U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-KSB
[x] Annual Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended April 30, 1996
[ ] Transition Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
Commission file Number: 1-11034
DIGITRAN SYSTEMS, INCORPORATED
(Name of small business issuer in its charter)
Delaware 72-0861671
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
90 North 100 East
Logan, Utah 84321
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801) 752-9067
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
Common Stock $.01 Par value None
Series 1 Class A 8% Cumulative
Convertible Preferred Stock None
Securities registered under Section 12(g) of the Exchange Act:
NONE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year:
1996 - $3,441,366
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a specified
date within the past 60 days: The aggregate market value of the voting stock
held by non-affiliates of the Registrant computed by using the closing sale
price as reported on the American Stock Exchange has been indeterminable
within the past 60 days as there has been no market in thecan Stock Exchange
has not permitted trading to recommence.
State the number of shares outstanding of each of the Issuer's classes of
common equity as of the latest practicable date: at July 31, 1996 there were
8,282,069 shares of the Registrant's Common Stock and 2,000,000 shares of
Class B Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ]; No [X]
Documents Incorporated by reference: None
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
History
Digitran Systems, Incorporated is a holding company, incorporated under the
laws of Delaware in 1985, that conducts all of its business operations
through Digitran, Inc. Digitran, Inc., a wholly owned subsidiary of Digitran
Systems, Incorporated was formed under the laws of the State of Louisiana in
1979. In 1992 it reincorporated in the State of Utah. As used in "ITEM 1
DESCRIPTION OF BUSINESS" the term "Company" refers to the combined
operations of Digitran Systems, Incorporated and Digitran, Inc.
The Company
The Company primarily develops, manufactures and markets simulator training
systems which can be used to train personnel in the petroleum, maritime,
construction and trucking industries. The Company began marketing its first
simulator training systems in 1979 and currently markets a variety of simulator
training systems including crane operating simulators, petrochemical
operations simulator training systems and a heavy duty truck simulator.
Going Concern Qualification
The financial statements of the Company have been prepared assuming that
the Company will continue as a going concern. The Company, as well as an
officer and director, is a defendant in a lawsuit alleging securities fraud and
misrepresentations of financial information relating to the Company's 1992
Form 10-K and other public disclosure. Management and the Company's
legal counsel have met with plaintiffs in an effort to settle the dispute
utilizing unissued common stock of the Company. While the Company has
successfully settled with one group of plaintiffs, it is not possible at this
time to predict the success of management's efforts at achieving a global
settlement.
As discussed in Note 18 to the financial statements, the uncertainty
surrounding this lawsuit raises substantial doubt about the ability of the
Company to continue in existence. Management's plans with regards to this
matter are described in Note 1 to the financial statements. See "ITEM 7 -
FINANCIAL STATEMENTS".
Simulator Training Systems
The Company's simulator training systems generally consist of an instructor's
console, various student consoles, visual subsystem, motion subsystem, sound
subsystem, cab controls and instrumentation, hardware interface computers
and main simulation computers. The entire set of mechanical, electronic and
computer subsystems are controlled by the operating system and simulation
software. The simulators are designed and manufactured by Digitran
engineers to appear, feel and work like the real-world equipment that is being
simulated.
The Company believes that training simulators offer higher quality and more
diverse training opportunities than the actual equipment can provide. In a
simulator, safety risks during the training period to personnel, equipment, and
cargo are eliminated. In addition, the operating costs of a simulator in the
petroleum and crane markets the Company has entered are lower than the
costs associated with using actual equipment dedicated to training. In the
truck market higher costs of the simulator, compared to actual equipment
costs, are believed to be offset by the potential for higher volume usage and
the ability to simulate conditions which would be too dangerous or are
unavailable for actual training.
Crane Operations Simulator Training Systems. The Company has developed
simulator training systems to train operators of various types of cranes for
use in the maritime and construction industries. These include, but are not
limited to, training systems for a Dock Gantry Container Single Lift Crane,
a Twin Lift Dock Gantry Container Crane, a Rubber Tire Gantry Crane, a Ship
Pedestal Crane, a Ship Gantry Container Crane, a Lattice Crane, a Truck
Mounted Telescope Crane, a Truck Mounted Lattice Crane, a Tower Crane and an
Offshore Lattice Pedestal Crane.
The Company believes that within the crane industry there are two major
concerns regarding the operation of cranes, namely safety and efficiency,
and that there is a drive to improve overall levels of safety within the
industry, thus reducing the risk of injury and damage. In addition, it is
believed that the industry desires to operate as efficiently as possible. The
Company believes its crane simulation equipment can improve both crane
operation safety and efficiency.
The Company believes that many of those within the crane industry are also
concerned about the liabilities associated with a crane accident. A crane
simulator is a tool available to help prevent a crane accident and also can
provide evidence documenting a crane driver's skill level. Thus, a crane
operating entity can assess the skill levels of their crane drivers and can
document the level of training that the crane drivers have received.
The Company's crane simulation systems provide customers with simulation
equipment that can be tailored to specific needs of each customer. The
universal cab featured in the crane simulators enables a company to train
operators on a wide variety of cranes. The universal cab features
interchangeable control panels designed to closely resemble crane controls.
In addition, the cab enables users to simulate many different kinds of cranes
with the same system. Generally, as training needs change, users may add
additional training capabilities to their simulator without having to purchase
an entirely new cab and motion base. The instructor's console is designed to
be easily learned and operated and requires little previous knowledge of
computers. The hydraulic motion system is designed to imitate the variety of
movements an operator experiences in an actual crane.
Included within the simulation experience is the capability to modify and
complicate a scenario so that it resembles actual working conditions. The
Company's crane operations simulator training systems have been designed
to give the trainee hands-on experience in picking up and moving cargo loads
under varying normal, abnormal and emergency conditions and to develop the
hand-eye coordination needed to operate a large crane. Once a trainee has
completed a simulation scenario, the computer analyzes his performance and
generates a printed summary for review. The Company's simulators are
created with the possibility of future upgrades to include additional training
applications.
Petrochemical Operations Simulator Training Systems. The market for
simulator training systems for the petrochemical industry originated in the
mid-1970's and grew in response to increased use of advanced technologies
in petrochemical operations. Because of the high costs of accidents in the
petrochemical industry, particularly in off-shore locations, there has been an
interest in training petrochemical production and engineering personnel in
order to reduce accidents caused by operator error.
The Company manufactures and markets various simulator training systems
for training personnel in petrochemical drilling and production operations.
These systems are used to train field, engineering and management personnel
in well pressure control, production and work-over operations, safety,
directional drilling, fluid circulating system operations and mud monitoring
operations.
The Company's petrochemical operations simulator training systems include
a Rig Floor Simulator, a Portable Drilling and Well Control Simulator, a
Production and Workover Simulator and a Portable Production and Workover
Simulator. The Digitran Rig Floor Simulator is a full-sized drilling and well
control simulator. It is designed to train both experienced and inexperienced
personnel in day-to-day operations and emergency situations. The Rig Floor
Simulator can be used to train personnel in drilling techniques, blowout
prevention and a number of optional activities including cementing, directional
drilling, mud analysis and treatment, and drill stem testing. The simulator is
used to teach the operation of individual control panels such as the draw
works, choke and blow out prevention (BOP) panels. Simulator classes may
vary in size from one student to an entire rig crew. The Company also has a
well systems simulator training system consisting of a small, portable version
of the Company's full-scale rig floor simulator training system. This portable
well control training simulator is designed to simulate land and off-shore well
control functions and problems. The Production and Workover Simulator
(PAWS) is a training aid in both the procedures and theory of Production
and Workover operations. Forward and reverse circulation, reservoir flow
testing, bullheading, lubricate and bleed, formation testing, formation
fracturing, equipment failures and other situations can be simulated. The
Production and Workover Simulator is available in both full-sized and standard
portable versions.
Truck Operations Simulation Systems.
The Company has developed a heavy duty truck simulator for use in training
drivers in varying types of truck use, from over-the-road hauling using single,
double, triple and tanker trailers, to localized applications such as those
found within ports, terminals and airports. The truck simulator consists of a
truck cab, motion base, projection screen and instructor's console similar to
those found in the Company's crane simulation systems.
The truck simulator, as the truck simulator is called, is equipped with an
operator's cab which offers interchangeable left-hand and right-hand driving
modes for domestic and international compatibility. The cab is positioned on
hydraulic actuators located underneath the simulator cab which provides
vibrations present under normal driving conditions, jolts during rough driving
conditions, and motion caused by braking, accelerating, turning and skidding.
In addition, the driver trainee views computer generated, textured images on a
wrap-around screen with rear-view insets. The visual system offers the driving
students the ability to view such things as oncoming vehicles, road hazards,
weather conditions, and details such as highway markers. The truck simulator
offers the ability to train drivers in highway, rural, mountain and urban
terrains. The system also includes an instructor's console, giving the
instructor control over all simulation parameters such as problem situations
and environmental conditions, allowing the instructor to view the entire
simulation from the console. The system may be installed in a 48-foot long
climate-controlled trailer for transportation to various training sites, or in
a permanent facility.
Management believes that the truck simulator will be useful to the trucking
industry in the screening of drivers for aptitude and ability. Thus, as with
the crane simulator, the truck operating entities can assess the skill levels
of their drivers and can document the level of training that the drivers have
received.
Through the use of the Company's graphics technology and its expertise
developed in its other simulators, the Company may tailor the simulation
system to the needs of respective customers. Graphics scenarios, truck
cabs and other facets of the simulation experience can be customized to
suit each customer's specific requirements.
The Company has completed and is continuing to work towards the completion
of training curriculum for the trucking industry which combines simulation,
interactive video technology, and classroom techniques to provide training to
the new and the experienced driver. See "ITEM 1 - BUSINESS - Research
and Development."
The Company entered into a partnership, during the fiscal year ended April
30, 1995, with two Canadian trucking companies to utilize the truck simulator
in several training centers throughout Canada over the course of the next few
years. This partnership resulted in the creation of a truck driver training
center, Trucksafe Learning Center (TLC), in Edmonton, Alberta Canada.
See "ITEM 7 - FINANCIAL STATEMENTS - Note 9."
Crane, Petroleum and Truck Sales
During the year ending April 30, 1996 crane simulator systems accounted for
over 93% of the company's sales, petrochemical operations simulator systems
accounted for approximately 5% and truck simulators accounted for less than
2% of the Company's sales. During the year ending April 30, 1995 the
crane simulator systems were 52.2%, petrochemical operations were 21.8%
and truck simulators were 26% of total sales for the Company. Significant
fluctuations in the relative percentages are expected between periods due to
the high dollar value of contracts and relatively small number of individual
contracts as a one contract difference may have a significant effect on the
relative percentages.
Marketing
Since the Company's products require considerable customer education and
post sales support, the Company primarily markets its simulators and other
products through direct contacts between its personnel and potential
customers. The Company has also engaged independent agents who are
generally paid on a commission basis. The Company provides sales
literature, videos, a corporate background brochure as well as direct mail
campaigns targeted to specific industries. Sales from direct mail require
follow-up with telephone contacts, sales calls, product demonstrations and
proposal submissions. A minor amount of expenditures are also incurred on
advertising and trade shows.
Marketing Strategy. In the petroleum industry, the Company's target markets
include large oil companies, major drilling contractors, petroleum engineering
institutions, colleges, universities and petroleum training centers. The
target markets for the Company's crane products include maritime universities
and training centers, major world ports (or minor ports combining together),
port authorities and port terminals, insurance risk management centers, unions
and industry trade associations, construction contractors and crane
manufacturers. The Company has also attempted to market the crane products to
the nuclear industry, however, there have been no sales to this segment to
date. The market segment for the truck simulation systems includes companies
in the commercial trucking industry, the private trucking industry,
professional trucking schools and institutions conducting truck driver
training, as well as state and federal agencies, transit authorities, and the
union associated with professional truck drivers.
In determining markets in which the Company will enter, it generally looks at
the following market characteristics:
1) Whether there are no or only minor competing simulation products
currently available. The Company departed from this criteria with regard to the
truck simulator in that a number of competitors are known to exist with
established products and customers. However, the Company's anticipation is
that with the truck simulator it could quickly overtake existing technology of
low end units, be price competitive with high end units and that these factors
justified its entry into this market.
2) The Company sees a need for the application of simulation
technology in the market which is known or can be conveyed to customers.
3) Potential purchasers have the resources to justify major
expenditures for simulation equipment. It should be noted that the cost of a
truck simulator can be from five to twenty times the cost of the tractor-
trailer being simulated, as opposed to the Company's other markets in which the
simulators are less expensive than the equipment being simulated. It is
believed, however, that this factor is offset by the existence of relatively
more truck drivers than crane or petroleum rig operators, providing for greater
potential utility to those employing or training large numbers of drivers, and
potentially opening up greater opportunities for the Company to enter into
the training market.
4) There is a sufficient profit potential and the Company has the
possibility of gaining market dominance.
5) The market is not sufficiently large to attract larger, more
established simulation competitors. With regard to the truck simulator the
Company departed from this criterion in that the potential market may be
sufficient to attract larger, more established competitors. However,
management feels that the Company's ability to enter the market with its
existing technology and competitive pricing justified departing from this
criterion.
In addition, in order for the marketing of the Company's products to be
successful, the industry must be such that a) operational mistakes and errors
can be very costly; b) risks are contingent upon the operators' ability; c)
actual operation of the equipment is experience oriented; d) special
operational situations can occur that require the operator to use unique
skills; and e) efficient and effective operation is crucial.
Significant Customers
During the fiscal years ended April 30, 1996 and 1995, net sales to certain
customers accounted for more than 10% of the Company's sales. During the
year ended April 30, 1996 Pt. Mandira Jaya Abadi, Jakarta ($1,110,000),
Maritime Employers' Association, Montreal ($911,400) and British Columbia
Maritime Employers' Association ($398,400) accounted for 32%, 26% and
12% respectively, of the Company's net sales. During the year ended April
30, 1995 Port of Singapore Authority ($1,166,000), Trucksafe Learning
Center ($600,000) and Kuwait University ($336,053) accounted for 45%,
23% and 13% respectively, of the Company's net sales. The Company's
significant customers usually change from year to year. When one or a few
customers install multiple or large simulator training systems, they may
account for a significant percentage of the Company's net sales for one or
more fiscal years. Once such an order is completed, such customer or
customers will generally no longer account for a significant percentage of the
Company's net sales.
Competition
The overall simulator training system market, which includes aviation,
military, nuclear power plant and petrochemical operations simulators, is
dominated by large companies and divisions including Evan's and Sutherland
Computer Corporation, Boeing Aerospace Corporation, McDonnel-Douglas
Corporation, the Link Division of Singer Corporation, Hughes Aircraft
Corporation, Westinghouse Corporation, General Electric Corporation and others.
While the Company's simulator training systems do not compete with any of the
simulator training systems manufactured by these large companies and divisions,
such companies and divisions have the resources and ability necessary to
develop simulator training systems in the markets in which the Company is
participating. There is no assurance that these large companies and divisions
will not develop simulator training systems which will compete with the
Company's products.
