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 January 31, 1998
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 84341-6310
(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 January 31, 1998
Common stock, $.01 par value 11,038,488
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 January 31, 1998
Unaudited Condensed Consolidated Statements of 2
Operations, for the three and nine month periods
ended January 31, 1998 and 1997
Unaudited Condensed Consolidated Statements of 3
Cash Flows, for the three and nine month periods
ended January 31, 1998 and 1997
Notes to Unaudited Condensed Consolidated Interim 4
Financial Statements
Item 2. Management's Discussion and Analysis of Financial 6
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)
January 31, 1998
ASSETS
Current assets
Cash $ 49,000
Accounts receivable 96,000
Inventories 320,000
Costs and earnings in excess
of billings 192,000
Prepaid Expenses 8,000
------------
Total Current Assets $ 665,000
Long term note receivable $ 150,000
Property, plant and equipment, net 766,000
------------
Total Assets $ 1,581,000
============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Accounts payable and accrued $ 1,545,000
expenses
Notes payable 1,315,000
Current portion of long-term
debt 184,000
------------
Total current liabilities $ 3,044,000
------------
Long-term Debt $ 786,000
------------
Commitments and Contingencies
Shareholder's Deficit
Preferred stock $ 2,000
Common stock 110,000
Class B Common stock 20,000
Additional Paid-in Capital 7,504,000
Accumulated Deficit (9,885,000)
------------
Total Shareholder's Deficit $ (2,249,000)
------------
Total Liabilities and Shareholder's
Deficit $ 1,581,000
============
The accompanying Notes are an integral part of these financial statements
1
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended January 31, Nine Months Ended January 31,
1998 1997 1998 1997
----------------------------------- ----------------------------------
REVENUES $ 852,000 $ 1,497,000 $ 2,487,000 3,077,000
COST OF GOODS SOLD 529,000 630,000 1,457,000 1,867,000
----------------------------------- ----------------------------------
GROSS PROFIT $ 323,000 $ 867,000 $ 1,030,000 $ 1,210,000
EXPENSES
Depreciation and Amortization $ 25,000 $ 205,000 $ 75,000 $ 730,000
Selling, general and administrative expenses 240,000 574,000 986,000 1,182,000
----------------------------------- ----------------------------------
OPERATING INCOME (LOSS) $ 58,000 $ 88,000 $ (31,000) $ (702,000)
OTHER INCOME (EXPENSE)
Interest $ (101,000) $ (73,000) $ (278,000) $ (186,000)
Equity in loss from joint venture (47,000)
Expense of stock issued for services and
Litigation Settlement (13,000) (281,000)
Gain on litigation settlement and other - 52,000
----------------------------------- ----------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (56,000) $ 15,000 $ (538,000) $ (935,000)
INCOME TAXES - - - -
----------------------------------- ----------------------------------
NET INCOME (LOSS) $ (56,000) $ 15,000 $ (538,000) $ (935,000)
LESS CURRENT UNPAID DIVIDENDS
on PREFERRED STOCK
----------------------------------- ----------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES
$ (56,000) $ 15,000 $ (538,000) $ (935,000)
=================================== ==================================
INCOME (LOSS) APPLICABLE TO COMMON STOCK
$ (0.00) $ 0.00 $ (0.05) $ (0.09)
=================================== ==================================
WEIGHTED AVERAGE COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING 11,685,413 10,282,000 11,685,413 10,282,000
=================================== ==================================
The accompanying Notes are an integral part of these financial statements
</TABLE>
2
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
For the Nine Months Ended January 31,
1998 1997
-------------------------------------
Cash Flows From Operating Activities
Net Loss $ (538,000) $ (935,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and Amortization 75,000 729,000
Loss in equity in joint venture 47,000
Issuance of common stock for services and
litigation settlement 281,000
Gain on litigation settlements (52,000)
(Increase) Decrease in:
Accounts receivable 132,000 (203,000)
Inventory 195,000 756,000
Costs and earnings in excess of billings (192,000) (173,000)
Other current assets 3,000 (10,000)
Increase (Decrease) in:
Accounts Payable and other current liabilities (889,000) 127,000
Billings in excess of costs (267,000) 289,000
----------- -----------
Net Cash (Used in) provided by Operating (1,252,000) 627,000
Activities
Cash Flows Used in Investing Activities
Purchase of Property, plant & equipment (4,000) (18,000)
Increase in capitalized simulator costs -- (144,000)
Purchase of truck demo unit -- (501,000)
----------- -----------
Net Cash used in Investing Activities (4,000) (663,000)
Cash Flows from Financing Activities
Proceeds from short term borrowing 1,001,000 996,000
Payments on short term borrowing (246,000) (620,000)
Proceeds from long term borrowing 39,000 6,000
Payments on long term borrowing (83,000) (229,000)
Issuance of Common Stock 555,000
----------- -----------
Net Cash Provided by Financing Activities 1,266,000 153,000
Net Increase (Decrease) in Cash (10,000) 117,000
Cash at Beginning of Period 39,000 72,000
----------- -----------
Cash at End of Period $ 49,000 $ 189,000
=========== ===========
The accompanying Notes are an integral part of these financial statements
</TABLE>
3
<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 January 31, 1998, unaudited
condensed statements of operations for the three months and nine months ended
January 31, 1998 and 1997 and unaudited condensed statements of cash flows
for the nine months ended January 31, 1998 and 1997 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 January
31, 1998 and 1997 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.
