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, 1997
[ ] 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)
2176 North Main
P.O. Box 6310
North Logan, Utah 84341-6310
- ----------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (435) 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
(continued on following page)
1
<PAGE>
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: 1997 - $2,900,000
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 is not possible to compute because the
Registrant has not been registered on any stock exchange for over three years.
State the number of shares outstanding of each of the Issuer's classes of
common equity as of the latest practicable date: at April 30, 1997 there were
8,620,869 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
2
<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, 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, were defendants in a lawsuit alleging securities fraud and
misrepresentations of financial information relating to the Company's 1992
Form 10-K and other public disclosure, however, the officer and the director
were exonerated of those charges in the trial of October, 1996. In September
1996 the Company filed for protection from these actions under the terms of
Chapter 11,of the U.S. Bankruptcy Code. In July 1997 the court approved a
settlement of the litigation, and in August 1997 the action in bankruptcy
was dismissed.
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.
3
<PAGE>
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
4
<PAGE>
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.
5
<PAGE>
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 terrain. 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.
The Company 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.
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 7."
Crane, Petroleum and Truck Sales
- --------------------------------
During the year ending April 30, 1997 crane simulator systems accounted for
71% of the company's sales, petrochemical operations simulator systems
accounted for approximately 20%, and truck simulators accounted for 9% of the
Company's sales. During the prior year ending April 30, 1996 the crane
simulator systems were 93%, petrochemical operations were 5% and truck
simulators were 2% of total sales for the Company. Significant
fluctuations in the relative percentages are expected between periods due to
6
<PAGE>
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
7
<PAGE>
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, 1997 and 1996, net sales to the
following customers accounted for more than 10% of the Company's sales:
1997 1996
------- --------
Customer A 972,000
Customer B 675,000
Customer C 299,000
Customer D 1,110,000
Customer E 911,000
Customer F 398,000
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.
8
<PAGE>
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, and
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
9
<PAGE>
occurred. Certain simulators so constructed were utilized for demonstration
purposes at customer locations, in some cases for extended periods. During
the current fiscal year the Company reduced inventory levels substantially.
This reduction resulted in a one time charge to operations of $1,110,000. See
"ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION".
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 would diminish. 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, 1997 virtually all 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.
10
<PAGE>
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 conditions
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 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.
11
<PAGE>
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.
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 April 30, 1997, the Company had 39 full-time employees and 2 part time
employees. As of November 30, 1997 the Company had 34 full-time and 3 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.
12
<PAGE>
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. It is subject to mortgage and deeds of trust of $260,000 at
April 30, 1997.
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
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. In
January 1993 the Company completed construction of an 11,250 square foot
production facility at this location adjacent to the existing building
described above. The building, which includes production, office and storage
space, is utilized by all manufacturing divisions for production, storage and
offices. As of April 30, 1997, the property was subject to mortgages and
deeds of trust of approximately $593,000.
Subsequent to the year end April 30, 1997, the administration building was
vacated and the administrative and marketing staff were relocated in the
engineering building. The former administration building is currently listed
for sale.
ITEM 3 LEGAL PROCEEDINGS
- -------------------------
Action Items "A" through "E" as summarized below have previously been
reported in Forms 10-KSB filed by the Company. As of July 15, 1997 all
actions had been resolved and a cash settlement offer was approved by the
court. The cash settlement is in the amount of $1,000,000 payable in
installments of $300,000 by August 1997, $300,000 by September 1997,
$200,000 by January 1998, and $200,000 by July 1998. As of the date of
this filing, the Company had paid the first two installments totaling
$600,000.
Action Item A
- -------------
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). Neither person is
presently associated with the Company. 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
13
<PAGE>
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.
Action Item B
- -------------
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.
Action Item C
- -------------
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 sought damages to be established at trial and
indemnification with respect to any judgment that would be entered against
Grant Thornton in this action.
