DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended January 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
(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, P.O. Box 6310, North Logan, UT 84341-631
(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, 1999
- ----------------------------------------- -------------------------------
Common stock, $.01 par value 13,641,379
Class B Common stock, $.01 par value 2,000,000
Transitional Small Business Disclosure Format (Check one)
Yes No X
1
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet
as of January 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations,
for the three month and nine month periods ended
January 31, 1999 and 1998 4
Unaudited Condensed Consolidated Statements of Cash Flows, for
the three month and nine month periods ended
January 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 10
2
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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, 1999
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,000
Accounts receivable 834,000
Inventories 82,000
------------------
Total Current Assets $ 934,000
Property, Plant, and Equipment (Net) 342,000
------------------
Total Assets $ 1,276,000
==================
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 2,051,000
Short Term Notes Payable 1,009,000
------------------
Total Current Liabilities $ 3,060,000
------------------
Long Term Notes Payable $ 980,000
------------------
Commitments and Contingencies -
Shareholder's Deficit
Preferred Stock 1,000
Common Stock 136,000
Class B Common Stock 20,000
Additional Paid-in Capital 9,157,000
Retained Earnings (Deficit) (12,078,000)
------------------
Total Shareholder's Deficit (2,764,000)
------------------
$ 1,276,000
==================
The accompanying notes are an integral part of these financial statements.
3
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
DIGITRAN SYSTEMS, INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31, Nine months Ended January 31,
^1999 ^1998 ^1999 ^1998
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 1,030,000 $ 852,000 $ 1,831,000 $ 2,487,000
COST OF GOODS SOLD 802,000 529,000 1,560,000 1,457,000
---------------------------------------------------------------------------------
GROSS PROFIT OR (LOSS) $ 228,000 $ 323,000 $ 271,000 $ 1,030,000
EXPENSES
Selling, general and administrative expenses $ 372,000 $ 240,000 $ 1,553,000 $ 986,000
Depreciation and Amortization 45,000 25,000 134,000 75,000
------------------------------------------------------------------------------
OPERATING INCOME $ (189,000) $ 58,000 $ (1,416,000) $ (31,000)
OTHER INCOME (EXPENSE)
Interest $ (106,000) $ (101,000) $ (366,000) $ (278,000)
Expense of stock issued for services and
Litigation Settlement (13,000) (281,000)
Gain on Litigation Settlement and Other 52,000
Gain on Sale of Buildings 416,000 .
------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (295,000) $ (56,000) $ (1,366,000) $ (538,000)
INCOME TAXES - - - -
------------------------------------------------------------------------------
NET INCOME (LOSS) $ (295,000) $ (56,000) $ (1,366,000) $ (538,000)
LESS CURRENT UNPAID DIVIDENDS
ON PREFERRED STOCK - - (26,000) -
------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (295,000) $ (56,000) $ (1,392,000) $ (538,000)
==============================================================================
LOSS PER SHARE APPLICABLE TO COMMON STOCK $ (0.02) $ (0.00) $ (0.10) $ (0.05)
==============================================================================
WEIGHTED AVERAGE COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING $ 13,406,708 $ 11,685,413 $ 13,406,708 $ 11,685,413
==============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
DIGITRAN SYSTEMS, INCORPORATED and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended January 31,
^1999 ^1998
-----------------------------
Cash Flows From Operating Activities
Net Loss $ (1,366,000) $ (538,000)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and Amortization 135,000 75,000
Issuance of common stock for services
and litigation settlement 180,000 281,000
Gain on litigation settlements (52,000)
(Increase) Decrease in:
Accounts Receivable (539,000) 132,000
Inventory 614,000 195,000
Costs & Earning in excess of billing (192,000)
Other current assets 3,000
Increase (Decrease) in:
Accounts Payable and other Current liabilities 472,000 (889,000)
Billing in excess of costs (267,000)
-----------------------------
Net Cash Used in Operating Activities $ (504,000) $(1,252,000)
Cash Flows From Investing Activities
Purchase of property and equipment (8,000) (4,000)
Increase in capitalized simulator costs -
-----------------------------
Net Cash Used in Investing Activities $ (8,000) $ (4,000)
Cash Flows From Financing Activities
Proceeds from Stock Offering 220,000 555,000
Proceeds from short term borrowing 797,000 1,001,000
Payments on short term borrowing (887,000) (246,000)
Proceeds from long term borrowing 691,000 39,000
Payments on long term borrowing (765,000) (83,000)
Net Proceeds from Sale of Buildings 409,000 0
-----------------------------
Net Cash Provided by Financing Activities $ 465,000 $ 1,266,000
Net Increase (Decrease) in Cash (47,000) 10,000
Cash Beginning of Period 65,000 39,000
-----------------------------
Cash End of Period $ 18,000 $ 49,000
=============================
The accompanying notes are an integral part of these financial statements
5
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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, 1999,
unaudited condensed statements of operations for the three months and nine
months ended January 31, 1999 and 1998 and unaudited condensed statements
of cash flows for the nine months ended January 31, 1999 and 1998 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, 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.