The Company believes that Drilling Systems, Ltd. based in the United Kingdom
and CS Manufacturing of Albuquerque, New Mexico are its primary competitors in
the petrochemical operations simulator training systems market. Drilling
Systems, Ltd. has been in the business of making petrochemical operations
simulator training systems since 1988. CS Manufacturing has been in business
for approximately 5 years and its predecessor, CS Simtran, Inc. for over 20
years. There is no assurance that additional competitors will not enter the
market. Competition within the petroleum industry has become increasingly
price competitive resulting in lowered profit margins. See "ITEM 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS".
Competition in the crane operations simulator training systems at present
includes Maritime Dynamics of the United Kingdom. Management believes that
preemptive marketing efforts taken by the Company to inhibit new sales by this
competitor, together with a technologically superior simulation system, should
ensure continued success within the crane simulation product line.
Professional Truck Driving Simulators (a joint venture of FAAC, Inc. and
Perceptronics, Inc.) and Doron Precision Systems, Inc. are believed by the
Company to be its main competitors in the truck operations training industry.
While there are other entities involved in the manufacture and sale of
simulators to the trucking industry the Company is not aware of any which
utilize the high graphics quality and reality of motion on a price competitive
basis with the Company.
The Company believes its simulator training systems can compete based on
price, quality, technology, service and ease of use, including the ability to
incorporate customer specific features and customizations.
Manufacturing and Sources of Supply
Prior to 1992 the Company generally operated on an order first principle, the
Company generally did not begin production activities until an order had been
placed. During fiscal 1993 the Company built up significant inventories in the
prospect of future sales, rather than waiting until such sales had occurred.
Certain simulators so constructed were utilized for demonstration purposes at
customer locations, in some cases for extended periods. The Company has
subsequently reduced inventory levels substantially and anticipates further
reducing inventories in the future. See "ITEM 6 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS".
The Company designs and specifies the mechanical and electronic components
and subassemblies that comprise the simulators. The Company then
subcontracts with third party vendors for the manufacture and fabrication of
such components and subassemblies. While some simulator components are
procured "off-the-shelf", the Company performs all of the assembly,
integration, testing and quality control prior to installation of the
simulators. The Company also conducts performance and functionality tests
after installation to ensure that the training system is operating according to
specifications. Normally, payment for the simulation systems is subject to
acceptance procedures by the customer, before and/or after shipment.
The Company procures certain simulator components from single sources.
Driving the need for the new graphics generations system was the increasing
costs involved in maintaining the old graphics generation computers. As
existing customers are upgraded to the new system, the costs involved with
maintaining these existing graphics generation computers with deminish. A
majority of the components of the simulation systems are available from
multiple sources and, excluding perhaps the old image generation computers, to
date there have been no significant negative effects on the Company arising
from the use of a single source for certain components. The Company currently
uses a wide variety of semiconductor chips from manufacturers including Intel,
Motorola, NEC and others. Most of the peripheral equipment is also procured
from other industry manufacturers including Hewlett-Packard, Mitsubishi and
Gateway. In addition, the Company utilizes high-end graphics computers and
main simulation computers from Silicon Graphics, Inc., Star Technologies and
Evans and Sutherland, Inc. Due to recent developments at Star Technologies,
Inc. the image generators used to date by the Company are no longer available
to the Company. The Company has decided to use Evans and Sutherland (E&S) as
the vendor for the new image. A more powerful system at a similar price along
with flexible terms made E&S the obvious choice and the Company anticipates
a long and prosperous relationship with E&S in the future. The use of a new
image generator requires the porting of existing software to the new image
generator. As of April 30, 1996 approximately half of the crane software
previously available on the Star Technologies image generator has been ported
to the new E&S system. The Company anticipates that the remaining crane
software will be ported in the following year and that the truck software will
likely be ported based on terms of future truck sales contracts.
Since many components used in the simulators are unique to the Company's
products, suppliers sometimes require lead times on orders. In order to reduce
lead times on hard-to-obtain components, the Company will stockpile some
parts. In addition, in the crane simulation field, the Company has attempted
to make many identical components to reduce production costs and lead time and
to create an opportunity to sell upgrades to existing customers.
Product Warranty and Service
The Company generally warrants its simulator training systems to be free of
defects in materials and workmanship for a period of 12 months following
delivery, although warranty periods of up to 24 months have been agreed to
by the Company in the past. During the warranty period, the Company will
repair or replace the defective part without charge. At the end of the
warranty period, the Company generally offers a yearly maintenance agreement.
The Company's simulator training systems are generally equipped with a
built-in hardware diagnostics feature which can identify different error
onditions which indicate the source of a hardware failure. Users of petroleum
systems are given a spare parts kit which contains parts and tools to maintain
the simulator. The spare parts kit, along with the diagnostic feature, enables
a system to be routinely maintained by users. The Company's simulator training
systems also are generally equipped with a modem so that the Company can
monitor a system via telecommunications and assist and instruct training
personnel in maintenance and service procedures by telephone. The
Company also provides "on-site" service and maintenance when required.
Warranty costs have been insignificant to date but are likely to become more
significant when costs for simulators currently in inventory are reclassified
to warranty costs as units are sold.
Research and Development
The Company capitalizes its simulator development costs after such time as
technological feasibility has been established. Amortization of simulator
development costs is computed on a product by product basis over the estimated
useful life of the product, generally seven years and is included in costs of
goods sold. Prior to establishing technological feasibility amounts are
expensed directly or accounted for as job costs reflected in inventory or cost
of sales to match against revenues on specific systems sales. See Note 1 to
financial statements under "Capitalized Simulator Development Costs" contained
in ITEM 7. As a result, during the fiscal year ended April 30, 1996 the
Company did not have material expenditures classified as research and
development. During the year indicated the Company had no customer
sponsored research and development activities.
The Company generally does not engage in research and development unless
a customer has engaged the Company to develop a project or the Company
has perceived a commitment on the part of customers that if a certain type of
simulator is developed, they will purchase it. The development of the truck
simulator without a specific purchase commitment was a departure from this
practice. The Company has begun initial development of other simulation
products and anticipates that it will be involved in the development of new
simulator products in the future. The nature of products to be developed will
depend upon market demand and the resources of the Company and there
can be no assurances development of any new simulation products will be
successful.
Foreign Sales and Concentration 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. One or several customers can account for a large portion
of the Company's earnings. See "ITEM 1 - DESCRIPTION OF BUSINESS - Significant
Customers". Normally, the Company attempts to secure shipments to points
outside the United States through letters of credit or progress payments. See
Note 1 to the Financial Statements under "Concentration of Credit Risk"
contained in ITEM 7.
In cases for which shipments are made on open account, the Company
normally retains title or ownership claim to the equipment shipped by terms of
its contracts or agreements until significant payment has been secured. In
many cases the Company retains possession of the equipment until significant
payment has been secured.
Although the Company has attempted to protect its rights to equipment sold in
foreign countries, sales with extended payment terms are subject to additional
risks that upon default in any payments, it may be difficult and/or include
additional expenditures to obtain possession of the simulator sold. Further,
any such return would include additional expenditure to transport the equipment
to the Company or to another customer.
In addition, sales to certain countries may require additional documentation
and/or licenses. Foreign sales can be subject to additional risks associated
with international banking, currencies and other considerations which can
affect payment terms and other matters.
Patents, Copyrights and Trademarks
The Company does not hold any patents which it deems material to its business
and has not sought patent protection for the technology it uses in its
products. The Company has attempted to protect the program codes used in its
products as trade secrets by utilizing nondisclosure agreements with its
employees, customers and others who are permitted access to such codes. To
date, the Company has initiated and settled two lawsuits regarding
nondisclosure agreements.
The Company has obtained software copyrights on essentially all the software
incorporated into the Company's non-transportation products. Copyrights
provide only limited protection. The Company has no trademarks.
Employees
As of July 16, 1996, the Company had 33 full-time employees and 2 part time
employees. In addition, the Company utilizes several sales agents on a
commission basis and engages various consultants. No employees are
represented by labor organizations. The Company is not a party to any
collective bargaining agreements.
ITEM 2 DESCRIPTION OF PROPERTY
The facilities of the Company consist of three separate buildings located in
Logan, Utah. The administration office of the Company is located at 90 North
100 East, Logan, Utah. The building, which was purchased in July 1989, has
approximately 9,000 square feet and is utilized primarily as office space;
approximately 1500 square feet is leased to other businesses on a month to
month basis, with aggregate rental payments of $865 per month. It is subject
to mortgage and deeds of trust of $268,714 at April 30, 1996. In February
1991 the Company purchased a building at 2176 North Main, Logan, Utah.
The building has approximately 10,000 square feet of space used for the
petroleum production and electronics assembly, offices for petroleum engineers
and service personnel as well as offices for software engineering personnel
for crane and truck production; approximately 1700 square feet is leased to
other businesses on a month to month basis, with aggregate rental payments
of $500 per month. The property is subject to a trust deed securing the
payment. As of April 30, 1996, approximately $197,000 was owed on the
property. In January 1993 the Company completed construction of an 11,250
square foot production facility at 2176 North Main, Logan, Utah adjacent to the
existing building described above. The building, which includes production,
office and storage space, is utilized by all manufacturing divisions primarily
for production, storage and offices. As of April 30, 1996, the property was
subject to mortgages and deeds of trust of approximately $250,000. Currently
the building is partially used for storage of completed sub-assemblies. If the
inventory is sold, this space will be converted to production as required.
Except as otherwise indicated the facilities are suitable and adequate for the
Company's current needs.
ITEM 3 LEGAL PROCEEDINGS
On April 1, 1993, the Securities and Exchange Commission (the "Commission"
or "SEC") issued an order directing that an investigation be conducted by the
Salt Lake City office of the Commission to determine whether the Company or
any of its affiliates or any other person has engaged in violations of certain
Federal laws. On May 21, 1993, the Commission issued an order suspending
trading of the Company's securities. On December 29, 1994, a complaint
against the Company was filed in U.S. District Court, District of Utah,
Northern Division by the Securities and Exchange Commission. The complaint
named, as defendants, Digitran Systems, Inc., Donald Gallent (a former officer
and director) and James R. Bryan (a former officer). Mr. Gallent is no longer
associated with the Company. Mr. Bryan has resigned as an officer and, while
still an employee of the Company, is not involved in financial disclosure. The
complaint sited violations of Sections 17(a) of the Securities Act of 1933, as
amended, and Sections 10(b), 13(a) and 13(b) of the Securities Exchange Act
of 1934, as amended, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and
13b2-2 promulgated thereunder. A Final Judgment was filed by the Securities
and Exchange Commission on September 25, 1995 in the United States District
Court, District of Utah, Northern Division. Without admitting or denying the
allegations of the complaint except as to the jurisdiction of the court, the
Company has consented to the Judgment. The Judgment permanently restrains
and enjoins the Company from engaging in acts and practices which constitute
and will constitute violations of all applicable rules and regulations
from the securities acts. There was no monetary penalty assessed by the SEC
in this matter.
In May 1994 a consolidated amended complaint was filed for a proposed Class
Action by Gregory McEwen and Larry Parker, on behalf of themselves and all
those similarly situated, in the United States District Court for the District
of Utah, Salt Lake City Division. The action consolidated two separate actions
filed in August 1993 and February 1994, respectively, against Digitran
Systems, Inc., Digitran, Inc., Donald G. Gallent, Loretta P. Trevers; Chris S.
Coray; Harris G. LeRoy, II; James R. Bryan; and the accounting firm, Grant
Thornton. Included as Plaintiffs was a proposed class consisting of all
persons who purchased securities of Digitran Systems, Incorporated during the
period from March 19, 1992 to May 21, 1993. The Complaint alleges that the
Company published or released false or misleading information relating to the
recognition of income on certain contracts and improperly capitalized certain
simulator development costs. The complaint also alleges that certain of the
defendants engaged in insider trading activities. The complaint seeks the
following relief: 1) declaring the action to be a proper class action; 2)
awarding compensatory and punitive damages, including interest and that
such damages be trebled; 3) awarding extraordinary equitable and/or injunctive
relief and 4) awarding costs and expenses, including attorney's fees and other
costs. The court has certified the Plaintiff's class, with the exception of
the Utah Securities Act Claim.
In May 1994 Grant Thornton filed a cross-claim against Digitran Systems,
Incorporated, Digitran, Inc., Donald G. Gallent, Loretta P. Gallent and James
R. Bryan. The cross-claim 1) alleges common law fraud based on activities
relating to the April 30, 1992, 1991 and 1990 financial statements and 2) seeks
contribution under federal securities laws and the Utah Uniform Securities Act.
The cross-claim seeks damages to be established at trial and indemnification
with respect to any judgment that may be entered against Grant Thornton in
this action.
In June 1994 the Company filed a cross-claim against Grant Thornton. The
cross-claim alleges breach of contract and negligence for failure of Grant
Thornton to follow generally accepted auditing standards in the audit of the
Company's financial statements. The cross-claim also seeks contribution under
federal and state securities laws. The cross-claim seeks damages to be
established at trial, indemnification with respect to any judgment that may be
entered against the Company, contribution and consequential damages.
On October 6, 1995, an intervention was filed by a number of shareholders who
purchased securities during the class period, but who purportedly excluded
themselvesfrom the class. The intervention also concerned Shareholders of the
corporation who had owned stock in the corporation for a number of years.
The alleged violations of securities laws mentioned those filed by the class
plaintiffs, as a result of the rising costs associated with the litigation, the
corporation assigned its action against Grant Thornton to the Intervenors in
exchange for the payment of all costs associated with the action against Grant
Thornton and dismissal of all claims by Intervenors against the corporation.
In the event that Intervenors are successful in this matter against Grant
Thornton, the corporation shall share equally with the Intervenors in the
recovery, less costs and attorney's fees.
Discovery is ongoing in this matter, especially in light of the resently filed
intervention but, based on information currently available, the amount of
damages, if any, which could be incurred by the Company is uncertain.
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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 29, 1996 the Company held its Annual Meeting of Stockholders.
Two concerns were voted on during the meeting: 1) To fix the number of and
elect directors to serve until the next annual meeting of the shareholders and
until their successors are elected and qualified and 2) to consider and vote
upon the ratification of the appointment of Tanner & Company as independent
certified public accountants for the Company for fiscal 1996. The voting
shares were represented in person or by proxy at the Annual Meeting:
Description Number of Shares Percentage of Class
Common Shares 5,653,442 75.5%
Preferred Shares 457,850 43.6%
Class B Common Shares 2,000,000 100.0%
1) The following votes were cast in connection with the election of
directors:
Gary Blum Preferred Shares For 197,350
Against 1,325
Withheld 1,000
Common Shares For 5,490,008
Against 69,956
Withheld 93,478
Loretta P. Trevers Class B Common Shares For 2,000,000
Jamie Levey Class B Common Shares For 2,000,000
2) Ratification of appointment of Tanner & Company:
Preferred Shares For 146,725
Against 51,100
Abstained 1,850
Common Shares For 5,263,080
Against 251,242
Abstained 139,320
Class B Common Shares For 2,000,000
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Since May 21, 1993 when the Securities and Exchange Commission
suspended trading of the Company's securities there has been no public
market for trading of the Company's Common Stock. On February 27, 1996
the American Stock Exchange delisted the Company's securities. The
Company is now actively seeking to reestablish a publicly trading market for
the Company's Common Stock.