Action Item D
- -------------
In June 1994 the Company filed a cross-claim against Grant Thornton. The
cross-claim alleged 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 sought contribution
under federal and state securities laws. The cross-claim sought damages to be
established at trial, indemnification with respect to any judgment that might
be entered against the Company, contribution and consequential damages.
Action Item E
- -------------
On October 6, 1995, an intervention was filed by a number of shareholders who
purchased securities during the class period, but who purportedly excluded
themselves from the class. The intervention also concerned Shareholders of
14
<PAGE>
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 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
- -----------------------------------------------------------
The last annual meeting of the shareholders of the Company was held on
February 29, 1996. The results of this meeting were duly reported in
Form 10-KSB as filed for the year ended April 30, 1996.
Because the Company filed for protection in September 1996 from shareholder
litigation under the provisions of Chapter 11 of the U.S. Bankruptcy Code,
approval for the annual shareholders meeting would have had to be granted by
the Bankruptcy Court; and because the cost of the annual meeting was
considered to be prohibitive in view of other cash requirements, the Company
elected not to have an annual meeting during this fiscal year.
The action in bankruptcy was dismissed by the court in August 1997. The
bankruptcy is more fully discussed elsewhere in this document.
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 de-listed the Company's securities. The Company is now
actively seeking to reestablish a publicly trading market for the Company's
Common Stock.
15
<PAGE>
Shareholders
- ------------
As of September 26, 1997, the Company had 603 record holders of its Common
Stock and one record holder of its Class B Common Stock as well as 30 record
holders of its Series 1Class 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 have been
paid since March 15, 1993 resulting in dividends in arrears of $804,000 as of
April 30, 1997. Subsequent to this date the Company has tendered offers to
holders of preferred stock to exchange each share of preferred and its accrued
dividends for three shares of common stock. It anticipates a favorable
response to this offer.
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 1997 VS. 1996
Net Sales. Net Sales for 1997 are $2,900,000 as compared to $3,432,000 in
1996. Net sales decreased by $532,000, about 18%, from the prior fiscal year.
Domestic revenues increased by approximately $1,247,000, while foreign
revenues decreased by just over $1,779,000, or 54%, from 1996 to 1997.
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.
16
<PAGE>
To the extent the Company is able to continue to resolve the issues enumerated
under "Financial Condition and Liquidity, 1997" below, and continue to focus
on operations, including the addition of management and other professional
staff, net sales are expected to increase in fiscal 1998. 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 years.
The crane market domestically and in certain foreign markets has remained
active; however, the bulk of the crane market continues to be in the Pacific
Rim. Given additional time and resources devoted to operations, and not to
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 petroleum market presents the most competition to the Company. The
addition of certain professional and technical personnel in the petroleum area
in fiscal 1995 and fiscal 1996 resulted in the development of a new Windows
based petroleum simulator. This innovation in technology has been well
received. In order to enjoy the benefits of close association, "hands on"
information, and the technical information transfer associated with petroleum
engineering firms and colleges the Company will transfer a major segment of
its petroleum marketing and engineering operations to the Gulf states ( the
United States that border the Gulf of Mexico) in early 1998.
Cost of Goods Sold. Cost of Goods Sold in 1997 remained at the same level
- -------------------
as in the previous year. However, because Net Sales were less than the
prior year, the percentage of gross profit decreased to 43% from 52% in 1996.
The increase in cost of sales ratio is due in part to under utilized capacity
in the production and engineering departments and to price increases. It
should be kept in mind that 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.
17
<PAGE>
Selling, General and Administrative Expenses. Selling and General &
- ---------------------------------------------
Administrative Expenses increased $375,000 or 21% over the previous year.
Almost $200,000 of the increase is accounted for by travel expenses incurred
in the Company's renewed sales efforts. With the average sales contract
approximating $800,000 and originating in foreign countries, the time
involved and travel involved to eventually close a sale is considerably
greater than for lower priced sales originating in the U.S. Salaries and
wages were also up 18% ($215,000) reflecting the effort focused on marketing
and engineering. Some of engineering salary increase is offset by cost
transfer to Cost of Sales. The balance of Selling and General &
Administrative Expense is not notable; the increases and decreases are spread
fairly equally and without any other significant variance.