During the quarter, the Company formed Digitran Simulation Systems, Inc., a
wholly-owned subsidiary formed under the laws of Arizona, USA. The Company
then transferred its crane division to this subsidiary.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there may be various 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.
The Company has not been unable to utilize traditional forms of corporate
financing for several years. 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
6
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
proposals currently outstanding to potential customers. Management plans to
continue focusing its time, attention and financial resources on
operational considerations.
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.
The Series 1 Class A 8% Cumulative Convertible Preferred Stock has a par
value of $.01 per share. As of January 31, 1999 there were 62,075 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 $191,191. 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
7
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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 or Plan
- --------------------------------------------------------------------------------
of Operations.
- --------------
Reporting Note. Due to the late date of this filing, management chooses to
report its plans as of the date of filing, which would include information
subsequent to the ending date of the period being reported. Management believes
that reporting the most current information is more meaningful.
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 $ 200,000
Payments for Short Term Debt 500,000
Overdue Payables - Key Vendors 500,000
Payment for Long Term Debt 500,000
Product Development 350,000
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
==========
8
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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.
Key Executives
- --------------
During this fiscal year, the Company bolstered its management team with three
experienced executives (Sales, Marketing, and Accounting). The Company continues
to develop and enhance its commitment to quality and to reversing the current
condition of Digitran. The additional sales personnel are already accelerating
the completion of existing projects, as well as identifying other potential
customers.
Results of Operations. Nine months ended January 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
9
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DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARIES
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 increased 30% due to the increased borrowing and a
higher average rate.
Sale Leaseback of Building. During the first quarter, the Company entered into a
Sale - Leaseback Agreement with a shareholder, for the two buildings it occupies
in North Logan. The sale price was at fair market value and the lease term is
for 10 years. A gain was recognized due to the difference between market value
and book value.
PART II OTHER INFORMATION
- -------------------------
ITEM 1 Legal Proceedings
- ------------------------
See Note 2 - "Commitments and Contingencies"
ITEM 2 Changes in Securities
- ----------------------------
During this quarter, 12,000 shares of common stock were issued as part of the
Private Offering Memorandum. 88,500 shares of common stock were issued as part
of the Preferred Stock conversion. 272,884 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 191,191.
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
10
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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 31, 1999 By: /s/ Loretta Trevers
------------------------------------
By: Loretta Trevers
(President, Chairman & Chief Executive Officer)
Dated March 31, 1999 By: /s/ S. Emerson Lybbert
------------------------------------
By: S. Emerson Lybbert
(Chief Financial Officer)
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIGITRAN
SYSTEMS, INCORPORATED, 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-04-1998
<PERIOD-END> JAN-31-1999
<CASH> 18,000
<SECURITIES> 0
<RECEIVABLES> 834,000
<ALLOWANCES> 0
<INVENTORY> 82,000
<CURRENT-ASSETS> 934,000
<PP&E> 815,000
<DEPRECIATION> (473,000)
<TOTAL-ASSETS> 1,276,000
<CURRENT-LIABILITIES> 3,060,000
<BONDS> 980,000
0
1,000
<COMMON> 156,000
<OTHER-SE> (2,921,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,276,000
<SALES> 2,247,000
<TOTAL-REVENUES> 1,831,000
<CGS> 1,560,000
<TOTAL-COSTS> 3,247,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 366,000
<INCOME-PRETAX> (1,366,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,366,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,366,000)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
