<PAGE>
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, 1999
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
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(Exact name of registrant as specified in its charter)
Delaware 72-0861671
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(State of other jurisdiction of (IRS employer
incorporation or organization) identification No.)
2176 North Main, P.O. Box 6310, North Logan, UT 84341-631
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(Address of principal executive offices and zip code)
(435) 752-9067
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, address, and 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, 1999
Common stock, $.01 par value 14,271,047
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
as of July 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations,
for the three month periods ended July 31, 1999 and 1998 4
Unaudited Condensed Consolidated Statements of Cash Flows,
for the three month periods ended July 31, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Interim Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation 9
PART II. OTHER INFORMATION 11
SIGNATURES 12
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
DIGITRAN SYSTEMS, INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<CAPTION>
July 31, 1999
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 17,925
Accounts receivable 198,767
Inventories 68,486
Total Current Assets 285,178
Property, Plant, and Equipment (Net) 139,655
$ 424,833
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 2,882,314
Short Term Notes Payable 1,525,906
Total Current Liabilities 4,408,220
Long Term Notes Payable 149,974
Total Liabilities 4,558,194
Shareholder's Deficit
Preferred Stock 566
Common Stock 142,701
Class B Common Stock 20,000
Additional Paid-in Capital 9,356,081
Retained Earnings (Deficit) (13,652,709)
Total Shareholder's Deficit (4,133,361)
Total Liabilities & Shareholder's Deficit $ 424,833
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
DIGITRAN SYSTEMS, INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended July 31,
1999 ^1998
<S> <C> <C>
NET SALES $ 291,644 $ 605,000
COST OF GOODS SOLD 71,909 359,000
GROSS PROFIT OR (LOSS) $ 219,735 $ 246,000
EXPENSES
Selling, general and administrative expenses 612,780 687,000
Depreciation and Amortization 40,628 45,000
OPERATING INCOME $ (433,673) $(486,000)
OTHER INCOME (EXPENSE)
Interest (69,826) (130,000)
Litigation Settlement Cost & Inventory Write Down
Gain on Sale of Real Estate 369,444 416,000
Other 15,023 -
INCOME (LOSS) BEFORE INCOME TAX $ (119,032) $(200,000)
INCOME TAXES - -
NET INCOME (LOSS) $ (119,032) $(200,000)
LESS CURRENT UNPAID DIVIDENDS ON PREFERRED STOCK (7920) -
NET LOSS APPLICABLE TO COMMON SHARES $ (126,952) $(200,000)
LOSS PER SHARE APPLICABLE TO COMMON STOCK (0.009) (0.02)
WEIGHTED AVERAGE COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING 14,198,459 12,932,849
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
DIGITRAN SYSTEMS, INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended July 31,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (119,032) $ (200,000)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and Amortization 40,628 45,000
Issuance of common stock for services
and litigation settlement
(Increase) Decrease in:
Accounts Receivable 49,851 (72,000)
Inventory 63,000
Costs & Earning in excess of billings
Other current assets
Increase (Decrease) in:
Accounts Payable
and other Current liabilities (206,944) 98,000
Billing in excess of costs
Net Cash Used in Operating Activities $ (235,497) $ (192,000)
Cash Flows From Investing Activities
Purchase of property and equipment (3,446) 0
Proceeds from sale of buildings 550,000 0
Net Cash Used in Investing Activities 546,554 0
Cash Flows From Financing Activities
Proceeds from Stock Offering 220,000
Proceeds from short term borrowing 180,000 397,000
Payments on short term borrowing (375,565) (753,000)
Proceeds from long term borrowing 631,000
Payments on long term borrowing (104,110) (764,000)
Net Proceeds from sale of buildings 0 409,000
Net Cash Provided by Financing Activities $ (299,675) $ 140,000
Net Increase (Decrease) in Cash 11,382 (52,000)
Cash Beginning of Period 6,543 65,000
Cash End of Period $ 17,925 $ 13,000
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
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, 1999, and the results of operations and cash
flows for the three month periods ended July 31, 1999 and 1998 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, 1998 audited
financial statements. The results of operations for the periods ended January
31, 1999 and 1998 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. Furthermore, due to the fixed
nature of certain costs of revenues, the gross margins on relatively low
revenue volumes will be lower than otherwise expected.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there may be various other legal actions
and proceedings pending which seek damages against the Company.
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 qualify for 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.
<PAGE>
Other Items
In the normal course of business, there may be various other legal actions
and proceedings pending which seek damages against the Company.
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 non-cumulative, $.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, 1999 there were 56,575 shares
outstanding.