Other Income (Expense). Interest expense was held to last year's level.
- ----------------------
The Company thoroughly evaluated its inventories and wrote off or wrote down
any item that did not possess readily realizable market or utility value.
This included many formerly usable items rendered obsolete during the current
year by technological advances within the industry. The inventory write down
amounted to $1,110,000.
In accordance with the policy for accounting for software development costs,
the Company elected to write off all previously capitalized and unamortized
software development costs. This amounted to $1,233,000. The total
adjustment pertaining to inventories and capitalized software costs is
reflected on the financial statements at $2,343,000. It is the single largest
charge against operations in fiscal 1997. Comparable adjustments in fiscal
1996 were only $285,000.
The Company settled all matters resulting from the 1992-97 SEC/Shareholder
litigation and/or investigations. The shareholder litigation settlement was
for $1,000,000 and was approved by the Bankruptcy Court in July 1997. The
Company included the settlement and all related legal fees as a liability at
April 30, 1997. The total charge against operations in fiscal 1997 is
$1,539,000.
Certain employees and consultants were issued stock in lieu of cash
compensation in order to conserve cash and to promote longer term positive
attitude and effort. The value of such stock for accounting purposes was set
at $1.00 per share.
The Company's share of a net operating loss in its truck driver training
center, a joint venture in which it holds a 50% interest, decreased to
$47,000 in fiscal 1997.
Other income, comprised primarily of a gain on restructuring of debt
increased 41% to $130,000 in fiscal 1997.
18
<PAGE>
Financial Condition and Liquidity. The auditors' report for the year ended
- ----------------------------------
April 30, 1997 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 partially 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" the trading of the Company's stock has not recommenced.
All legal actions pertaining to or resulting from the above referenced SEC
actions have been fully reported in prior Form 10-KSB filings by the Company.
As noted elsewhere in this report, settlement of all matters was completed in
July 1997. The Company is liable for a $1,000,000 cash settlement payable in
installments of $300,000 by August 1997, $300,000 by September 1997,
$200,000 by January 1998, and $200,000 by July 1998. As of the date of this
filing, the Company was current and had timely paid $600,000.
Because of the legal actions taken against the Company, the Company has had to
rely primarily on cash on hand since 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. Since 1994 the Company has reduced inventory
levels substantially. The cash benefit through sales of completed or
partially completed systems was substantially depleted in fiscal 1996. In
1997 inventories were further written down to a very conservative "ready
realizable market value."
Despite the amount of resources required over the last three years to
successfully attend to SEC and shareholder litigation matters, the Company was
able to maintain reasonable marketing efforts and technological upgrades of
its product lines. Cash flow was irregular throughout the year due to the
average size of sales contracts, payment terms associated with our
international customers, and the fact that the Company has not had access to
traditional credit and reasonably priced bank financing.
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. In this regard the Company is
seeking capital infusion through a private placement offering of 3,000,000
shares of unregistered common stock coupled with 1,500,000 warrants. The
stock is being offered at $1.00 per share. Each warrant entitles its holder
to acquire one share of common stock for $1.50. The warrants expire after
February 28, 1999. Proceeds from the placement are intended to be used for:
Commissions $300,000
Lawsuit Settlement 600,000
(continued on next page)
19
<PAGE>
Debt Reduction 600,000
Working Capital 270,000
Engineering 450,000
Product Upgrades 300,000
Marketing 440,000
Other 40,000
----------
Total $3,000,000
In 1998 the Company plans to aggressively pursue, on behalf of its
shareholders, a public listing and public trading of the Company's stock.
The Company is preparing to apply to the OTC Bulletin Board for listing of its
Common Stock. There is no assurance that the OTC Bulletin Board or
alternative exchange will agree to list the Company's Common Stock.
