DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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 October 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 (IRS 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 October 31, 1997
------------------------------------ -------------------------------
Common stock, $.01 par value 9,912,663
Class B Common stock, $.01 par value 2,000,000
Transitional Small Business Disclosure Format (Check one)
Yes ___ No X
<PAGE>
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet 1
as of October 31, 1997
Unaudited Condensed Consolidated Statements of 2
Operations, for the three and six month periods
ended October 31, 1997 and 1996
Unaudited Condensed Consolidated Statements of 3
Cash Flows, for the three and six month periods
ended October 31, 1997 and 1996
Notes to Unaudited Condensed Consolidated Interim 4
Financial Statements
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
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)
October 31, 1997
ASSETS
Current assets
Cash $ 12,000
Accounts receivable 347,000
Inventories 264,000
Costs and earnings in excess of billings 389,000
Prepaid Expenses 6,000
--------------
Total Current Assets $ 1,018,000
Long term note receivable $ 150,000
Property, plant and equipment, net 791,000
--------------
Total Assets $ 1,959,000
==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,102,000
Notes payable 1,537,000
Current portion of long-term debt 184,000
--------------
Total current liabilities $ 3,823,000
Long-term Debt $ 749,000
--------------
Commitments and Contingencies -
Shareholder's Deficit
Preferred stock $ 3,000
Common stock 99,000
Class B Common stock 20,000
Additional Paid-in Capital 7,094,000
Accumulated Deficit (9,829,000)
--------------
Total Shareholder's Deficit $ (2,613,000)
Total Liabilities and Shareholder's
Deficit $ 1,959,000
==============
The accompanying Notes are an integral part of these financial statements
1
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
DIGITRAN SYSTEMS, INCORPORATED and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Ended Six months Ended
October 31, October 31,
1997 1996 1997 1996
---------------------- ------------------------
REVENUES $ 817,000 $ 1,190,000 $ 1,635,000 $ 1,580,000
COST OF GOODS 453,000 684,000 928,000 1,237,000
---------------------- ------------------------
GROSS PROFIT 364,000 506,000 707,000 343,000
EXPENSES
Depreciation and
Amortization 25,000 328,000 50,000 525,000
Selling, general and
administrative expenses 346,000 268,000 746,000 609,000
OPERATING LOSS (7,000) (90,000) (89,000) (791,000)
OTHER INCOME (EXPENSE)
Interest (96,000) (91,000) (177,000) (113,000)
Equity in loss from joint
venture (18,000) (47,000)
Expense of stock issued for
services and Litigation
Settlement (105,000) (268,000)
Gain on litigation
settlement and other 41,000 52,000
---------------------- ------------------------
LOSS BEFORE INCOME TAXES (167,000) (199,000) (482,000) (951,000)
INCOME TAXES - - - -
---------------------- ------------------------
NET LOSS $(167,000) $ (199,000) $ (482,000) $ (951,000)
LESS CURRENT UNPAID DIVIDENDS
on PREFERRED STOCK
---------------------- ------------------------
NET LOSS APPLICABLE TO
COMMON SHARES $(167,000) $ (199,000) $ (482,000) $ (951,000)
====================== ========================
LOSS APPLICABLE TO COMMON
STOCK $ (0.02) $ (0.02) $ (0.05) $ (0.09)
====================== ========================
WEIGHTED AVERAGE COMMON STOCK
AND COMMON STOCK
EQUIVALENTS OUTSTANDING 11,104,000 10,282,000 11,104,000 10,282,000
======================= ========================
The accompanying Notes are an integral part of these financial statements
2
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
DIGITRAN SYSTEMS, INCORPORATED and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
October 31,
1997 1996
--------------------------
Cash Flows From Operating Activities
Net Loss $ (482,000) $ (951,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and Amortization 50,000 525,000
Loss in equity in joint venture 47,000
Issuance of common stock for services and
litigation settlement 268,000 -
Gain on litigation settlements (52,000) -
(Increase) Decrease in:
Accounts receivable (119,000) 131,000
Inventory 251,000 536,000
Costs and earnings in excess of billings (389,000) 66,000
Other current assets 5,000 -
Increase (Decrease) in:
Accounts Payable and other current
liabilities (552,000) 26,000
Billings in excess of costs (267,000) 215,000
--------------------------
Net Cash (Used in) provided by Operating
Activities (1,287,000) 595,000
Cash Flows Used in Investing Activities
Purchase of Property, plant & equipment (4,000) (20,000)
Increase in capitalized simulator costs - (144,000)
Purchase of truck demo unit - (502,000)
--------------------------
Net Cash used in Investing Activities (4,000) (666,000)
Cash Flows from Financing Activities
Proceeds from short term borrowing 932,000 6,000
Payments on short term borrowing (115,000) (219,000)
Proceeds from long term borrowing - 640,000
Payments on long term borrowing (78,000) (325,000)
Issuance of Common Stock 525,000 -
Conversion of Preferred Stock
--------------------------
Net Cash Provided by Financing Activities 1,264,000 102,000
Net Increase (Decrease) in Cash (27,000) 31,000
Cash at Beginning of Period 39,000 72,000
--------------------------
Cash at End of Period $ 12,000 $ 103,000
==========================
The accompanying Notes are an integral part of these financial statements
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
Digitran Systems, Incorporated (the "Registrant") files herewith
unaudited condensed balance sheets of the Registrant as of October 31,
1997, unaudited condensed statements of operations for the three months
and six months ended October 31, 1997 and 1996 and unaudited condensed
statements of cash flows for the six months ended October 31, 1997 and
1996 together with unaudited condensed notes thereto. In the opinion of
management of the Registrant, the financial statements reflect all
adjustments, all of which are normal recurring adjustments, necessary to
fairly present the financial condition of the Registrant for the interim
periods presented.