The overwhelming majority of Preferred shareholders have converted their
Preferred shares into Common shares. This is because it appears likely that
the Common stock share price will appreciate faster than the Company's ability
to overcome its accumulated deficit. There are currently insufficient
preferred shares remaining for them to trade publicly. The Preferred share's
characteristics are described below:
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 $190,090. 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.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 2 Management's Discussion and Analysis of Financial Condition or Plan
of Operations.
Management's Future Plans
Financing
To allow the Company to move forward, grow and have sufficient liquidity for
future operations, the Company is seeking to restructure its finances as
follows. In the absence of this or a similar refinancing, the Company will
experience cash flow problems on a chronic basis until operations can generate
positive cash flow:
(1) Equity Financing $3,000,000 minimum
Senior Debt 1,500,000
Line of Credit 500,000
Total $5,000,000
(1) The Company is seeking to sell common stock in a Private
Placement Offering. However, other potential equity
instruments such as a separate class of Preferred Shares is also
possible.
The Use of Proceeds from the financing are described as follows:
Commissions $300,000
Payments for Short Term Debt 500,000
Overdue Payables Key Vendors 500,000
Payment for Long Term Debt 350,000
Product Development 150,000
Increased Marketing Efforts 150,000
Increased Engineering Personnel 150,000
Stock Market Relations 50,000
Working Capital and General Corporate
Purposes to Finance Growth 2,500,000
Total $5,000,000
New Product Development
The Company is developing variations to its larger scale products. As
computer components become increasingly more capable and less expensive,
development of smaller, personal computer-based simulators becomes more
feasible. Also, mid-sized simulators are being developed for those customers
who need simulated training, but can't afford or don't need, all the features
available on current models. These variations are being developed primarily
for the Crane and Truck product lines.
<PAGE>
Results of Operations. Three months ended July 31, 1999 vs. 1998
Sales. Sales were adversely affected throughout the year and during this
quarter by the following:
A. Lack of cash resources. The Company could not take advantage of all
potential sales opportunities due to the lack of available resources
at various times throughout the year.
B. Instability in the global economy. The Company saw several
significant potential projects eliminated or deferred by their
customers, due to uncertainties with the customer's currency,
national economy, or other political issues.
C. Drop in Petroleum Industry prices. Softness in the oil industry has
also led to the postponement of several sizeable projects from those
customers.
D. Lack of alternative product offering. Consequently, the Company is
developing smaller and mid-sized products in order to increase its
sales and service market.
Cost of Sales. Cost of sales will appear to be unusually high for the current
period when compared to the previous period. This is because the Company's
management has chosen to report its results from operations in a very
conservative manner. Cost of sales consists of two major expense categories:
(1) Cost of Parts and Components (variable by item sold)
(2) Engineering and Production Labor (fixed by pay period)
Manufacturing overhead is negligible. Consequently, gross margins will be
adversely affected when sales levels are below the breakeven point. Gross
margins could possibly be negative if sales do not exceed the Company's fixed
commitment to Engineering and Production labor. This change in presentation
is part of a concerted effort by management to simplify its accounting
practices and to eliminate practices that involve or create intangible assets.
Selling, General and Administrative. During this period, the Company
invested heavily in Sales and Marketing efforts: Trade shows, advertising and
extensive travel. Also because of weak cash flow, the Company incurred
commitment fees, legal fees and investor related expenses in excess or normal
levels during this quarter.
Interest. Interest expense decreased 45% due to paying off debt through the
sale of the Library building.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
See "Note 2 - Commitments and Contingencies".
ITEM 2 Changes in Securities
<PAGE>
During this quarter, 143,196 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 resulting in aggregate dividends in arrears of $190,090
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
Exhibits: None
<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 July 31, 1999 By: /s/ Loretta Trevers
------------------------------
By: Loretta Trevers
(President, Chairman & Chief Executive
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JUL-31-1999
<CASH> 17925
<SECURITIES> 0
<RECEIVABLES> 198767
<ALLOWANCES> 0
<INVENTORY> 68486
<CURRENT-ASSETS> 285178
<PP&E> 180283
<DEPRECIATION> 40628
<TOTAL-ASSETS> 424833
<CURRENT-LIABILITIES> 4408220
<BONDS> 0
0
566
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<OTHER-SE> (4296628)
<TOTAL-LIABILITY-AND-EQUITY> 424833
<SALES> 291644
<TOTAL-REVENUES> 291644
<CGS> 71909
<TOTAL-COSTS> 71909
<OTHER-EXPENSES> 1022852
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<INTEREST-EXPENSE> 69826
<INCOME-PRETAX> (126952)
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<NET-INCOME> (126952)
<EPS-BASIC> (0.009)
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</TABLE>