Due to cash constraints, only $21,000 was used in fiscal 1997 for property and
equipment. The Company anticipates additional expenditures for property and
equipment as cash constraints are lifted through increased sales levels and
the capital infusion through the private placement of common stock.
Inflation has had no significant impact on the Company in the years ended
April 30, 1997 and 1996.
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
- --------------------
The Company's auditors, Tanner + Co., for the current year (FYE 4/30/97) have
performed the annual audit of the Company's financial statements for the last
three years. Although the auditors express concern about the Company's
ability to continue as a "going concern," no qualification of opinion or
scope of the audit has been made.
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:
20
<PAGE>
NAME AGE POSITION
- ---- --- --------
Loretta Trevers 48 President and Chairman of the Board
Rod F. McLeod 57 Chief Financial Officer
Gary Blum 57 Director
Jamie Levey 36 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. Ms. Trevers holds a B.S. Degree from Utah State
University and an advanced degree from Iowa State University. She is a founding
trustee of the Utah Information Technology Association and had been since 1989.
Rod F. McLeod was appointed Chief Financial Office in June 1997. He replaced
Kit Finlinson who left the company that same month. Mr. McLeod is a
Certified Public Accountant. He has been employed on a 60% of full time
basis due to prior commitments with a medical group in California with whom he
serves in a similar capacity. Mr. McLeod holds a B.S. Degree in accounting
from San Diego State University. Prior to joining the Company he had
directed (1966-1979) the accounting and taxation of a $140,000,000 publishing
company with publishing operations in several states. He also has owned (50%)
and operated a successful commercial/industrial construction company in
California as well as an import company specializing in the importation of
high end architectural stone, tile, and custom teak doors and windows.
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,
Los Angeles, California, which he founded in June 1988. 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 distribution of personal computer
peripherals and equipment. Mr. Blum currently serves as a director of DHS
Industries, a publicly held company specializing in marketing research. 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
21
<PAGE>
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 31, is the Vice President of Engineering at Digitran. He
has a B.S. Degree in Computer Engineering and a M.S. Degree in Computer
Science. He began his employment at Digitran as a Software Engineer for
crane simulator projects in 1990. As a Lead Engineer during 1991 and 1992 he
led the design and development of the Company's crane and truck simulators.
As a Senior Projects Engineer since 1993 he led the engineering projects in
the crane, truck, and petroleum product lines. He is responsible for the
management of the Development, Manufacturing and Support groups within the
Engineering Department and is integrally involved in the marketing, sales, and
new business development activities of the Company.
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.
22
<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 $100,000 (the Named
Executive Officers).
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------
Annual Compensation Awards Payouts
- --------------------------------------- ------------------ ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Awards(s) Options/ Payout sation
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) ($)
- -------- ---- --------- -------- --- --- -------- --- ---
Loretta Trevers
(Chairman of the Board and Chief Executive Officer)
1997 $175,507 $ -0- (1) -0- 315,000 -0- -0-
1996 $175,507 $ -0- (1) -0- 100,000 -0- -0-
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
- --------
At the beginning of the year the Company owed Loretta Trevers $5,964. During
the year Ms. Trevers traveled extensively on behalf of the Company. In
addition to her own business travel, she personally paid for travel expenses
of employees at times when the Company's cash position was inadequate.
Likewise, during the year Ms. Trevers settled certain third party obligations
of the Company by transferring shares of her own common stock in the Company.
At April 30, 1997 the Company owed Ms. Trevers $99,582.
No other amounts are due to or from Loretta Trevers.
23
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
(a) (b) (c) (d) (e)
Value of
Number of
Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exerciseable/ Exerciseable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ---- --------------- ----------------- ------------- -------------
Loretta Trevers
(Chief Executive Officer)
1997 -0- -0- 315,000 -0-(1)
1996 -0- -0- 100,000 -0-
Gary Peterson
(Former Chief Financial Officer)
1997 -0- -0- -0- -0-(1)
1996 -0- -0- 150,000 -0-
(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, 1997 and 1996, 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, 1997 or 1996.