Shareholders
As of July 1996, the Company had 336 record holders of its Common Stock
and one record holder of its Class B Common Stock as well as 25 record
holders of its Series 1 Class A 8% Cumulative Convertible Preferred Stock
(the Preferred Stock) as reflected on the books of the Company's transfer
agent. The Company has not paid any dividends on its Common Stock and
the Board of Directors of the Company presently intends to pursue a policy
of retaining earnings, if any, for use in the Company's operations and to
finance expansion of its business. The declaration and payment of dividends
in the future on the Common Stock will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, financial condition, capital requirements and other factors. In
addition, as noted below, the Company is in arrears in the payment of
dividends on its Preferred Stock. Dividends are not payable on any other
class of stock ranking junior to such Preferred Stock until the full cumulative
dividend requirements of the Preferred Stock have been satisfied.
Dividends
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, beginning September 15, 1992. The Company paid dividends of
$27,362 for September 15, 1992 and $136,682 for March 15, 1993. No
dividends were paid since March 15, 1993 resulting in dividends in arrears
of $626,296. As part of a settlement with intervenor preferred stock
shareholders 86,155 preferred shares were consented to be converted to
three shares of Common Stock reducing dividends in arrears by $144,740
and the semi-annual dividend payment by $24,123. The future payment of
dividends on the Preferred Stock is dependent on further settlements and also
upon the generation of future cash flow and profit by the Company sufficient
to meet such obligations and allow the Company to pay such dividends under
Delaware and Utah corporate law.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto. See "ITEM 7 FINANCIAL
STATEMENTS".
RESULTS OF OPERATIONS 1996 VS. 1995
Net Sales. Net sales increased by $848,684, or about 33%, from the year
ended April 30, 1995 to the year ended April 30, 1996. This increase was
due to the increase of in the number of contracts in 1996 from the number
achieved in 1995. Domestic revenues decreased by approximately
$142,000, or about 50%, while foreign revenues increased by just over
$991,000, or 43%, from 1995 to 1996. Significant fluctuations in the relative
percentages of foreign and domestic sales are expected between periods.
Due to the high dollar nature of individual contracts, a difference of one
contract may have a significant effect on the relative percentages.
To the extent the Company is able to continue to resolve the issues
enumerated under "Financial Condition and Liquidity, 1996" below, and
continue to focus on operations, including the addition of management and
other professional staff, net sales are expected to increase in fiscal 1997.
While market acceptance in the truck market has continued to be slow, the
Company is progressing towards sales and training commitments on several
fronts, and remains hopeful that given proper time and resources multiple
truck sales can be achieved in the coming year. The crane market
domestically and in certain foreign markets has been experienced some
activity recently, however, the bulk of the crane market continues to be in
the Pacific Rim. Again, given additional time and resources devoted to
operations, and away from the shareholder litigation matters, it appears to
the Company that crane activity can be,increased in the geographic areas
which currently have little activity, and that multiple sales can continue to
be achieved in the Pacific Rim. The addition of certain professional and
technical personnel in the petroleum area in fiscal 1995 and fiscal 1996
has resulted in the development of a new windows based petroleum
simulator. This new breakthrough in technology has resulted in optimism
for sales of petroleum products in the following year to far exceed that of
the previous two years.
Cost of Goods Sold. The increase of approximately $706,000, or 45%, in
cost of goods sold was the result of the increased sales activity. This
percentage increase was greater than that for sales due in large part to the
fact that amortization of capitalized software costs, which are not
necessarily directly related to sales activity, are included in cost of goods
sold thereby reducing the volatility of cost of goods sold relative to sales.
As a component of cost of goods sold, software amortization increased
slightly from $570,391 to $587,663. Management anticipates that
amortization will decrease in the following years thus increasing the
variability of cost of goods sold relative to sales variability.
As a percentage of sales, gross profit decreased from 39% in 1995 to 33%
in 1996. The main reason for this decline was due to a sale of an upgrade
to an existing crane customer during fiscal 1996 at a price which had little
profit margin. Given the Company's limited access to capital and equity
markets, this discounted upgrade took place in order for the Company to
finance the porting of several crane modules to the latest state of the art
computer graphics image generators. Gross profit as a percentage of
sales is subject to significant changes between periods depending on the
nature of the contracts entered into, the relative sales mix between periods,
the degree of change to existing products, and other factors. Profit margins
vary by contract depending on various factors such as: the number of
customized features, the location of the customer, the potential for
additional sales, educational and developmental discounts. These and
other factors can lead to departures from standard pricing and therefore
affect the gross profit on any simulators being sold. The underlying costs
to the Company can be impacted by the number and sophistication of any
software development or customization required by the project and by the
internal efficiency of the Company in completing the projects. These
factors, when combined with the small number of units being sold lead to
substantial variations in the gross profit percentages during discrete
reporting periods.
Within the petroleum simulator industry, the level of competition is currently
greater than in the crane industry. Also, in petroleum, there are several
different types of products, from a full size rig floor simulator to a
portable, limited function model. This can, in some instances, lead to lower
profit margins in the petroleum products compared to the margins in the crane
products and the expected margins in the truck products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 20%, or $514,237, from 1995 to
1996. Although there was a general decline for most selling, general and
administrative expenses, the majority of the decrease can be contributed
to a significant reduction in legal, professional and consulting fees.
Combined legal, professional and consulting fees decreased primarily due
to efforts of management to focus more on the operations of the Company
rather than the distractions of the shareholder litigation, and SEC
investigation. Legal fees decreased by over $288,000, or 70%,
professional fees decreased by $19,123, or 35% and consulting fees
decreased by $21,918 or 8% due primarily to the reasons noted above.
Other consultants were commissioned during 1995 for a variety of reasons
ranging from legal to marketing issues.
As with 1995, the Company took steps to streamline operations and
conserve cash in 1996, which is reflected in a continued decrease in the
majority of all operational expenses with the notable exception of marketing
related expenses. Marketing related expenses experienced an increase
of $122,553 or 69% due to management's effort to refocus on sales.
Telephone and communication expenses decreased by $17,648 or 26%
as a result of a more direct marketing effort. Salary and wage related
expenses decreased by $97,536 (10%), however this was not due to
reductions in personnel, rather the decrease can be attributed to increased
amounts allocated as direct labor to jobs costs during fiscal 1996.
Commissions on sales declined by over $86,000 due to lower commission
percentages payable on 1996 sales relative to 1995 sales. Other operating
expenses declined by $44,574 due to the completion of operating lease
payments for image generation systems which ended in fiscal 1995. Utilities
and rent decreased by approximately $19,000 or 23% and depreciation
decreased by approximately $27,800. Other administrative expense
declined by approximately $100,000 due primarily to a reversal of an
adjustment of an estimated penalty relating to the pending SEC investigation.
Corporate expenses and dues increased by $18,338 (169%) and Directors
fees increased by $15,000 (150%). These increases were related to the
actions taken by management to resume trading of the Company's stock.
The extent of various expenditures in the respective selling, general and
administrative expenses in 1997 will be dependent, among other things,
upon the resolution of the matters referred to above. The Company hopes
to increase sales and production activity, but will likely only be able to do
so to the extent resources can continue to be diverted from shareholder
litigation to operations.
Due to the need for the Company to operate from its own capital resources,
it has been forced to adjust its disbursements relative to marketing and
property and equipment purchases. Although 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 lead to inefficiencies within the Company, which would
not otherwise occur, if the current trend continues into the future.
Management does not anticipate future declines from the current low levels
of selling, general and administrative expenses.
Other Income (Expense). The increase in interest expense of $89,560, or
56% came about from the need for increased amounts of short term
borrowings and an increased cost of those borrowings. The joint venture
loss of $132,349 related to the one-half equity interest in a truck driver
training center (See "ITEM 7 FINANCIAL STATEMENTS-Note 9"). An
accrual for an agreement with shareholders intervening in the shareholder's
suit against the Company of approximately $134,000 was based on stock awarded
at $1.00 per share. A truck demonstration system and Graphicon software were
both written down a combined $285,373 due to the recent upgrade in graphics
generation systems and software. Other income decreased by $42,207 or 34% due
to customers paying off, during 1996, equipment which had been sold under
an installment type contract during 1995.
Financial Condition and Liquidity, 1996. The auditors' report for the year
ended April 30, 1996 provides that the financial statements have been
prepared assuming that the Company will continue as a going concern.
The Company's plans for continuing as a going concern are set forth in
Note 1 to the financial statements under "ITEM 7 - FINANCIAL
STATEMENTS". As discussed in "ITEM 3 LEGAL PROCEEDINGS", in
April 1993 the SEC issued an order directing an investigation be made
related to Digitran Systems, Incorporated. On May 21, 1993, trading in the
Company's stock was suspended by the SEC. As discussed in "ITEM 5 -
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER
MATTERS" and as noted below, the trading of the Company's stock has
not recommenced.
In May 1994 a consolidated amended complaint was filed for a proposed
Class Action by two individual plaintiffs holding fewer than 15,000 (.15%
of the Company's outstanding shares) shares of the Company's Common
Stock on behalf of themselves and, additionally, all those similarly situated,
in the United States District Court of the District of Utah, Salt Lake
Division. SEE "ITEM 3 - LEGAL PROCEEDINGS".
On May 21, 1993, with no prior notice to the Company, Grant Thornton, the
Company's former auditor, withdrew its opinion dated July 29, 1992 on the
Company's financial statements. This withdrawal stated as its reason the
fact that certain information had come to Grant Thornton's attention related
to revenue recognition on certain contracts. The withdrawal came after
discussion by the Company with Grant Thornton of a press release to be
issued by the Company containing disclosure related to the contracts in
question. The press release contained information related to termination
provisions on the contracts, which the Company believes had previously
been discussed by the Company with Grant Thornton. Grant Thornton was
provided with a draft of the press release prior to its release, but Grant
Thornton did not mention the possible withdrawal of its opinion to the
Company prior to issuance of the release.
Extreme expenditures of time, effort and financial resources were made in
dealing with Grant Thornton in order to obtain reissuance of their opinion on
the Company's financial statements. The Company feels it was led to
believe the reissuance was imminent, based on the ongoing discussions
with Grant Thornton, pending completion of a changing set of conditions.
The Company made every effort to meet the conditions, but was unable to
do so based on the changing nature of the conditions. Based on its
discussions with Grant Thornton, the Company continued to believe that
the reissuance of the opinion could be accomplished within a reasonable
period of time. The efforts to meet conditions were continued by the
Company at the time due to what the Company perceived as assurances
by Grant Thornton that, if conditions were met, the opinion would be
reissued by Grant Thornton. These efforts included the Company, on
its own initiative, engaging a Senior Advisor and appointing a legal firm,
which subcontracted an accounting firm, to perform due diligence on the
Company and its records. As Grant Thornton would not reissue its opinion
on the Company's financial statements, even in light of the above actions,
successor auditorswere required to be appointed in March 1994 and the
Company's financial statements completely re-audited, again at great
expenditure of time and financial resources.
In June 1993 the Company was notified by the bank holding its lines of
credit and capital leases that the Company may be in default of the master
lease agreement as well the agreements related to the lines of credit, as
a result of the withdrawal of Grant Thornton's unqualified opinion and the
items mentioned above. The bank did not accelerate payment under the
leases upon notice of default. In January 1994 a Modification Agreement
was entered into extending payment until April 1994 but allowing no further
borrowings. In December 1995 the line of credit and lease with the
Company's bank were refinanced resulting in a combined monthly payment
of $13,737 and are subsequently no longer in default.
Due to the withdrawal of Grant Thornton's opinion, and the other factors
noted above, the Company has not had access to its traditional lines of
credit or guarantee of such by the Export Import Bank of the United States,
nor has the Company been able to resume trading on any exchange.
As a result of these factors, the Company has had to rely primarily on cash
on hand in July 1993, and on new sales and additional debt subsequent to
that date, to fund operations. During 1993 and 1994 the Company
committed significant amounts of its cash on hand to finance the build-up
of inventories. The Company has subsequently reduced those inventory
levels substantially and anticipates having a balance at the end of fiscal 1997
which will be close to the Company's long-term equilibrium inventory level at
approximately $950,000. Thus the cash benefit through the sales of
completed or partially completed systems was substantially depleted in
fiscal 1996 and will likely be exhausted in fiscal 1997.
Starting in fiscal 1995 and continuing through fiscal 1996 the Company has
been successful in its efforts to redirect the Company's focus from the SEC
and shareholder litigation matters to hiring key personnel in marketing and
increasing the overall marketing effort as well as creating industry leader,
state of the art simulation systems. The Company has started to realize
some of these benefits through increased sales; however, as in previous
years, due to limited access to capital and equity markets and an increase
in marketing related expenses, some temporary cash shortages were
experienced during the year relating to the timing of cash collections from
sales. These cash liquidity shortfalls which were funded primarily by the
sales of simulators, the sale of certain operating assets, the placing of debt
on real estate and other assets, some short-term financing arrangements
backed by sales contracts and the forbearance of the Company's vendors
in accepting late payments on outstanding invoices.
The Company's continued existence as a going concern is dependent upon
its ability to continue to focus on operational considerations in order to
increase sales, and bring to closure sufficient of the proposals currently
outstanding to potential customers,to locate additional customers, and to
maximize utilization of available resources.
The Company plans to aggressively pursue, on behalf of its shareholders,
a public listing and public trading of the Company's stock. The Company
spent several months attemplting to satisfy the American Stock Exchange
requirements to resume trading. As of February 1996, the Company was
formally notified that their request was being denied and the Company's
Common and Preferred Stock was permanently being delisted. The
Company is now preparing to apply to the Electronic Bulletin Board for
listing of its Common Stock.. There is no assurance that the electronic
bulletin board or alternative exchange will agree to list the Company's
Common Stock.
The Company was able to satisfying a significant portion of unpaid
obligations of the Company to certain creditors by issuing unregistered
stock. Approximately $493,600 in past due and current obligations were
settled for approximately 452,500 shares of unregistered, Class A common
stock.
Management does not believe that the threat of obsolescence is imminent
for the truck simulation systems due to the lack of competition with this
industry. These systems are currently used lightly as demonstration units
or are being stored in crates. They represent the state of the art in
technology and are upgraded as necessary to keep up with changes in
technology. The crane product line has recently experienced some
increase competition. However, there is currently an insignificant amount
of crane systems in inventory and a recent upgrade in the crane software
and hardware has been a proactive response to the increased competition
in the crane simulation industry. The petroleum product line has been
subject to direct competition. This competition demands that the latest
technologies are present in our current systems and that new petroleum
systems are to be constructed only upon completion of a sale of petroleum
system from inventory. With Digitran's recent release of a windows based
petroleum software, the Company is confident that the minimal systems in
inventory at the end of fiscal 1996 are far from obsolete. Although
pressures to replace crane and truck systems are not as great as pressures
to replace petroleum systems, management makes every attempt to place
the oldest systems first.