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.
5
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
The Series 1 Class A 8% Cumulative Convertible Preferred Stock has a par
value of $.01 per share. As of January 31, 1998 there were 154,012 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 $388,110. 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.
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 three
quarters of the current fiscal year. The Company continued to be without
access to traditional lines of credit with the Company's bank; however, as of
January 31, 1998, the Company was able to raise $555,000 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 $889,000 during the first three
quarters of the fiscal year. 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.
6
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
Cash used by operations for the nine months ended January 31, 1998 was
approximately $1,252,000 as compared to a provision of $627,000 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 January 31, 1998 vs. quarter ended January 31, 1997
Net sales decreased by approximately $645,000 (approximately 43%) 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 decreased from 58% last year to
38% this year. 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. Sales of the third quarter of 1998
were dominated by Petroleum Division contracts, which tend to reflect lower
margins. Management expects this trend to be temporary. Note that the year to
date margins for the current year still exceed that of the previous year.
Selling, general and administrative expenses decreased 26% ($334,000) over
last year. The decrease was due primarily to cost cutting measures taken at
the beginning of the second quarter, the realization of which became visible
in the third quarter. In spite of those measures, management continues to
invest in sales and marketing effors, in order to generate future revenues.
Interest expense increased by $28,000. 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.
- --------------------------------------------------------------------------------
7
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
Nine Month Period Ended January 31, 1998 -vs-
Nine Month Period Ended January 31, 1997
Revenues for the nine months ended January 31, 1998 have decreased 19%, while
costs of goods sold were reduced by 22%. 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.
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
30,000 shares of common stock were issued as part of the Private Offering
Memorandum. 668,450 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 109,125 shares into 327,375 shares
of Common Stock. After the conversion the aggregate dividends in arrears are
$338,110.
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:
None
(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 March 18 , 19 98 By: /s/ Loretta Trevers
----------- --- ---------------------
By: Loretta Trevers
(President, Chairman & Chief Executive
Officer)
Dated March 18 , 19 98 By: /s/ S. Emerson Lybbert
----------- -- ------------------------
By: S. Emerson Lybbert
(Chief Financial Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM DIGITRAN SYSTEMS,
INCORPORATED AND SUBSIDIARIES JANUARY 31, 1998 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 49,000
<SECURITIES> 0
<RECEIVABLES> 137,000
<ALLOWANCES> 41,000
<INVENTORY> 320,000
<CURRENT-ASSETS> 665,000
<PP&E> 1,427,000
<DEPRECIATION> 661,000
<TOTAL-ASSETS> 1,581,000
<CURRENT-LIABILITIES> 3,044,000
<BONDS> 970,000
0
2,000
<COMMON> 112,000
<OTHER-SE> 7,504,000
<TOTAL-LIABILITY-AND-EQUITY> 1,581,000
<SALES> 2,487,000
<TOTAL-REVENUES> 2,487,000
<CGS> 1,457,000
<TOTAL-COSTS> 1,457,000
<OTHER-EXPENSES> 507,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,000
<INCOME-PRETAX> (538,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (538,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (538,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