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. At April 30, 1996
the Company had a payable to Mr. Blum for Director's fees of $3,333. At April
30, 1997 the Company had a payable to Mr. Blum for Director's fees of
$11,483.29.
24
<PAGE>
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. At April 30, 1996 the Company had a payable to Ms. Levey for Director's
fees of $2,520. AT April 30, 1997 the Company had a payable to Ms. Levey for
Director's fees of $10,019.92.
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,
1997 the Company paid legal expenses of $90,863.74 , 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 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 was employed by the Company as General Manager. Mr. Bryan
left the Company in July 1997.
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.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The following table sets forth as of December 23, 1997 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
25
<PAGE>
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>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
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
- -------------- -------- ----------- ---------- ------------- ------------ ------------
Loretta P. Trevers*
2176 North Main (1)(2)
No. Logan, UT 84341 3,364,191 36.8% 2,000,000 100% 0** 74.7%
Clayton Paul Hilliard
1001 West Pinhook Rod
Building 3, Suite 300
Lafayette, LA 70503 1,209,093 13.2% ** 0** 0** 4.2%
CEDE & Co.
P.O. Box 20
Bowling Green Station
NY, NY 10274-0020 2,877,008 31.5% 0 ** 0** 10%
Jamie Levey*
The Trump Building
40 Wall Street, 59th Floor
New York, NY 10005 6,666 ** 0 ** 0** **
Gary Blum*
3278 Wilshire Blvd,
Suite 603
Los Angeles, CA 90010 15,667 ** 0 ** 0** **
Rod McLeod*
3544 Ryan Road
Escondido, CA 92025 100,000 1% 0 ** 0** **
Total of Executive (1)(2)
Officers and Directors 3,486,524 38.2% 2,000,000 100% 0** 75%
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Indicates current officer or direct or of the Company.
**Indicates less than one percent.
26
<PAGE>
(1) Includes 2,000,000 shares of Class B Common Stock convertible into
2,000,000 shares of Common Stock.
(2) Includes 720,000 shares of Common Stock and 200,000 shares of Class B
Common Stock which is in the name of a partnership trust in which Ian French
is General Partner; however, Ms. Trevers retains full voting rights until such
time as the stock is sold from the partnership. Beneficiaries of the trust
include three of Ms. Trevers' children.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
Other than payment of employee and third party obligations of the Company by
Loretta Trevers and as duly reported under ITEM 10, Advances, there is
nothing to report in this category.
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)
(10.5) 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)
(21) Subsidiaries (5)
27
<PAGE>
(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
28
<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 23rd day of December, 1997.
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) December 23, 1997
/s/ Gary Blum Director December 23, 1997
- -----------------------
Gary Blum
/s/ Jamie Levey Director December 23, 1997
- -----------------------
Jamie Levey
/s/ Rod F. McLeod Chief Financial Officer December 23, 1997
- -----------------------
Rod F. McLeod
29
<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' deficit F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
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, 1997, and the related consolidated statements of
operations, shareholders' deficit, and cash flows for the years ended April
30, 1997 and 1996. 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, 1997, and the results of their
operations and their cash flows for the years ended April 30, 1997 and 1996 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.
TANNER+Co.