If management is unable to achieve expected results due to sales shortfalls
or other unanticipated events, it will be required to obtain equity financing,
reduce operations, refinance significant assets, or undertake other actions
as may be appropriate.
In 1996, the Company continued to devote significant resources to the
development of simulators and the related software. Amounts capitalized
of $151,630 in 1996 represent a slight decrease of approximately 2% from
the $155,195 capitalized in 1995. The software capitalized in fiscal 1996
includes a windows based petroleum software, crane software which was
ported to the new image generation computer system and some truck
enhancements. Although fewer software costs were capitalized during
1996 and 1995, more money was spent on software development than in
1994 due mainly to the addition of more software engineers. The efforts
related to simulator development continue to be critical to the Company's
further development. Management hopes that increased efforts can
continue to be made in this area in 1997 related to all products. Such
efforts will be a function of resources available, which are dependent
upon the factors noted above in the other sections of "MANAGEMENT'S
DISCUSSION AND ANALYSIS".
Due to cash constraints, no significant expenditures were made in 1996
for property and equipment, except for the acquisition of a new image
generator and development software. The Company anticipates additional
expenditures for property and equipment as cash constraints are lifted
through increased sales levels.
Inflation has had no significant impact on the Company in the years ended
April 30, 1996 and 1995.
ITEM 7 FINANCIAL STATEMENTS
The Consolidated Financial Statements are filed as part of this Annual
Report on Form 10-KSB.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Change from Grant Thornton to Peterson, Siler & Stevenson
On March 8, 1994, the Company dismissed its independent public
accountants, Grant Thornton, and filed with the Securities and Exchange
Commission a Current Report on Form-K describing such event. In
response to such filing, Grant Thornton submitted a letter to the Company
dated March 18, 1994, which was filed by the Company with the Securities
and Exchange Commission in an amendment to the original Current Report
on Form 8-K dated March 8, 1994.
On March 15, 1994, the Board of Directors approved the appointment of
Peterson, Siler & Stevenson as the Company's independent auditor. The
decision to change accountants from Grant Thornton to Peterson, Siler &
Stevenson was approved by the Company's Audit Committee.
Change from Peterson, Siler & Stevenson to Tanner & Co.
On April 15, 1995, Peterson, Siler & Stevenson resigned as independent
auditors of the Company. This resignation was due to Peterson, Siler &
Stevenson's internal review wherein they deemed themselves to be non-
independent for purposes of any future audit engagements. The resignation
did not involve a dispute with the Company over accounting policies or
practices. The reports of Peterson, Siler & Stevenson on the Company's
financial statements for the years ended April 30, 1994, 1993 and 1992
contained an explanatory paragraph as the Company's ability to continue
as a "going concern." Except for such "going concern" limitation, the report
of Peterson, Siler & Stevenson did not contain an adverse opinion or
disclaimer of opinion, nor was it modified as to uncertainty, audit scope,
or accounting principals. In connection with the audits of the Company's
financial statements for each of the three years ended April 30, 1994 there
were no disagreements with Peterson, Siler & Stevenson on any matters
of accounting principals and practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of
Peterson,Siler & Stevenson would have caused such firm to make reference
to the matter in their report.
On May 12, 1995, the Board of Directors approved the appointment of
Tanner & Co. As the Company's independent auditor.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of the directors and executive officers of the
Company are as follows:
NAME AGE POSITION
Loretta Trevers 47 President and Chairman of the Board
Gary B. Peterson 49 Chief Financial Officer
Gary Blum 55 Director
Jamie Levey 35 Director
Directors are elected at the Annual Meeting of Shareholders and serve
until their successors have been elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors and serve
until their successors have been elected and qualified. All persons hold
the same position with Digitran, Inc. and Digitran Systems, Incorporated.
Digitran, Inc. is the operating subsidiary of Digitran Systems, Incorporated.
Loretta P. Trevers has been President since March, 1994 and Chairman
of the Board of the Company since September, 1985. She was also
President from July, 1985 to April, 1989. She served as Executive Vice
President of Digitran, Inc. from April 1982 to July, 1985.
Gary B. Peterson started with the Company in the capacity of Chief
Financial Officer in March of 1995 replacing James R. Bryan who
resigned during the year. Mr. Peterson has been instrumental in working
with the Securities and Exchange Commission relating to completing the
correction and filing of periodic reports. He has also assisted in the
review and design of accounting and asset control systems. Mr. Peterson
also spends up to 16 hours a week working as a consultant and in his
capacity as an officer of another company. Prior to joining the Company
he received his B.S. in accounting from Brigham Young University. Mr.
Peterson worked for Price Waterhouse, Touche Ross, a small local CPA
firm and as a controller for a public company prior to starting his own
accounting practice in 1982. Since that time he has been a partner or
shareholder in that practice.
Gary Blum was appointed director of the Company by the Chairman of
the Board in October, 1994. Mr. Blum is the principal of the Law offices
of Gary Blum, Beverly Hills, California, which he founded in June 1998.
From 1985 to June 1988, Mr. Blum was a founding member of the Los
Angeles law firm of Blum & Pflug. Mr. Blum currently serves as a director
of PCC Group, Inc., a publicly held company specializing in the
manufacturing and distribution of personal computers and equipment
and training devices. From January 1992 to August 1994, Mr. Blum
served as a director of DCC Compact Classics, Inc., a publicly held
company specializing in manufacturing and selling compact discs
featuring reissued recordings. In addition, from December 1992 to June
1994, Mr. Blum served as a director of E.N. Phillips Company, a publicly
held company specializing in the legalized gaming industry.
Jamie Levey was appointed director of the Company by the Chairman of
the Board in November 1994. Jamie Levey is an independent financial
consultant, specializing in international investment banking activities in the
global marketplace. She started her career in finance based in various
locales overseas as a financial manager of an international travel
corporation. After a brief time as an associate of an international mergers
and acquisitions boutique in New York, she spent several years as a
financial analyst at Prudential Bache Capital Funding and, most recently
as a financial consultant at Merrill Lynch. Ms. Levey has an MBA in
Finance and Investments, is multi-lingual and currently resides in New
York and Zurich.
Significant Employees
Sandeep Gupte, age 29, has been employed at the Company since 1990.
From 1991-1992 he was Lead Engineer. Since 1993 he has been Senior
Project Engineer. During fiscal 1996 he received the title of Vice
President, Engineering. Prior to joining the Company Mr. Gupte worked
part-time as a lab assistant and computer lab consultant at Utah State
University while he was completing his Masters Degree. He received his
B.S. in Computer Engineering in 1987 and his Masters Degree in
Computer Science in 1991.
Compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended.
During the fiscal year ended April 30, 1996 Loretta P. Trevers, officer,
director and beneficial owner of more than 10% of the Common Stock,
will file one late report on Form 5 relating to five gift transactions.
<PAGE>
ITEM 10
EXECUTIVE COMPENSATION
The following table sets forth certain specified information concerning the
compensation of the Chief Executive Officer of the Company and any
executive officer whose total annual salary and bonus exceeded $100,000
(the Named Executive Officers).
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Awards(s) Options/ Payout sation
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loretta Trevers
(Chairman of the Board
and Chief Executive Officer)
1996 $175,507 $ -0- (1) -0- 100,000 -0- -0-
1995 $176,943 $ -0- (1) -0- -0- -0- -0-
1994 $140,561 $ -0- (1) -0- -0- -0- -0-
</TABLE>
1) Loretta Trevers also received the use of automobiles purchased by the
Company and personal benefits paid by the Company. The aggregate
incremental cost of these items is less than 10% of the total annual salary
and bonus paid to Loretta Trevers.
Advances
As of April 30, 1993 the Company had a receivable of $192,521 from
Loretta Trevers for travel and other expenses during the year for which
receipts had not been provided.
During the fiscal year ended April 30, 1994, personal charges of $14,685
were paid by the Company on behalf of Ms. Trevers and repayments of
prior advances of $85,584 was made. The balance was offset against the
note payable to the Ms. Trevers in the amount of $54,764. As of April 30,
1994, the Company's receivable totaled $74,174 while the note payable
to the Ms. Trevers was reduced to a zero balance.
During the fiscal year ended April 30, 1995, personal charges and loans
of $93,277 were paid by the Company on behalf of Ms. Trevers and
repayments of prior advances of $132,500 were made. The repayments
were made by cash payments of $49,000, the transfer of a personal asset
to a third party vendor to retire obligations to the Company which was
valued at $18,000 by the third party vendor and through the transfer of
65,500 shares Ms. Trevers' common stock holdings in the Company to
pay down Company obligations to third party vendors which were reduced
by $65,500. Travel advances in excess of expenses of $1,209 and
interest of $7,236 were also advanced to the receivable during 1995.
As of April 30, 1995, the Company's receivable totaled $43,396.
During the fiscal year ended April 30, 1996, personal charges and loans
of $94,915 were paid by the Company on behalf of Ms. Trevers and
repayments of prior advances of $150,384 were made. The repayments
were made by cash payments of $17,754, and through the transfer of
115,104 shares Ms. Trevers' common stock holdings in the Company to
pay down Company obligations to third party vendors which were reduced
by $132,630. Travel expenses in excess of advances of $11.891 also
reduced the receivable during 1995. The value of $18,000 for the asset
transferred to a vendor in 1995 was reversed in 1996. As of April 30,
1996, the Company owed Ms. Trevers $5,964. See "ITEM 12 - CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
Other Items
During the fiscal year ended April 30, 1996 Gary Peterson, the Chief
Financial Officer and Ms. Trevers, the Chief Executive Officer were
granted warrants to purchase 50,000 shares each, excersizable at $1.00
per share, of the Company's common stock in connection with a personal
guaranty of two Company loans.
There were no exercises of stock options (or tandem stock appreciation
rights) and freestanding appreciation rights (or unexercised options or
stock appreciation rights) made during the fiscal years ended April 30,
1996 and 1995 by any Named Executive Officer. The following table
represents outstanding options by both officers of the Company.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exerciseable/ Exerciseable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Loretta Trevers
(Chief Executive Officer)
1996 -0- -0- 100,000 -0-(1)
1995 -0- -0- -0- -0-
1994 -0- -0- -0- -0-
Gary Peterson
(Chief Financial Officer)
1996 -0- -0- 150,000 -0-(1)
1995 -0- -0- -0- -0-
1994 -0- -0- -0- -0-
</TABLE>
(1) A value of unexercised in-the-money options was indeterminable due
to the non-trading status of the Company's stock.
There were no long term incentive plan awards by the Company during
the fiscal years ended April 30, 1996 and 1995, to any Named Executive
Officer.
Director Compensation
Non-employee directors are to receive $10,000 per year as compensation.
Non-employee directors may also receive each year, in the discretion of
the Chairman of the Board, an option exercisable for a period of five years
to acquire 10,000 shares of Common Stock at a price based on market
value on the first trading day in January of the year granted. No options
were granted during the fiscal years ended April 30, 1996 or 1995.
During the years ended April 30, 1996 Gary Blum, a director of the
Company received 5,667 shares of the Company's stock in lieu of $5,667
of directors fees and also received $4,000 in cash for director's fees.
No director's fees were paid to Mr. Blum during fiscal 1995. At April 30,
1996 the Company had a payable to Mr. Blum for Director's fees of $3,333.
During the years ended April 30, 1996 Jamie Levey, a director of the
Company received 6,666 shares of the Company's stock in lieu of $10,000
of directors fees. No director's fees were paid to Ms. Levey during fiscal
1995. At April 30, 1996 the Company had a payable to Ms. Levey for
Director's fees of $2,520.
During the year ended April 30, 1996 Harris G. LeRoy II, a former director
of the Company received 4,600 shares of the Company's stock in lieu of
$4,600 of directors fees and $3,500 in cash for director's fees. $4,000
director's fees were paid to Mr. Leroy during fiscal 1995. At April 30,
1996 the Company had an accounts payable balance to Mr. Leroy for
Consulting and Director's fees of $9,991. Options for the purchase of
10,000 shares of common stock at $2.00 issued in 1992 were exercised
near the end of fiscal 1993 by Mr. LeRoy, the proceeds of which were
later returned to Mr. LeRoy in a reversal of the transaction. These
options were still outstanding at April 30, 1996.
13,000 shares of the Company's stock was issued to a vendor on behalf
of Chris S. Coray, a former director of the Company, who recognized
this transfer as payment in lieu of $13,203 of directors fees. No payments
were made to Mr. Coray during fiscal 1995. At April 30, 1996 the
Company had no outstanding liabilities to Mr. Coray.
The Company's Bylaws as well as Delaware and Utah corporate statutes
provide for indemnification of and advances of expenses (including legal
fees) under certain circumstances for officers and directors who are a
party to or threaten to be made a party to any proceeding by reason of
the fact that they are a director, officer or employee of the Company,
against expenses and amounts paid in settlement of such actions. During
the year ended April 30, 1996 the Company paid legal expenses of
$25,250 and transferred 81,014 shares of the Company's stock in lieu of
payment of legal fees on behalf of Loretta Trevers, a portion of which
related to corporate matters and a portion of which were personal in
connection with indemnification provisions relating to the investigation of
the Securities and Exchange Commission and the Class Action lawsuit. See
"ITEM 3 LEGAL PROCEEDINGS". This amount is not included in the table set
forth above. The Company intends to advance legal fees of officers and
directors in the future pursuant to the indemnification provisions.
Employment Contracts
The Company has entered into an employment agreement with James
Bryan, a former Financial Officer of the Company to employ him as
General Manager which provides for the issuance of options to purchase
up to 100,000 shares of Common Stock at a price equal to their fair
market value to be determined by counsel to the Company after resumption
of trading of the Company's stock. The options will be exercisable for a
period of 2.5 years. The shares underlying the options will be registered
in the next registration statement filed by the Company. During fiscal 1996
Mr. Bryan gave his personal guaranty on a Company loan and was given
a warrant to purchase 50,000 shares at $1.00 per share as compensation.
Mr. Bryan resigned as an officer of the Company during 1995 and is
currently employed by the Company as General Manager.
In August 1994 the Company entered into an employment agreement with
the Vice President of Engineering, Sandeep Gupte,. In addition to salary
the agreement provides for the issuance of options to purchase up to
100,000 shares of Common Stock exercisable at the fair market value of
the stock as determined by the independent auditors, as soon as
practicable, but not more than thirty (30) days after the commencement
of trading of the Common Stock. The options will be exercisable for a
period of 5 years from their vesting dates. The shares underlying the
options will be registered in the next registration statement filed by the
Company.
