to customer and as recognition of revenue on significant contracts
varies from period to period, variations of several percentage points
between periods can be expected.
Selling, general and administrative expenses increased 18% ($60,000) over
last year. The increase was due in large part to concerted efforts on
management's part to focus more attention on the marketing and sales.
The majority of the remaining selling, general and administrative expenses
stayed at a relatively stable level for the first quarter 1997 compared to
first quarter 1996.
Interest expense increased by $58,000 even though interest bearing debt
increased only $37,000 for quarter ended July 31, 1997 from that of the
quarter ended July 31, 1996. The increase is obviously due to unfavorable
increases in interest rates, primarily through utilization of a quasi-
government lending agency lending against sales contracts at an interest
rate of 24% per annum.
Due to the need for the Company to operate in large part from its own
capital resources, it has been forced to adjust its disbursements relative
to marketing and property and equipment purchases. Management has
attempted to prioritize the expenditures and to maximize the benefits from
the expenditures being made. The current low levels of expenditures on
property and equipment may also lead to inefficiencies within the Company,
which would not otherwise occur, if the current trend continues into the
future.
Due to the somewhat lengthy period of time required between the generation
of a sales lead with a potential customer and the completion of a contract
with that customer, results of efforts taken in the past few periods will
likely start to be realized during the next few quarters.
Management's Plans for Near Term Operations
In late June 1997 the company significantly reduced managerial and other
staff for reasons associated with cash flow and personal contribution.
Some replacements have been made but the company continues to operate at
bare bone minimum. At the same time the company has expended funds on
managerial consultants and technical consultants. This effort is
expected to result in more efficient operations and a significantly
improved product line. Management believes its product lines continue to
be the state of the art in the industry. It plans to maintain this
advantage.
8
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
See "Note 2 - Commitments and Contingencies, Shareholder Litigation".
ITEM 2 Changes in Securities
250,000 shares of common stock were issued as part of the settlement
with the intervening shareholders. 75,000 shares of common stock were
issued to a consultant in exchange for services.
ITEM 3 Defaults on Senior Securities
Holders of Series 1 Class A 8% Cumulative Convertible Preferred Stock
are entitled to receive cumulative dividends at the annual rate of $.56
per share, payable semi-annually on September 15 and March 15,
beginning September 15, 1992. No preferred stock dividends have been
paid since September 15, 1993 resulting in aggregate dividends in
arrears of $804,000.
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other
None
9
<PAGE>
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits: Part I
Sequential
S-B Reference Description Page Number
------------- ------------------------ -----------
11 Statement Re Computation
of Per Share Earnings
(b) Reports on Form 8-K: None
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digitran Systems, Incorporated
------------------------------
Registrant
Dated Jan. 12 , 1998 By: /s/ Loretta Trevers
--------------------------
By: Loretta Trevers
(President, Chairman & Chief Executive
Officer)
Dated Jan. 10 , 1998 By: /s/ Rod F. McLeod
--------------------------
By: Rod F. McLeod
(Chief Financial Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIGITRAN
SYSTEMS, INCORPORATED JULY 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 66,000
<SECURITIES> 0
<RECEIVABLES> 447,000
<ALLOWANCES> 41,000
<INVENTORY> 279,000
<CURRENT-ASSETS> 897,000
<PP&E> 1,377,000
<DEPRECIATION> 561,000
<TOTAL-ASSETS> 1,863,000
<CURRENT-LIABILITIES> 4,171,000
<BONDS> 749,000
0
4,000
<COMMON> 106,000
<OTHER-SE> (109,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,170,000
<SALES> 818,000
<TOTAL-REVENUES> 829,000
<CGS> 475,000
<TOTAL-COSTS> 900,000
<OTHER-EXPENSES> 142,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,000
<INCOME-PRETAX> (294,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (294,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (294,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