Salt Lake City, Utah
November 19, 1997
F-2
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1997
Assets
Current assets:
Cash $ 39,000
Accounts receivable, net 228,000
Inventories 515,000
Prepaid expenses 11,000
--------------
Total current assets 793,000
Property, plant and equipment, net 837,000
Note receivable 150,000
--------------
$ 1,780,000
==============
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 1,066,000
Accrued expenses 1,659,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 267,000
Notes payable 717,000
Current portion of long-term debt 241,000
--------------
Total current liabilities 3,950,000
Long-term debt 756,000
--------------
Commitments and contingencies -
Shareholders' deficit:
Preferred stock, $.01 par value, 1,000,000
authorized, 358,795 shares issued and
outstanding (aggregate liquidation preference
$3,316,000), (entitled to one-tenth vote per
share) 4,000
Common stock, $.01 par value; 25,000,00 shares
authorized, 8,620,869 shares issued and
outstanding (entitled to one-tenth vote per
share) 86,000
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 6,311,000
Accumulated deficit (9,347,000)
--------------
(2,926,000)
--------------
$ 1,780,000
==============
See accompanying notes to consolidated financial statments. F-3
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statement of Operations
Years Ended April 30,
1997 1996
------------------------
Net sales $ 2,900,000 $ 3,432,000
Cost of sales 1,662,000 1,636,000
------------------------
Gross profit 1,238,000 1,796,000
Selling, general and administrative expenses 2,196,000 1,821,000
Depreciation and amortization 136,000 808,000
Bad debt expense 293,000 -
------------------------
Loss from operations (1,387,000) (833,000)
Other income (expense):
Interest expense (259,000) (250,000)
Inventory and software development
write-down (2,343,000) (285,000)
Litigation settlement and related costs (1,539,000) (255,000)
Stock compensation expense (318,000) -
Equity in loss from partnership (47,000) (133,000)
Other income 130,000 92,000
------------------------
Loss before income taxes (5,763,000) (1,664,000)
Income tax benefit - -
------------------------
Net loss $(5,763,000)$(1,664,000)
========================
Dividends on convertible preferred stock;
unpaid (208,000) (208,000)
------------------------
Net loss applicable to common stock $(5,971,000)$(1,872,000)
========================
Loss per common share $ (.56)$ (.19)
========================
Weighted average number of common stock and
common equivalent shares 10,732,000 9,627,000
========================
See accompanying notes to consolidated financial statments. F-4
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statement of Shareholders' Deficit
Years Ended April 30, 1997 and 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B Capital in Accumu-
Preferred Stock Common Stock Common Stock Excess of lated
Shares Amount Shares Amount Shares Amount Par Value Deficit
----------------------------------------------------------------------------------------------
Balance at May 1, 1995 457,850 $ 5,000 $ 7,408,383 $ 74,000 $ 2,000,000 $ 20,000 $ 5,354,000 $(1,920,000)
Shares issued for:
Cash - - 75,000 1,000 - - 74,000 -
Services - - 69,000 1,000 - - 68,000 -
Settlement of litigation - - 133,754 1,000 - - 132,000 -
Reduction of accounts
payable and long-term
debt - - 337,467 3,000 - - 357,000 -
Conversion of preferred
stock to common stock (86,155) (1,000) 258,465 3,000 - - (2,000) -
Net loss - - - - - - - (1,664,000)
----------------------------------------------------------------------------------------------
Balance at April 30, 1996 371,695 4,000 8,282,069 83,000 2,000,000 20,000 5,983,000 (3,584,000)
Shares issued for
services - - 313,000 3,000 - - 160,000 -
Conversion of preferred
stock to common stock (12,900) - 25,800 - - - - -
Stock warrants granted to
non-employees - - - - - - 168,000 -
Net loss - - - - - - - (5,763,000)
----------------------------------------------------------------------------------------------
Balance at April 30, 1997 358,795 $ 4,000 $ 8,620,869 $ 86,000 $ 2,000,000 $ 20,000 $ 6,311,000 $(9,347,000)
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statments. F-5
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statement of Cash Flows
Years Ended April 30,
1997 1996
Cash flows from operating activities: -------------------------
Net loss $(5,763,000) $(1,664,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 136,000 808,000
Inventory and software development
write-down 2,343,000 285,000
Issuance of common stock for services and
litigation 163,000 203,000
Issuance of stock warrants for services 168,000 -
Gain on forgiveness of debt (95,000) (22,000)
Payment of loan fees by related party in
exchange for reduction of related party
receivable 83,000 30,000
Provision for losses on accounts receivable 281,000 (5,000)
Equity in loss from joint venture 47,000 133,000
(Increase) decrease in:
Accounts receivable (71,000) (238,000)