Gary Peterson, the Chief Financial Officer received an option to purchase
up to 100,000 shares of Common Stock, exercisable at the fair market
value of the stock, defined as the average of the bid and ask prices on
the 30th day after trading in a public market has been commenced.
Mr. Peterson also received a warrant to purchase 50,000 shares of the
Company's Common Stock at $1 per share pursuant to his personal guaranty of
a Company loan.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of July 23, 1996 and as reflected on the
records of the transfer agent of the Company, the number of shares of
Common Stock, Series 1 Class A 8% Cumulative Convertible Preferred
Stock (the "Preferred Stock") and Class B Common Stock beneficially
owned by each person known to be the beneficial owner of more than
five percent of the outstanding shares of the Company's Common Stock,
Preferred Stock and Class B Common Stock, by each director and each
Named Executive Officer as defined in Item 10 and by all officers and
directors as a group. Unless otherwise indicated, all persons have sole
voting and investment power over such shares, subject to community
property laws.
<TABLE>
<CAPTION>
______________________________________________________________________________________________________
Name and Number Percent of Number Percentage of
Address of of Shares outstanding of Shares outstanding Number and
Beneficial of shares of of Class B Shares of Percentage Percent of
Owner\Identity Common Common Common Class B of Preferred Total Voting
of Group Stock Stock Stock Common Stock Shares Power
<S> <C> <C> <C> <C> <C> <C>
Loretta P. Trevers*
90 North 100 East
Logan, UT 84321 3,581,301(1)(2) 35.1% 2,000,000 100% 0** 76.5%
Clayton Paul Hilliard
P.O. Box 52745
Lafayette, LA 70505 1,045,593 10.2% 0 ** 0** 3.7%
Gary Peterson*
150 Brothers Drive
Suite 570
SLC, UT 84116 150,000 1.5% 0 ** 0** **
Jamie Levey*
375 South End Ave
Suite 25A
New York, NY 10280 6,666 ** 0 ** 0** **
Gary Blum*
9595 Wilshire Boulevard
Suite 511
Beverly Hills, CA
90212 5,667 ** 0 ** 0** **
Wasatch Advisors, Inc.
68 South Main #400
Salt Lake City, UT
84101 727,222(3) 7.1% 0 ** 99,300 2.6%
(21.6%)
All executive officers
and directors
as a group
(4 persons) 3,743,634(1)(2) 36.7%(1)(2) 2,000,000 100% 0** 77.1%
- - ------------------------------------------------------------------------------------------------------
</TABLE>
*Indicates current officer or director of the Company.
**Less than one percent
(1) Includes 2,000,000 shares of Class B Common Stock convertible into
2,000,000 shares of Common Stock.
(2) Includes 500,000 shares of Common Stock and 200,000 shares of Class B
Common Stock which is in the name of a partnership trust in which Ms. Trevers
is General Partner and retains full voting rights until such time as the trust
has been executed. Beneficiaries of the trust include Ms. Trevers and three
of her children.
(3)Includes 99,300 shares of Preferred Stock convertible into 198,600
shares of Common Stock.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to 1989 the Company issued a promissory note to Loretta P. Trevers,
the current President and Chairman and Principal Shareholder of the
Company, in the amount of $92,261, in lieu of certain Subchapter S
distributions. This note, which bears interest at 10%, was later assigned
to a partnership which had undertaken to develop certain products for the
Company. In 1989 the note was reinstated by the Company when it
became clear the partnership was not going to pay the note and the
Company would be able to do so. During 1992 the note was offset in the
amount of $32,194 by personal charges incurred during the year. As of
April 30, 1992, there was a balance owing under the promissory note to
Loretta P. Trevers, in the amount of $43,396. The note was due upon
demand. The note was offset during the 1994 fiscal year against
advances made. Advances made on behalf of Loretta Trevers a director,
principal shareholder and an executive officer of the Company are set
forth in "ITEM 10 - EXECUTIVE COMPENSATION".
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed (separately) as exhibits to this report:
Regulation S-B Sequential
Exhibit Number Page Number
(3.1) Certificate of Incorporation, as amended to date (5)
(3.2) Bylaws (1)
(4.1) Specimen Preferred Stock Certificate and
Certificate of Designations (4)
(4.2) Specimen Common Stock Certificate,
as amended. (3)
(4.3) Form of Selected Dealers' Warrant (3)
(4.4) First Interstate Bank
Loan documents, as modified (5)
(4.5) LDP Corp Line of Credit documents
(10.1) Option of Howard M. Crosby (1)
(10.2) Trucksafe Learning Center joint venture contract (1)
(10.3) Intervenor Settlement Attached
(10.4) Form of Options of Harris G. LeRoy, II* (3)
(10.5) Purchase Agreement on building (3)
(10.7) James Bryan employment contract* (5)
(10.8) Sandeep Gupte employment contract* (5)
(10.9) Termination Agreements with Donald G. Gallent (5)
(11) Statement regarding computation of
per share earnings Attached
(21) Subsidiaries (5)
(1) Filed as an Exhibit to the Company's Form 10 Registration
Statement, (File Number 0-19470) as amended and incorporated herein
by reference.
(2) Filed as an Exhibit to the Company's Form 10-Q for the Quarter
ended January 31, 1992 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's S-1 Registration Statement
(File Number 33-47406) as amended and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1992 and incorporated herein by
reference.
(5) Filed as an Exhibit to the Company's Form 10KSB for
the fiscal years ended April 30, 1994 and 1993 and incorporated by
reference.
* Indicates management contract or compensatory agreement
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
Digitran Systems, Incorporated caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 31st day of
July, 1996.
DIGITRAN SYSTEMS, INCORPORATED
(Registrant)
By /s/ Loretta Trevers
Its: President
In accordance with the Exchange Act, this report has been signed below
by the following person on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Loretta Trevers Chairman of the Board
Loretta Trevers (Chief Executive Officer,
& Director) July 31, 1996
/s/ Gary Blum Director July 31, 1996
Gary Blum
/s/ Jamie Levey Director July 31, 1996
Jamie Levey
/s/ Gary B. Peterson Chief Financial Officer July 31, 1996
Gary B. Peterson
/s/ Steven J Hansen Controller July 31, 1996
Steven J Hansen
<PAGE>
DIGITRAN SYSTEMS,
INCORPORATED AND SUBSIDIARY
April 30, 1996
Consolidated Financial Statements
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
Report of Tanner + Co. F-2
Consolidated balance sheet F-3
Consolidated statement of operations F-4
Consolidated statement of shareholders' equity F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
[FN]
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Digitran Systems, Incorporated
We have audited the consolidated balance sheet of Digitran
Systems, Incorporated as of April 30, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the
years ended April 30, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Digitran Systems, Incorporated as of April 30, 1996, and the results of
their operations and their cash flows for the years ended April 30, 1996
and 1995 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the
Company has incurred recurring operating losses, and has an
accumulated deficit. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Also, as discussed in Notes 1, and 18 to the consolidated
financial statements, the Company is involved in a shareholder lawsuit
related to alleged false and misleading information provided to the public.
Management and the Company's legal counsel are attempting to resolve
these matters with the shareholders. However, it is not possible to predict
the outcome of these matters. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
/s/ Tanner + Co.
Salt Lake City, Utah
June 21, 1996
[FN]
F-2
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1996
ASSETS
Current assets:
Cash $ 71,589
Accounts receivable, net 188,067
Costs and estimated earnings in excess
of billings on uncompleted contracts 484,800
Receivable from related parties 1,365
Inventories 1,535,613
Prepaid expenses 1,380
Current portion of note receivable 120,000
Total current assets 2,402,814
Simulator development costs, net 1,089,313
Property, plant and equipment, net 951,459
Note receivable 280,000
Depreciable property under contract, net 260,996
Investment in partnership 47,052
$5,031,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 564,181
Accrued expenses 474,637
Billings in excess of costs and estimated
earnings on uncompleted contracts 113,250
Notes payable 291,447
Current portion of long-term debt 448,050
Total current liabilities 1,891,565
Long-term debt 633,768
Commitments and contingencies -
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
authorized, 371,695 shares issued and
outstanding (aggregate liquidation
preference $3,228,161), (entitled to
one-tenth vote per share) 3,717
Common stock, $.01 par value; 25,000,000
shares authorized, 8,282,069 shares
issued and outstanding (entitled to
one-tenth vote per share) 82,821
Class B common stock, $.01 par value;
5,000,000 shares authorized; 2,000,000
shares issued and outstanding (entitled
to one vote per share) 20,000
Capital in excess of par value 5,984,101
Accumulated deficit (3,584,338)
2,506,301
$5,031,634
[FN]
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Consolidated Statement of Operations
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Net sales $3,441,366 2,592,682
Cost of sales 2,288,798 1,582,642
Gross profit 1,152,568 1,010,040
Selling, general and administrative
expenses 2,097,329 2,611,566
Loss from operations (944,761) (1,601,526)
Other income (expense):
Interest expense (250,486) (160,926)
Inventory and software development write-down (285,373) -
Litigation settlement (133,754) -
Equity in loss from partnership (132,349) (43,707)
Other income 82,675 124,882
Loss before income taxes (1,664,048) (1,681,277)
Income tax benefit - -
Net loss $(1,664,048) (1,681,277)
Dividends on convertible preferred
stock; unpaid (208,149) (257,012)
Net loss applicable to common stock $(1,872,197) (1,938,289)
Loss per common share $(.19) (.21)
Weighted average number of common stock
and common equivalent shares 9,627,000 9,405,000
<FN>
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Consolidated Statement of Shareholders' Equity
Years Ended April 30, 1996 and 1995
<CAPTION>
Class B Capital In Accumu-
Preferred Stock Common Stock Common Stock Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1994 460,050 $4,600 7,403,983 74,040 2,000,000 20,000 5,353,766 (239,013)
Conversion of preferred
stock to common stock (2,200) (22) 4,400 44 - - (22) -
Net loss - - - - - - - (1,681,277)
Balance at April 30, 1995 457,850 4,578 7,408,383 74,084 2,000,000 20,000 5,353,744 (1,920,290)
Shares issued for:
Cash - - 75,000 750 - - 74,250 -
Services - - 69,000 690 - - 68,310 -
Settlement of litigation - - 133,754 1,338 - - 132,416 -
Reduction of accounts
payable and long-
term debt - - 337,467 3,374 - - 357,105 -
Conversion of Preferred
Stock to Common Stock (86,155) (861) 258,465 2,585 - - (1,724) -
Net loss - - - - - - - (1,664,048)
Balance at April 30, 1996 371,695 $3,717 8,282,069 82,821 2,000,000 20,000 5,984,101 (3,584,338)
<FN>
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Consolidated Statement of Cash Flows
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,664,048) (1,681,277)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 811,457 852,498
Inventory and software development write-down 285,373 -
Gain on forgiveness of debt (22,422) -
Issuance of Common Stock for services and
litigation settlement 202,754 -
Payment of loan fees by related party in
exchange for reduction of related party receivable 30,000 -
Provision for losses on accounts receivable (5,025) (21,431)
Equity in loss from joint venture 132,349 43,707
Gain on disposition of property and
equipment - (23,632)
(Increase) decrease in:
Accounts receivable (165,916) 40,509
Inventory 526,971 327,160
Cost in excess of billings (484,800) 825,000
Prepaids and other current assets 13,620 26,941
Note receivable 100,000 (500,000)
Related party receivable (70,674) (99,647)
Increase in:
Accounts payable and other current liabilities 259,704 333,876
Billings in excess of costs 113,250 -
Net cash provided by operating activities 62,593 123,704
Cash flows from investing activities:
Proceeds from sale of property and equipment - 29,200
Purchase of property and equipment (138,299) (14,829)
Increase in capitalized simulator costs (151,630) (155,195)
Net cash used in
investing activities (289,929) (140,824)
Cash flows from financing activities:
Proceeds from short-term borrowings 1,098,800 -
Payments on short-term borrowings (944,548) (90,000)
Proceeds from long-term borrowings 423,708 76,469
Payments on long-term debt (372,934) (408,561)
Issuance of common stock 75,000 -
Net cash provided by (used in)
financing activities 280,026 (422,092)
Net increase (decrease) in cash 52,690 (439,212)
Cash, beginning of year 18,899 458,111
Cash, end of year $ 71,589 18,899
<FN>
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1996 and 1995
(1) Summary of Business and Significant Accounting Policies
History and Business Activity
Digitran Systems, Incorporation (the Company) was formed under
the laws of the state of Delaware in March 1985 as Mark, Inc. The
Company began business operations in September, 1985 when it acquired
all the outstanding shares of Digitran, Inc. In connection with the
acquisition of Digitran, Inc., the Company changed its name to Digitran
Systems, Incorporated. In 1979, Digitran, Inc., introduced a digital
petrochemical well pressure control simulator training system; subsequently,
Digitran, Inc., has developed crane training simulation systems for the
construction and maritime crane industries and a truck driving training
simulation system.
Going Concern
The Company has incurred recurring operating losses and has an
accumulated deficit. As discussed in Note 18, the Company is the
defendant in a class action lawsuit with unspecified damages. The effect
of such recurring operating losses and the litigation has been to render
the Company unable to trade on the open market and to deny the
Company access to competitive borrowing facilities. Due to the lack of
competitive borrowing and access to equity markets for the reasons
noted, the Company has had to rely on loans with unfavorable interest
rates, loan from related parties, an from new sales to fund operations.
These conditions raise substantial doubt about the ability of the Company
to continue as a going concern.
Management is attempting to obtain profitable operations through
increased sales. This is in part dependent upon the Company's ability to
successfully resolve the pending litigation. This will permit management to
focus its time, attention and financial resources properly on operational
considerations.
Principles of Consolidation
The consolidated statements include the accounts of the Company
and its wholly owned subsidiary. As all operations for all periods presented
are conducted in Digitran, Inc., there are no material intercompany
eliminations required, and the accounts of Digitran, Inc., are essentially
reflected as the books of Digitran Systems, Incorporated.
[FN]
F-7
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(1) Summary of Business and Significant Accounting Policies -
Continued
Cash Equivalents
For purposes of the statement of cash flows, cash includes all
cash investments with original maturities to the Company of three months
or less.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or
market.
Significant components of certain simulators held for resale have
been financed over periods exceeding one year. These simulators and
components have been included in inventories, with the related obligations
under long-term debt classified as current, due to the Company's intent to
sell the related simulators in the next fiscal year.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less
accumulated depreciation. Depreciation and amortization on capital
leases and property, plant and equipment is determined using the straight-
line method over the estimated useful lives of the assets or terms of the
lease. Expenditures for maintenance and repairs are expensed when
incurred and betterments are capitalized. Gains and losses on sale of
property, plant and equipment are reflected in operations.