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, 1997 audited financial statements. The results of operations
for the periods ended October 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 three installments and fully
expects to meet the last installment.
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.
4
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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.
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 and contracts.
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%.
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 - 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.
5
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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 October 31, 1997 there were 263,137
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 $663,000. 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 and
second quarter of 1997. The Company continued to be without access to
traditional lines of credit with the Company's bank; however, as of October
31, 1997, the Company was able to raise $525,000 through a Private Offering
Memorandum.
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 decreased by approximately $552,000 during the first two
quarters of 1997. This decrease is reflective of management's focus on
reducing its debt and restoring strength to the Company's balance sheet.
The Company currently has no material commitments for capital expenditures.
Cash used by operations for the six months ended October 31, 1997 was
approximately $1,287,000 as compared to a provision of $595,000 during the
same period last year. The decrease over the last year is attributable
primarily to the timing of cash invested in sales contracts and their
construction costs relative to collections thereon, as well as a
significant commitment to pay suppliers for past due amounts.
Results of Operations
Quarter ended October 31, 1997 vs. quarter ended October 31, 1996
Net sales decreased by approximately $373,000 (approximately 31%) 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.
Gross profits as a percentage of net sales increased from 43% last year to
45% 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.
7
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
Selling, general and administrative expenses increased 29% ($78,000) 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 second quarter 1997 compared to
second quarter 1996.
Interest expense increased by $5,000. 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, offset by some conversions of debt to
equity.
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.
Six Month Period Ended October 31,1997 -vs-
Six Month Period Ended October 31, 1996.
--------------------------------------------------------------------------
Revenues for the six months ended October 31, 1997 have increased slightly,
but costs of goods sold were reduced by $309,000, (25%). Operating costs
were reduced significantly by the absence of amortization of capitalized
software costs and depreciation of certain items previously written off.
The Company continues to increase its investment in selling and marketing
expenses in order to attract sales contracts.
The Company continues to incur costs relative to the settlement of its
debts from the litigation period. The Company expects these expenses to
continue, though on a smaller scale.
The Company has shown significant overall improvement in its operations by
controlling its costs and selectively directing its available resources.
The results of operations also reflect the effect of certain reductions in
costs and personnel, made at the beginning of the second quarter of fiscal
1997.
8
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
See "Note 2 - Commitments and Contingencies, Shareholder Litigation".
ITEM 2 Changes in Securities
525,000 shares of common stock were issued as part of the Private
Offering Memorandum. 154,820 shares of common stock were issued to
consultants, suppliers and employees, for services rendered.
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. Certain holders of Preferred Stock converted 95,658
shares into 286,974 shares of Common Stock. After the conversion the
aggregate dividends in arrears are $663,000.
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits: Part I
(b) Reports on Form 8-K:
None
9
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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. 28 , 19 98 By: /s/ Loretta Trevers
---------- -- ---------------------------
By: Loretta Trevers
(President, Chairman & Chief Executive
Officer)
Dated Jan. 28 , 19 98 By: /s/ S. Emerson Lybbert
----------- -- ---------------------------
By: S. Emerson Lybbert
(Chief Financial Officer)
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM DIGITRAN SYSTEMS,
INCORPORATED AND SUBSIDIARIES OCTOBER 31, 1997 FINANCIAL STATMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<CASH> 12,000
<SECURITIES> 0
<RECEIVABLES> 388,000
<ALLOWANCES> 41,000
<INVENTORY> 264,000
<CURRENT-ASSETS> 1,018,000
<PP&E> 1,377,000
<DEPRECIATION> 586,000
<TOTAL-ASSETS> 1,959,000
<CURRENT-LIABILITIES> 3,823,000
<BONDS> 749,000
0
3,000
<COMMON> 119,000
<OTHER-SE> (2,735,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,959,000
<SALES> 1,635,000
<TOTAL-REVENUES> 1,635,000
<CGS> 928,000
<TOTAL-COSTS> 1,674,000
<OTHER-EXPENSES> 393,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,000
<INCOME-PRETAX> (482,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (482,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (482,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