Inventory 172,000 530,000
Costs in excess of billings 485,000 (485,000)
Prepaids and other current assets (10,000) 14,000
Note receivable - 100,000
Increase in:
Accounts payable and other current
liabilities 1,699,000 260,000
Billings in excess of costs 154,000 113,000
-------------------------
Net cash (used in) provided by
operating activities (208,000) 62,000
-------------------------
Cash flows from investing activities:
Purchase of property and equipment (21,000) (138,000)
Increase in capitalized simulator costs (144,000) (152,000)
-------------------------
Net cash used in
investing activities (165,000) (290,000)
-------------------------
Cash flows from financing activities:
Proceeds from short-term borrowings 1,454,000 1,099,000
Payments on short-term borrowings (1,029,000) (945,000)
Proceeds from long-term borrowings 269,000 424,000
Payments on long-term debt (353,000) (373,000)
Issuance of common stock - 75,000
-------------------------
Net cash provided by
financing activities 341,000 280,000
-------------------------
Net (decrease) increase in cash (32,000) 52,000
Cash, beginning of year 71,000 19,000
-------------------------
Cash, end of year $ 39,000 $ 71,000
=========================
See accompanying notes to consolidated financial statments. F-6
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1997 and 1996
1. Summary of Business and Significant Accounting Policies
History and Business Activity
Digitran Systems, Incorporated (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, a deficit in working
capital, and has an accumulated deficit. As discussed in Note 18, the
Company was a defendant in a class action lawsuit filed by certain
shareholders of the Company, which was settled in favor of such shareholders.
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, loans from related
parties, and 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 pay the
lawsuit settlement as discussed in Note 18. 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.
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.
F-7
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
1. Summary of Business and Significant Accounting Policies Continued
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.
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.
F-8
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
1. Summary of Business and Significant Accounting Policies Continued
During the years ended April 30, 1997 and 1996, the Company wrote off
approximately $1,233,000 and $100,000, 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, which, due to continued
net operating losses, resulted in no investment in TLC as of April 30, 1997.
The terms of the agreement also limit the Company's obligation to fund losses
so no obligation exists beyond the amount invested in the partnership.
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.
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.
F-9
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
1. Summary of Business and Significant Accounting Policies Continued
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.
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 1996 financial statements have been reclassified to
conform with the current year.
F-10
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
2. Detail of Certain Balance Sheet Accounts
Accounts receivable:
Trade receivables $ 308,000
Less allowance for doubtful accounts (80,000)
-------------
$ 228,000
=============
Inventories:
Parts and supplies $ 64,000
Work-in-process 65,000
Finished goods 386,000
-------------
$ 515,000
=============
Accrued expenses:
Accrued expenses $ 500,000
Deferred revenue 159,000
Accrued lawsuit settlement (see Note 18) 1,000,000
-------------
$ 1,659,000
=============
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 $ 1,116,000
Estimated earnings 1,070,000
-------------
2,186,000
Less billings to date (2,453,000)
-------------
Total $ (267,000)
=============
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ -
Billings in excess of costs and estimated
earnings on uncompleted contracts (267,000)
-------------
$ (267,000)
=============
4. Related Party Transactions
At April 30, 1997, the Company included approximately $90,000 of advances and
commissions payable to a shareholder/officer and employees, and $70,000 of
accrued stock compensation to employees in accrued expenses.
F-12
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
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 7). During 1995, Trucksafe Learning Center (TLC), the
partnership, purchased a 50% interest in a simulator from Digitran. The
purchase price of the interest in 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, 1997, such payments
are not being made by the Canadian corporation, therefore, the Company has
allowed for the portion of the note which is considered to be unrecoverable.
As of April 30, 1997, the note had a balance of $400,000 of which $250,000 is
not considered recoverable.