Capitalized Simulator Development Costs
Capitalized simulator development costs result from the
development and enhancement of software used to control, monitor and
drive simulators used for training in petrochemical operations, various
crane operations and heavy duty truck operations. Software cost
capitalization begins at such time as technological feasibility of a given
product has been established and ceases when the product is available
for general release to customers. Technological feasibility is determined
by a multi-step analysis of the progress toward a marketable product
which, generally, requires that the product has progressed to the point
that the risks of completion have been identified, overcome and the
product is functional in its software stage. From the point technological
feasibility has been established, until the product is available for general
release, the costs of the software engineers, including those costs of
coding and testing are capitalized. In addition to the direct labor costs
of the engineers, the Company allocates certain overhead expenses
which are directly related to software development. The allocation is
based on the relationship of direct labor dollars charged to projects
which have achieved technological feasibility to the total labor dollars.
Expenses related to maintenance and servicing performed by the
Company under customer support and warranty arrangements are
charged to expense as incurred.
[FN]
F-8
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(1) Summary of Business and Significant Accounting Policies - Continued
Capitalized Simulator Development Costs - Continued
Amortization of the capitalized simulator development costs is
computed on a product by product basis over the estimated useful life of
the product, generally seven years. Software costs are carried at the net
of unamortized cost or net realizable value. Net realizable value is
reviewed on an annual basis after assessing potential sales of the product
in that the unamortized capitalized cost relating to each product is
compared to the net realizable value of that product and any excess is
written off as required by SFAS No. 86.
During the years ended April 30, 1996 and 1995, the Company
wrote off $100,373 and $0, respectively, of the capitalized software
development costs related to its net realizable value.
Investment in Partnership
The Company owns a fifty percent interest in a partnership
(Trucksafe Learning Center (TLC)) formed to provide training for truck
drivers. The Company accounts for the investment using the equity
method.
Revenue Recognition
The Company recognizes revenue on the manufacture and sale
of computer driven simulation equipment. The sales can be from existing
inventory of the Company, wherein the revenue is recognized once the
amount and collectibility are reasonably assured. Sales may also be
generated through contractual agreements between the Company and
their customers which require the Company to manufacture the product
and/or customize some of the software applications for specific training
scenarios. Where the Company is required to develop and manufacture
a simulator, the Company uses long-term contract accounting, using the
percentage of completion method of accounting for uncompleted contracts.
Such accounting takes into account the costs, estimated earnings and
expectation of collection, as well as revenue to date on contracts not yet
completed. The amount of revenue recognized is not related to the
progress billings to customers.
For most contracts, the revenue recognized at the statement date
is the proportion of total revenue equal to the percentage of the labor
hours incurred to date on that contract compared to anticipated final total
labor hours to be incurred in completing the contract, based on current
estimates of labor hours required to complete the contract.
[FN]
F-9
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(1) Summary of Business and Significant Accounting Policies - Continued
Revenue Recognition - Continued
Contract costs include all direct labor and benefits, material unique
to or installed in the project, and indirect costs allocation, including
employee benefits and equipment expense.
As contracts extend over one or more years, revisions in cost and
earning estimates during the course of the work are reflected in the
accounting period in which the estimates are adjusted.
At the time a loss on a contract becomes known, the entire amount
of the estimated ultimate loss is recognized in the financial statements.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting,
principally related to the capitalization of software costs.
Loss Per Common and Common Equivalent Share
Net loss per common share is based on net loss after preferred
stock dividend requirements and the weighted average number of common
shares outstanding, including Class B common stock, during each year
after giving effect to stock options considered to be dilutive common stock
equivalents, determined using the treasury stock method. Fully diluted net
loss per common share is not materially different from primary net loss per
common share.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses
which, when realized, have been within the range of management's
expectations.
[FN]
F-10
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(1) Summary of Business and Significant Accounting Policies - Continued
Concentration of Credit Risk - Continued
The Company has cash in bank and short-term investments which,
at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash and short-term investments.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain accounts in the 1995 financial statements have been
reclassified to conform with the current year.
(2) Detail of Certain Balance Sheet Accounts
Accounts receivable:
Trade receivables $ 202,419
Less allowance for doubtful accounts (14,352)
$ 188,067
Inventories:
Parts and supplies $ 251,872
Work-in-process 568,943
Finished goods 714,798
$1,535,613
Accrued expenses:
Accrued expenses $ 348,404
Deferred revenue 126,233
$ 474,637
[FN]
F-11
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(3) Costs and Estimated Earnings on Uncompleted Contracts
Information relative to uncompleted contracts is as follows:
Costs incurred on uncompleted contracts $ 743,300
Estimated earnings 793,000
1,536,300
Less billings to date (1,164,750)
Total $ 371,550
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 484,800
Billings in excess of costs and estimated
earnings on uncompleted contracts (113,250)
$ 371,550
(4) Related Party Transactions
The receivable from related parties consists of cash advances,
plus related interest, made to an officer/stockholder and employees of the
Company. The amount due is expected to be repaid within the current
period.
At April 30, 1996, the Company included $15,037 of related party
payables in accounts payable, $86,231 of commissions payable to
employees in accrued expenses and $70,355 of bonuses payable to
employees in accrued expenses.
(5) Note Receivable
The Company has entered into a partnership agreement with a
Canadian corporation in order to provide simulator training to the
Canadian trucking industry (see Note 9). Trucksafe Learning Center
(TLC) purchased a simulator from Digitran for $600,000 and a one-half
interest in the partnership. The purchase price of the simulator consisted
of cash of $50,000 and a note receivable of $550,000. The note is
payable in monthly installments of $10,000 plus interest. As of April 30,
1996 the note had a balance of $400,000, of which $120,000 is current
and $280,000 is long-term.
[FN]
F-12
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(6) Simulator Development Costs
Simulator development costs consist of the following:
Capitalized software development costs $4,844,696
Capitalized software purchased 121,264
4,965,960
Less accumulated amortization (3,876,647)
$1,089,313
Amortization expense related to the capitalized software costs was
$587,663 and $570,391 for the years ended April 30, 1996 and 1995,
respectively.
(7) Property, Plant and Equipment
Property, plant and equipment consists of the following:
Buildings and improvements $ 762,532
Computer equipment 546,501
Office equipment and fixtures 208,522
Vehicles 107,024
Land 15,400
1,639,979
Less accumulated depreciation
and amortization (688,520)
$ 951,459
[FN]
F-13
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(8) Depreciable Property Under Contract
The Company leases a simulator to the Shipping Association of
Jamaica. There is no formal lease agreement, therefore, the simulator is
leased on a month-to-month basis. Jamaica has an option to purchase
the simulator at any time for the sales price of the simulator less any lease
payments made in the past. At year end the related simulator had a cost
of $451,732 with related accumulated depreciation of $190,736.
(9) Investment in Partnership
On November 4, 1994, the Company entered into a partnership
agreement with a Canadian corporation, Trucksafe, Inc. (TSI). This
corporation consists of two Canadian trucking companies, Westcan and
Economy Carriers. The partnership agreement creates a truck training
center, Trucksafe Learning Center (TLC), in Canada. The Company
contributed one "Trucksafe 1000" truck simulation system for a one-half
interest in the training center entitling the Company to receive one-half
of all profits from the training center and no responsibility to fund losses
or cash calls. The Canadian partner purchased a one-half interest in TLC
through $600,000 of consideration.
The Company has accounted for this transaction as a sale of a
one-half interest in the simulator and an investment in a partnership equal
to one-half of the cost of the simulator.
<TABLE>
Summarized unaudited financial information for TLC is as follows:
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Total assets $1,015,183 1,377,395
Total liabilities 675,478 557,866
Net equity $ 339,705 819,529
Revenues $ 274,899 10,527
Net loss $ (479,824) (87,413)
Company equity in loss
from partnership $ (132,349) (43,707)
</TABLE>
The difference between the Company's share of the net assets of
the partnership and its recorded investment is attributed to the cost of the
simulator and is being amortized over its estimated useful life.
[FN]
F-14
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(10) Notes Payable
Notes payable at April 30, 1996 are comprised of the following:
Note payable to a stockholder
with interest due monthly at a
rate of 15%, due May 31, 1996,
secured by a building $100,000
Note payable to a stockholder
with interest due monthly at a
rate of 15%, due on demand,
secured by a building 100,000
Note payable to a stockholder
with interest due monthly at a
rate of 15%, due March 15, 1997,
secured by a building 50,000
Note payable to a company at a
flat charge of 5% of the principal
loaned, due May 15, 1996, secured by
sales contract 25,000
Note payable to a financial institution
with interest at a rate of 21%, due
May 15, 1996, secured by a vehicle 16,447
$291,447
(11) Long-Term Debt
Long-term debt at April 30, 1996 is comprised of the following:
Note payable to an individual in monthly
installments of $1,750, including interest
at 8.5%, secured by a building $ 196,875
[FN]
F-15
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(11) Long-Term Debt - Continued
Note payable to a bank in monthly
installments of $10,000, including
interest at prime plus 2% (10.25%
at April 30, 1996), secured by inventory
and a note receivable 167,332
Note payable to a bank with interest due
monthly, at a rate of prime plus 2.5%
(10.75% at April 30, 1996) and principal
of $5,000 due June 17 and December 17 of
each year and principal of $1,500 due
March 17 and September 17 of each year,
secured by a building 149,931
Note payable to a vendor in monthly
installments of $7,540, including
interest at prime plus 2% (10.25%
at April 30, 1996, secured by equipment) 138,534
Note payable to a bank in monthly
installments of $1,362, including
interest at 10.5%, secured by a building 118,714
Note payable to a bank in monthly
installments of $3,737, including
interest at prime plus 2% (10.25%
at April 30, 1996), secured by accounts
receivable, equipment, and inventory 92,071
Unsecured note payable to a financial
institution in monthly installments of
$2,100, including interest at 12% 81,624
Note payable to a governmental
organization, interest due monthly
at 10.25%, and principal payments of
$25,000 due in September 1996 and
March 1997, secured by inventory 50,000
[FN]
F-16
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(11) Long-Term Debt - Continued
Unsecured non-interest bearing note
payable to a professional corporation
for services provided, due January 1999 49,659
Notes payable to financial institutions
in aggregate monthly installments of
$4,308, including interest at rates
ranging from 9% to 9.5%, secured by
vehicles 13,254
Unsecured note payable to an individual
in monthly installments of $5,000 in
May 1996 and $2,000 thereafter,
including interest at 10% 14,270
Unsecured note payable to an individual
in monthly installments of $400, including
interest at 8% 8,107
Capital lease obligation (see Note 12) 1,447
1,081,818
Less current portion (448,050)
Long-term debt $ 633,768
Future maturities of long-term debt are as follows:
1997 $ 448,050
1998 114,160
1999 203,467
2000 33,446
2001 14,226
Thereafter 268,469
$1,081,818
[FN]
F-17
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(11) Long-Term Debt - Continued
None of the Company's financial instruments are held for trading
purposes. The Company estimates that the aggregate fair value of all
financial instruments at April 30, 1996, does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgement is
necessarily required in interpreting market data to develop the estimates
of fair value, and, accordingly, the estimates are not necessarily indicative
of the amounts that the Company could realize in a current market
exchange.
(12) Lease Obligations
The Company leases certain equipment and fixtures under a
noncancellable lease. The lease provides the Company the option to
purchase the leased asset at the end of the initial lease term. Assets
under capital lease included in property, plant, and equipment are as
follows:
Office equipment and fixtures $ 2,996
Less accumulated amortization (1,246)
$ 1,750
Amortization expense for assets under capital lease during fiscal
1996 and 1995 was $996 and $15,533, respectively.
The capital lease obligation has an imputed interest rate of 25
percent and is payable in monthly installments through 1997. The lease
is secured by equipment and fixtures. Future maturities and minimum
payments on the capital lease obligation is as follows:
Amounts due $1,604
Less amount representing interest (157)
Present value of minimum capital
lease obligation $1,447
[FN]
F-18
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(12) Lease Obligations - Continued
The Company leases office equipment under noncancellable
operating lease agreements which expire in 1997. Future minimum rental
payments for existing noncancellable operating leases for the year ending
April 30, 1996, was $4,269.
Rental expense on operating leases for fiscal 1996 and 1995 was
$6,404 and $2,135.
(13) 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 percent Cumulative Convertible Preferred
Stock has a par value of $.01 per share. As of April 30, 1996, there were
371,695 shares outstanding. Holders of preferred shares are entitled to
cumulative dividends of 8 percent per annum on the stated value of the
stock, designated at $7 per share. Dividends are payable annually on
September 15 and March 15. No dividends have been paid since March
15, 1993, resulting in dividends in arrears of approximately $626,296.
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.
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.
[FN]
F-19
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(14) Income Taxes
The income tax benefit differs from the amount computed at
federal statutory rates as follows:
<TABLE>
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Income tax benefit at statutory rate $ 566,000 572,000
Change in valuation allowance (550,000) (488,000)
Life insurance and meals (11,000) (8,000)
Other - (76,000)
$ - -
</TABLE>
Deferred tax assets (liabilities) at April 30, 1996 are comprised of
the following:
Net operating loss carryforward $ 1,561,000
Software development costs (347,000)
Depreciation 15,000
Accrued commission 29,000
Accrued bonuses 24,000
Allowance for bad debts 17,000
Donation carryforward 8,000
1,307,000
Valuation allowance (1,307,000)
$ -
At April 30, 1996, the Company has a net operating loss carryforward
available to offset future taxable income of approximately $4,600,000,
which will begin to expire in 2008. If substantial changes in the Company's
ownership should occur, there would also be an annual limitation of the
amount of NOL carryforwards which could be utilized.
[FN]
F-20
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(15) Supplemental Cash Flow Information
During the year ended April 30, 1996:
The Company acquired equipment in exchange for long-term debt of
$151,386.
The Company reduced certain accounts payable and long-term debt in the
amount of $360,479 in exchange for common stock.
The Company reduced related party receivable by $132,630, accounts
payable by $102,630, and its notes payable by $30,000, due to the related
party satisfying certain accounts payable and notes payable with issuance
of personal stock in lieu of repayment to the Company.
The Company increased related party receivable and accounts payable by
$18,000 due to the reversal of a prior transaction.
The Company reduced certain accounts payable in the amount of $8,522
in exchange for a vehicle.
The Company cenverted 86,155 shares of Preferred Stock to 258,500 shares of
Common Stock in accordance with the Preferred Stock conversion feature and the
litigation settlement agreement (see Note 18).
During the year ended April 30, 1995:
The Company acquired equipment in exchange for long-term debt of
$2,996.
The Company reduced certain accounts payable, accrued expenses, and
long-term debt in the amount of $60,097, in exchange for equipment and
land with a book value of $42,952, recorded a gain on the transaction of
$20,145 and recorded accounts receivable of $3,000.
The Company reduced its related party receivable and its accounts
payable by $128,500 due to the related party satisfying certain accounts
payable in lieu of repayment to the Company.
Stockholders converted 2,200 shares of preferred stock for 4,400 shares
of common stock.
The Company exchanged inventory with a cost of $223,108 for an
investment in a joint venture.
[FN]
F-21
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(15) Supplemental Cash Flow Information - Continued
<TABLE>
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Interest $210,831 157,991
Income taxes $ - -
</TABLE>
(16) Major Customers and Export Sales
Sales to major customers which exceeded 10 percent of net sales
are as follows:
<TABLE>
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Company A $1,110,000 -
Company B 911,400 -
Company C 398,400 -
Company D - 1,166,000
Company E - 600,000
Company F - 336,000
</TABLE>
Export sales to unaffiliated customers were as follows:
<TABLE>
<CAPTION>
Years Ended
April 30,
1996 1995
<S> <C> <C>
Region
North America (excluding the U.S.) $1,402,364 652,197
Asia 1,234,607 1,221,705
South America 331,709 -
Australia 226,500 -
Europe 106,531 76,098
Africa - 360,491
$3,301,711 2,310,491
</TABLE>
[FN]
F-22
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(17) Stock Options
Information regarding the Company's stock options are
summarized below:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
<S> <C> <C>
Outstanding at April 30, 1995 660,000 $ *
Granted 845,000 .50-1.25,*
Expired (250,000) *
Outstanding at April 30, 1996 1,255,000 $.50-1.25,*
</TABLE>
Options exercisable at April 30, 1996 and 1995 are 1,185,000 and
540,000, respectively.
* Some option prices are based on the stock trading price. At
April 30, 1996 and 1995, the Company's stock was not trading and,
therefore, this amount could not be determined.
(18) Shareholder Litigation
In May, 1994 a consolidated amended complaint was filed for a
proposed Class Action by certain stockholders on behalf of themselves
and all those similarly situated in the United States District Court of the
District of Utah, Salt Lake Division. The action consolidated two separate
actions filed in August, 1993, and February, 1994 respectively, against
Digitran Systems, Incorporation, Digitran, Inc., its subsidiaries, officers
and directors, and Grant Thornton, its former auditor. Included as
Plaintiffs was a proposed Class consisting of all persons who purchased
and held securities of Digitran Systems, Incorporated during the period
from March 19, 1992 to May 21, 1993. The complaint alleges that the
Company published or released false or misleading information relating to
the recognition of revenue on certain contracts and improperly capitalized
certain simulator development costs. The complaint also alleges that
certain defendants engaged in insider trading activities. The complaint
seeks the following relief: 1) declaring the action to be proper class action;
2) awarding compensatory and punitive damages, including interest and
that such damages be trebled; 3) awarding extraordinary equitable and/or
injunctive relief and 4) awarding costs and expenses, including attorney's
fees and costs. In connection with this case, Grant Thornton, the
Company's former auditors have filed a cross-claim against the Company,
and the Company has filed a cross-claim against Grant Thornton.
[FN]
F-23
DIGITRAN SYSTEMS, INCORPORATED
AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
(18) Shareholder Litigation - Continued
On October 6, 1995, an intervention was filed by a number of
persons who purchased securities during the class period, but who
purportedly excluded themselves from the class. The alleged violations of
securities laws mirrored those filed by the class plaintiffs. As a result of
the rising costs associated with the litigation, the Corporation has agreed
to a settlement with the intervenors which requires issuance of common stock
valued at approximately $134,000, conversion of approximately 86,000 shares of
Preferred Stock to Common Stock on a three for one basis, and the assignment
of its action against Grant Thornton to the Intervenors in exchange for the
payment of all costs associated with the action and for dismissal of all
claims by the Intervenors against the Corporation. In the event that
Intervenors are successful in this matter against Grant Thornton, the
Corporation shall share equally with Intervenors in the recovery, less costs
and attorney's fees.
The case has currently concluded the discovery phase. However,
as a result of the Intervention filed by a significant number of shareholders
of the Corporation, new expert reports have been filed and sought to be
entered by Grant Thornton. In addition, it is the intent of new counsel for
the Corporation to seek permission from the Court to submit expert reports
on both the significant accounting issues before the Court and the
damages which have been alleged by the class plaintiffs.
Based on information currently available, the damages, if any,
which could be incurred by the Company is uncertain. Consequently, no
accrual has been made in the financial statements for possible losses
related to this case, except for the $134,000 due to the agreement with
the Intervenors and the conversion of Preferred Stock to Common Stock, which
has been accrued and included in the April 30, 1996 financial statements.
(19) 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. Management believes that the amount, if any, that may result
from these claims, will not have a material adverse affect on the financial
statements.
[FN]
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Digitran
Systems, Incorporated 4/30/96 financial statements qualified in its intirety in
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 72
<SECURITIES> 0
<RECEIVABLES> 202
<ALLOWANCES> 14
<INVENTORY> 1536
<CURRENT-ASSETS> 2403
<PP&E> 1640
<DEPRECIATION> 689
<TOTAL-ASSETS> 5032
<CURRENT-LIABILITIES> 1892
<BONDS> 0
0
4
<COMMON> 103
<OTHER-SE> 2400
<TOTAL-LIABILITY-AND-EQUITY> 5032
<SALES> 3441
<TOTAL-REVENUES> 3441
<CGS> 2289
<TOTAL-COSTS> 2289
<OTHER-EXPENSES> 634
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250
<INCOME-PRETAX> (1664)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1664)
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<PAGE>
</TABLE>
SETTLEMENT AGREEMENT
This settlement Agreement ("Agreement") made, entered and effective this 16th
day of January, 1996, by and among Digitran Systems, Inc. (Collectively
"Digitran"); Jordan S. Cohen ("Cohen") and those persons and entities set
forth in paragraph 32 of this Agreement (collectively "Intervenors"); Loretta
Trevers formerly known as Loretta Gallent, who is President of Digitran
("Trevers"); Harris LeRoy II, who is or has been a Director of Digitran
("LeRoy"); Chris Corray, who is or has been a Director of Digitran ("Corray")
and such other shareholders, option holders and warrant holders of Digitran as
may choose to participate in this Agreement and accept its terms, as indicated
by their signatures individually or by their counsel; and, if appropriate, by
order of the United States District Court for the District of Utah, per
Honorable J. Thomas Greene (the "Court") with respect to pending litigation
entitled Gregory McEwen, Larry Parker, and Leonard Labiak, on behalf of
themselves and all others similarly situated, Plaintiffs, V. Digitran Systems,
Inc, et.al., Defendants [etc.], No. 93-C-728G, a consolidated action (the
"McEwen Action").
RECITALS
A. The McEwen Action has been certified as a class actin by the Court with
named plaintiffs McEwen, Parker and Labiak (the "Named Plaintiffs") as class
representatives of the certified class (the "Current Class").
B. The Current Class has been defined with approval of the Court.
C. The Court has permitted the Named Plaintiffs to send notice of the McEwen
Action to putative class members giving, inter alia, information about opting
out of the Class order.
D. In October, 1995, Intervenors intervened as parties in the McEwen Action
pursuant to Court order.
E. Digitran, Trevers, LeRoy and Corray, all named among the Defendants in
the McEwen Action, have each denied all allegations of wrongdoing and other
misconduct, whether alleged by the individual Named Plaintiffs, by the current
class, by Intervenors or by a defendant frequently called "Grant Thornton" or
"Grant Thornton LLP" ("Grant"). Digitran, Trevers, LeRoy and Corray believe
that some or all of them have claims (whether cross-claims or counterclaims)
against Grant; and Digitran has pleaded certain of its claims against Grant.
F. Because of Digitran's articles of incorporation and bylaws, Digitran has
certain obligations to indemnify its officers and directors for costs and
expenses arising from litigation.
G. Prior to the filing and consolidation of the McEwen Action, the American
Stock Exchange ("AMEX") suspended trading in Digitran.
H. After the AMEX suspension, the Securities and Exchange Commission (the
"SEC") conducted an investigation of Digitran. The SEC investigation has been
concluded.
I. The SEC made no findings of impropriety and levied no fines or sanctions
against Digitran's officers and directors except against Donald Gallent, a
former officer and director; and against James C. Bryan ("Bryan"), an employee
and officer of Digitran.
J. Digitran has entered into a consent decree finally settling the SEC
investigation and proceedings. Digitran denied all wrongdoing but consented
to a permanent injunction which, in substance, prohibits Digitran from
violating federal securities laws.
K. The McEwen Action has required Digitran to engage counsel and to spend
large amounts of time in defending its interests and to expend large sums of
money for legal fees and other costs incurred in connection with the McEwen
Action.
L. Although Digitran has pleaded and believes it has valid defenses against
the claims and cross-claims filed against it in the McEwen Action and also
believes Digitran has a reasonable chance to prevail after trial and appeal,
Digitran seeks to reduce the risks, costs and expenses of the McEwen Action
without admission of liability or fault.
M. Digitran also believes its own claims arising from the subject matter of
the McEwen Action, whether or not already pleaded before the Court, should be
prosecuted. Digitran recognizes that the prosecution of its claims could
require significant expenditures of both time and money, and Digitran believes
it will be in the best interests of the companies and of the shareholders,
option holders and warrant holders to reduce those costs and expenses without
losing possible benefits of recovery or settlement of Digitran's claims.
N. Without admission of fault or liability and in order to reduce the risks,
costs and expenses of litigation, Digitran has determined, by and through
appropriate resolution of its Directors and after due consideration and such
legal advice as its Officers and Directors have deemed appropriate, that the
interests of both of the Digitran companies and their current and future
business will be served by settling with and making an assignment to
Intervenors and by offering settlement to those who are class members in the
McEwen Action ("Current Class Members") and putative class members that have
opted out of the class but have not become Intervenors (the "Opt-Outs") and
all other shareholders, option holders and warrant holders ("Other Holders").
O. Trevers, LeRoy and Corray also have determined, after due consideration
and such legal advice as they have deemed appropriate, that their interests
will be served by settling with and making an assignment to Intervenors of
any claims they may have and by offering settlement to Current Class Members,
Opt-Outs and Other Holders. Digitran, because of its obligations to officers
and directors, concurs in this judgment by Trevers, LeRoy and Corray.
P. Intervenors, who represent numerous shareholders and shareholder interests
in Digitran, have concluded that a settlement upon the terms set forth in this
Agreement together with efforts to settle with Current Class Members, Opt-Outs
and Other Holders will serve the best interest of all Digitran shareholders.
Q. Digitran, in order to facilitate its efforts to resume trading, is
offering to preferred shareholders an enhanced conversion from preferred to
common shares: the conversion for a preferred share was originally to be two
shares of common; the enhanced conversion will be three shares of common in
lieu of any dividends that may otherwise have accrued up to and including the
date of this Agreement and the waiver of any future dividends that might have
accrued but for conversion of preferred to common shares. Digitran is
offering the enhanced conversion to all holders of Preferred shares.
R. Although Digitran admits no liability or fault on its part or on behalf
of Trevers, LeRoy and Corray, Digitran recognizes that a trier of fact could
reach a different conclusion and could award damages on a variety of theories.
Digitran also recognizes that calculation of damages on a variety of theories.
Digitran also recognizes that calculation of damages based on different
theories would be time-consuming and would be unlikely to command agreement
by all those with any potential interest. Digitran believes the filing of
the McEwen Action and the lengthy proceedings that have been incurred have
been harmful to all shareholders and warrant and option holders but that
differentiating the measure and amount of harm would be counterproductive and
would lead to unnecessary strife and expense. Digitran therefore offers to
settle with each and every shareholder, option holder and warrant holder on a
per share basis, offering this Agreement as a gesture of good faith to the
loyalty of its shareholders and in hopes of continuing to merit the confidence
and trust they have shown by investing in Digitran.
NOW THEREFORE in consideration of the mutual promises, covenants and terms of
this agreement and for other good, valuable and sufficient consideration here
set forth, the Parties make, enter and effectuate this Agreement.
1. Settling Shares. Digitran shall make available for settlement
approximately 902,000 shares of common stock held as treasury stock to be
distributed in accordance with this Agreement (the "Settling Shares").
2. Dismissal of Claims Against Digitran. Intervenors shall dismiss with
prejudice all claims against Digitran, LeRoy, Corray and, to the extent any
claims may exist (although not pleaded by Intervenors because of their
reliance on previously conducted discovery and the determination and reports
from the SEC), Trevers.
3. Enhanced Conversion. Those Intervenors (and any Opt-Out, Current Class
Members and Other Holders) owning preferred shares accept the offer from
Digitran for an enhanced conversion of preferred to common shares and
specifically agree to waive and do hereby waive any dividends on preferred
shares that may otherwise have accrued or may otherwise accrue to their
preferred shares but for the enhanced conversion. Intervenors' share holdings
set forth with respect to this Agreement express the enhanced conversion of
preferred shares to common stock.
4. "Settlement (Global)." The Settlement and those who join into it,
recognize that the larger the number of shareholders that the settle claims
against Digitran will provide Digitran with the greatest relief from the
risks, costs and expenses of litigation. Digitran and Intervenors will offer
Settlement (Global Form) to the Named Plaintiffs, Current Class Members,
Opt-outs in the McEwen Action and Other Holders and will make such efforts as
may seem reasonable and prudent to Digitran and Intervenors to obtain global
settlement under the terms of this Agreement.
5. "Settlement (Non-Global)." Settlement at this time with the Intervenors
identified on or before January 16, 1996, and not including the bulk of the
Current Class Members, the Opt-Outs or Other Holders will be called
"Settlement (Non-Global) may be increased to Settlement (Global) upon
acceptance or imposition of the terms of settlement by or upon more than
one-half of the individual Current Class Members.
6. Assignment of Claims and Defenses. For the sum of $10.00 in addition to
other consideration set forth in this Agreement , Digitran [, LeRoy, Corray
and Trevers] assigns [assign] any and all claims defenses they may have
against Grant and any other Parties to the McEwen Action (except Intervenors
and Opt-Outs) to the Intervenors with Cohen to serve as primary representative
of the Intervenors and Opt-Outs) to the Intervenors with Cohen to serve as
primary representative of the Intervenors in connection with the assigned
claims and defenses; provided, however, that no assignment shall relieve any
shareholder, warrant holder or option holder of the obligation to make full
payment for their shares, including without limitation making all required
payments to their brokerage or margin accounts.
7. Intervenors' Costs and Expenses. intervenors shall be responsible for
the payment of all costs incurred by them in connection with the McEwen
Action, except as others may assist with the payment of costs and expenses
to Intervenors' counsel as specifically provided in this Agreement. If no
dollar or cash recovery is made by Intervenors against Grant, sufficient
shares from the Settling shares shall be allocated to reimburse contributing
Intervenors for costs advanced at the agreed-upon value of $2.00/share.
Digitran may repurchase those specific shares at $2.00/share no later than
275 days after Digitran resumes trading.
8. Intervenors' Attorney Fees. Intervenors shall compensate their attorneys
Randall L. Leshin and M. Karlynn Hinman (" Intervenors' Counsel") for all
services performed by Intervenors' Counsel in connection with this settlement
(whether Global or Non-Global in Form) by causing 12.5% of the Settling
Sahres to be distributed or paid by Digitran to Intervenors' Counsel, Leshin
and Hinman to determine the division of those shares between them.
9. Acceptance of Assignment. Intervenors, by Jordan S. Cohen, accept
assignment of and shall prosecute as may be suitable in the exercise of
reasoned judgment based on legal counsel all claims and defenses of Digitran
Trevers [, LeRoy and Corray] in the McEwen Action.
10. Settlement (Global) Settling Shares. If this Settlement is global,
Digitran shall distribute to each of the Intervenors, to each Opt-Out, the
Named Plaintiffs, to Current Class Members and to other Holders 1 Settling
Share for each 12 shares common held by each shareholder, less Intervenors'
Counsel's fee of 12.5% of the whole number of Settling Shares, then rounded
up to the nearest whole number of shares. (For example, a person with 100
shares common would receive 8.33 Settling shares less 12.5% Intervenors'
Counsel fees (.955 shares), rounded up to the nearest whole number of shares
or 8 shares). Opt-Outs, the Named Plaintiffs, Current Class Members and Other
Holders shall be responsible for their own costs and attorney's fees, if any,
in connection with the McEwen Action, provided, however, that Intervenors
shall not object if counsel for any Opt-Outs or for Named Plaintiffs, Current
class members or Other Holders seek an attorney's fee from specific persons
or entities they represent, but only from shares or assets of the persons or
entities those attorneys represent, not from any shares or any shares or any
assets of any other persons or groups entering this Agreement.
11. Settlement (Non-Global) Settling Shares. If this Settlement is with
Intervenors and not global, Digitran shall distribute to each of the
Intervenors (and Others who join the Intervenors for this purposes) 1 Settling
Share for each 20 shares common held by the Intervenors as specified in this
Agreement, less Intervenors' attorney's fee, but rounded up to the nearest
whole number of shares. (For example, a person with 100 shares common stock
would receive 5 Settling Shares less 12.55 Intervenors' Counsel fee (.625
shares) rounded up to the nearest whole number of shares, 5 shares).
12. Preferred Shareholders Who Settle. Holders of preferred stock who
accept the enhanced conversion shall be entitled to settlement benefits
calculated on their enhanced number of common shares, less Intervenors'
attorney fee, rounded to the nearest whole number of shares. (For example, a
person with 100 preferred shares will receive settling Shares based upon 300
common shares).
13. Benefits of Rounding Numbers Upward. The Parties acknowledge that
rounding up the individual shareholders' Settling shares to the next higher
whole number, such rounding to be done after deduction of Intervenors' Counsel
fees as specified, provides a benefit of less than one full share to those
with small share holdings that is somewhat disproportionate to the benefit of
rounding up those with greater shareholdings. (For example, if a shareholder
under Global Form owns 180 shares, the shareholder would be entitled to 15
shares less attorney's fee of 1.874 shares (12.5%) or 13.126 shares under
traditional rounding, 13 shares [180 shares/12 = 15 x .125 = 1.874; 15 18.74
= 13.126]. This would mean the shareholder was paying 13.33% in attorney's
fee rather than 12.5%. Rounding up from 13.126 to 14 shares avoids fractional
shares but also benefits the small shareholder. A shareholder with 18000
shares would be entitled to 1500 shares and would be responsible to pay
attorney's fee of 187.4 shares, for a recovery of 1312.6 shares, rounded up
by, 4 shares to 1313, which is a smaller proportionate benefit to the large
holder but also keeps attorney fees very close to the 12.5% figure). Digitran
has recommended rounding up in order to avoid fractional shares and to prevent
the smaller shareholders from paying more then 12.5% of their Settling Shares
towards fees for Intervenors' counsel and thus to protect small shareholders.
14. Digitran's Belief in Value of settling Shares. Although Digitran is not
currently trading on an exchange, Digitran believes the Settling Shares would
command at least $3/share had Digitran been trading on January 1, 1996.
15. Holders of Options and Warrants. Among the Intervenors and Other Holders
are persons who hold options or warrants for common shares in Digitran, the
time for exercise having previously expired. To settle with those who hold
options or warrants, Digitran hereby extends the time for exercise of all
outstanding options and warrants to and including 90 days after any expiration
the specific options and warrants may contain or 90 days after resumption of
trading, whichever provides the option and warrant holders with the longer
period of time, the exercise of options and warrants otherwise to be governed
by the existing terms of the options and warrants. Those holding warrants or
options for preferred shares, upon exercise of their rights, shall obtain the
enhanced number of common shares and Settling Shares in accordance with this
Agreement.
16. Share Certificates. Digitran shall use its best efforts to issue share
certificates within 90 days after this Agreement is signed to record and cause
the distribution of Settling Shares certificates. This provision is intended
to require Digitran to exercise its best efforts to issue and deliver share
certificates to the SEC as may be required, but any period taken by the SEC
or other appropriate governmental entity shall not be charged against Digitran.
17. Costs of Distribution. Digitran shall be responsible for all costs and
expenses of notice and the distribution and transfer of Settling Shares,
including without limitation costs of registration.
18. Best Efforts for Free Trading of Settling Shares. Digitran shall be
responsible for all costs and expenses of exercising and shall exercise its
best efforts to make the Settling Shares free trading without restrictive
legends.
19. Distribution as per Table. Subject to Correction for accuracy of
shareholder names and share holdings, distribution to intervenors and any
other settling shareholders shall be as set forth in the Table to be
considered
20. Efforts to Resume Trading. Digitran will exercise its best efforts to
resume trading during 1996, and Intervenors ( and all others who enter this
Agreement) will cooperate with Digitran in assisting Digitran to resume
trading during 1996 once this Agreement has be signed.
21. Recovery for Digitran's Assigned Claims. If Intervenors recover after
litigation or tough settlement of the McEwen Action any sums or amounts from
the claims assigned to them by Digitran, such sums and amounts of recovery
shall be shared as follows:
a. 50% to Digitran, from which Digitran shall pay to Intervenors' Counsel
an attorney's fee of 24% of the full amount payable to Digitran before costs;
and Digitran shall in addition pay 50% of any costs incurred by Intervenors
in the McEwen Action incurred from the date of this Agreement until its final
resolution; and
b. 50% to Intervenors, subject to Intervenors' paying Intervenors' Counsel
an attorney's fee pursuant to existing agreement and any costs incurred by
Intervenors' Counsel not paid by Digitran under this Agreement.
22. Recovery for Other Assigned Claims. If Intervenors recover after
litigation or through settlement any sums or amounts from the claims assigned
by Trevers, LeRoy or Corray, such sums and amounts shall be shared as follows:
a. 50% to the recovering assignor, from which assignors shall pay
Intervenors' Counsel an attorney's fee of 24% of the amount payable to the
assignor before costs; and
b. 50% to intervenors, subject to intervenors' paying Intervenors' Counsel
an attorney's fee pursuant to existing agreement and any costs incurred by
Intervenors not paid by Digitran in accordance with this Agreement.
23. Confidentiality. Except as may be required by the Court or by federal
securities laws, the terms and conditions of this Agreement shall remain
confidential, to be discussed only among counsel and those assisting
individual shareholders with any tax or other personal accounting decisions.
24. Governing Law. This Agreement shall be governed by the laws of the
State of Utah and all parties consent to jurisdiction in the State of Utah
for any action to enforce or interpret this Agreement.
25. Amendment Only By Writing. This Agreement, except for minor corrections
in shareholdings or mathematical calculations in the Table to provide for the
rounding up of shares shall not be amended except in a writing signed by
the Parties, provided, however, that their share holdings, by the addition of
a writing accepted by Digitran and Intervenors' Counsel and stating,
substantially, that "[Name] accepts the Settlement Agreement made by Digitran
on the 16th day of January, 1996, and has______ shares of common stock
[options, warrants]."
26. COOPERATION TO IMPLEMENT AGREEMENT. The parties shall cooperate in the
execution of any additional documents that may be required to implement the
terms and conditions of this Agreement, including without limitation,
consenting to a Stipulation and Order substantially in the form set forth as
Exhibit A attached hereto and made a part hereof, together with such other
and further modifications to Exhibit A as may be required to advise the Court
the settling parties. Digitran shall also cooperate, without limitation, by
providing all documents and information available to Digitran to assist with
the prosecution of Digitran's assigned claims.
27. INTEGRATED CONTRACT. This Agreement incorporates and integrates all
terms and conditions and prior negotiations and discussions among and
between the parties on its subject matter, and, together with Exhibit A and
such documents as may be required to implement this Agreement, constitutes
the entire understanding of the parties on the subject matter of this
Agreement.
28. HEADINGS. Paragraph and other headings are for the convenience of the
parties and neither limit nor expand the terms and conditions of this
Agreement.
29. COUNTERPARTS. This Agreement may be executed separately and in
counterparts by the Parties and by those who subsequently wish to join the
Settlement and terms of this Agreement, and the Agreement shall be effective
as of the date first set forth above with respect to Digitran and Intervenors,
and shall be effective with respect to any other settling party on the same
day or otherwise as may be required by the date of signature of any party who
adheres to this Agreement at a later time. Digitran and Intervenors' Counsel
shall each retain copies of this Agreement and of all Counterparts, to be
deemed as the original.
30 NO BENEFIT FROM DRAFTING. This Agreement shall be construed upon its own
terms and conditions without respect to what parties participated in drafting.
31 DIGITRAN WARRANTIES. Digitran represents and warrants that the persons
signing on its behalf are duly authorized to sign this Agreement and that
this Agreement is binding and intended to be binding on the Digitran Companies.
32 TABLES OF INTERVENORS' SHARES, INTERVENORS' COUNSEL FEES AND SETTLING
SHARES TO BE DISTRIBUTED. Intervenors and their holdings (with preferred
shares converted to common shares) are set forth in this paragraph.
Information about their Shares Held, Settling Shares, Intervenors' Counsel
Fees, Settling Shares, Rounded Number of Shares to be Distributed
(in handwriting) and totals are set forth as Exhibits B and C to this
Agreement, followed by calculations based upon Settlement (Global) or
Settlement (Non-Global). Intervenors with options and warrants are also to
be set forth. From time to time, amended tables or forms to provide for
additional parties settling, corrections to numbers or calculations and other
such matters not related to the substance of this Agreement may be added
upon approval of Intervenors and Digitran and any additional parties to the
addition of their own names and relevant details.
<TABLE>
INTERVENORS
<CAPTION>
NAME SHARES
<S> <C>
ALVARINO 2,000
ALVARINO 1,000
ALVARINO 750
AUTIN 10,000
AUTIN 49,000
AUTIN 120,000
BADGLEY 1,200
BAKER 1,000
BAKER 2,500
BALER 1,500
BARKSHIRE 1,000
BARKSHIRE 1,500
BAYLESS 500
BOWEDEN 180
BOWEN 500
BOWEN 300
BOWER 5,000
BREMENS 23,000
BREMENS 24,000
BRYAN 600
BEVIER 600
CANTO 60,000
CANTO 25,000
CHENERY 2,500
CHENERY 600
CIANCARELLI 400
CLIONSKY 250
COHEN 10,000
COHEN 130,000
COHEN 2,500
COHEN 30,000
COOP, HOLDING 307,000
DRAUGHN 100
DEWAL 1,000
DEWAL 36,500
DEWOLF 3,000
DEWOLF 3,000
EDWARDS 300
ERICKSON 100
EZZELL 1,750
FC AIR 50,000
FEROLIE 5,000
FULLERTON 1,000
FULLERTON 3,000
GARRITY 135
GARRITY 800
GARRITY 380
GIBSON 180
GIBSON 4,610
GIBSON 180
GIL 500
GOEL 900
GREEN 6,900
HAMBLETON 34,500
HAMBLETON 12,500
HARBIN 1,750
HENSHAW 300
HILLIARD 996,000
HILLIARD 42,743
HOFFMAN 200
IBANEZ 735
JAM 30,000
JENSEN 600
JOHNSON 4,500
KALLMAN 500
KELLMAN 500
KLEIN 2,400
KLEINSCHMIDT 300
KLEINSCHMIDT 1,500
KLEINSCHMIDT 700
KORKOWSKI 35,000
LOUALCONO 2,500
MARTEX 1,000
MARTEX 2,900
MARTEX 12,100
MARTI 1,000
MARTI 213,000
MARTIN 12,500
MARTIN 7,000
MECCIA 300
MORIS 500
MORIS 1,000
MUSIAL 300
MCKNIGHT 500
NADEL 500
NADEL 200
OSTREM 1,000
PAL-BRO 139,500
PARRISH 27,637
PLATT 14,000
RICHARDSON 144
ROMAN 3,000
ROMAN 875
ROMAN 1,700
ROSTELLI 260
SALERNO 2,000
SAMMON 3,500
SCHMID 1,250
SCHMID 1,950
SCHMID 700
SHIPMAN 27,000
SHIPMAN 15,000
SIMON 1,000
SIMON 9,000
SIMON 5,000
SIMON 3,000
STATMILLER 200
THEA 8,400
THEA 3,000
THOMPSON 30,000
THOMPSON 18,000
WAHLBORG 360
WALKER 650
ZAPPE 3,200
TOTAL 2,675,069
</TABLE>
DIGITRAN SYSTEMS, INC.
By /s/ Loretta Trevers
President
DIGITRAN, INC.
By /s/ Loretta Trevers
President
LORETTA TREVERS
INTERVENORS
By /s/ Jordan S. Cohen
Jordon S. Cohen
<TABLE>
EXHIBIT 11
DIGITRAN SYSTEMS, INCORPORATED
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Year ended Year ended
on April 30, 1996 on April 30, 1995
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
<S> <C> <C> <C> <C>
Net Loss ($1,664,048) ($1,664,048) ($1,681,277) ($1,681,277)
Less: dividends on convertible
preferred stock
Paid
Unpaid ($208,149) ($208,149) ($257,012) ($257,012)
Net loss applicable to
common stock ($1,872,197) ($1,872,197) ($1,938,289) ($1,938,289)
Common Stock:
Shares outstanding from
beginning of period 9,408,383 9,408,383 9,403,983 9,403,983
Weighted average shares
issued during the period 218,293 218,293 1,133 1,133
Weighted average shares
outstanding during the period 9,626,676 9,626,676 9,405,116 9,405,116
Common stock equivalents
computed using the Treasury
Stock method:
$.50 options(1) 120,000 120,000 120,000 120,000
$2.00 options(1) 10,000 10,000 10,000 10,000
Other options (1)(2) 1,125,000 1,125,000 450,000 450,000
Proceeds from exercise - - - -
Average price the for period (2) n/a n/a n/a n/a
Shares repurchased - - - -
Net shares outstanding from
options exercised - - - -
Common stock and common stock
equivalents outstanding 9,626,676 9,626,676 9,405,116 9,405,116
Convertible preferred stock
Weighted average equivalent
shares outstanding during
the period 865,796 919,533
All dilutive contingent shares 10,492,472 10,324,649
Loss per common share and
common share equivalents ($0.19) ($0.21)
Loss per common share--
assuming full dilution n/a n/a
<FN>
(1) Options would be antidilutive on EPS for both periods due to net losses in
those periods.
(2) No FMV available. See Note 16 in "ITEM 7 - FINANCIAL STATEMENTS".
</TABLE>