6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
Buildings and improvements $ 765,000
Computer equipment 402,000
Office equipment and fixtures 84,000
Vehicles 107,000
Land 15,000
-------------
1,373,000
Less accumulated depreciation and amortization (536,000)
-------------
$ 837,000
=============
7. Investment in Partnership
The Company has 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 50% of the agreed value of 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. TLC then
purchased the other 50% interest in the simulation system for $600,000.
F-13
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
Summarized unaudited financial information for TLC is as follows:
Years Ended
April 30,
1997 1996
----------------------
Total assets $ 828,000 $1,015,000
Total liabilities 737,000 675,000
----------------------
Net equity $ 91,000 $ 340,000
======================
Revenues $ 668,000 $ 275,000
Net loss $ (319,000)$ (480,000)
======================
Company equity in loss from
partnership $ (47,000)$ (133,000)
======================
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.
8. Notes Payable
Notes payable at April 30, 1997 are comprised of the following:
Note payable to a stockholder with
interest due monthly at a rate of 15%,
due on demand, secured by a building $ 402,000
Note payable to a stockholder with
interest due monthly at a rate of 15%,
due on demand, secured by receivables 160,000
Note payable to a financial institution
due with interest at a rate of 2% per
month, on demand, secured by receivables 100,000
Note payable to a financial institution
with interest at a rate of 2% per
month, due on demand, secured by receivables 45,000
Note payable to a financial institution
with interest at a rate of 18%, due on
demand, secured by receivables 10,000
------------
$ 717,000
============
F-14
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
9. Long-Term Debt
Long-term debt at April 30, 1997 is comprised of the following:
Unsecured note payable to an individual
with interest at 12% due monthly and
monthly principal installments of
$25,000 beginning January 1998 $ 250,000
Note payable to an individual in
monthly installments of $1,750,
including interest at 8.5%, secured by
a building 195,000
Note payable to a bank with interest
due monthly, at a rate of prime plus
2.5% (11% at April 30, 1997) 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 140,000
Note payable to a bank in monthly
installments of $1,362, including
interest at 10.5%, secured by a building 110,000
Note payable to a bank in monthly
installments of $10,000, including
interest at prime plus 2% (10.50% at
April 30, 1997), secured by inventory
and a note receivable 69,000
Note payable to a bank in monthly
installments of $3,737, including
interest at prime plus 2% (10.50% at
April 30, 1997), secured by accounts
receivable, equipment, and inventory 61,000
Unsecured note payable to a financial
institution in monthly installments of
$2,100, including interest at 12% 60,000
F-15
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
9. Long-Term Debt Continued
Note payable to a vendor in monthly
installments of $7,540, including
interest a prime plus 2% (10.50% at
April 30, 1997), secured by equipment 53,000
Unsecured note payable to a
professional corporation for services
provided, due with interest at 10%,
January 1999 50,000
Note payable to a financial institution
in monthly installments of $523,
including interest at 9.25%, secured
by a vehicle 4,000
Unsecured note payable to an individual
in monthly installments of $400,
including interest at 8% 4,000
Unsecured note payable to an individual
in monthly installments of $525
including interest at 12%, due on demand 1,000
-----------
997,000
Less current portion (241,000)
-----------
Long-term debt $ 756,000
===========
9. Long-Term Debt Continued
Future maturities of long-term debt are as follows:
Year Ending Amount
-----------
1998 $ 241,000
1999 206,000
2000 248,000
2001 210,000
2002 7,000
Thereafter 85,000
-----------
$ 997,000
===========
F-16
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
10. 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, 1997, there were 358,795 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 for 1997 and 1996 of approximately $804,000 and $626,000,
respectively, or $2.24 and $1.68 per share, respectively. 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.
11. Income Taxes
The income tax benefit differs from the amount computed at federal statutory
rates as follows:
Years Ended
April 30,
1997 1996
-----------------------
Income tax benefit at statutory rate $ 1,959,000 $ 566,000
Change in valuation allowance (1,800,000) (555,000)
Stock warrants granted (57,000) -
Life insurance and meals (21,000) (11,000)
Other (81,000) -
-----------------------
$ - $ -
=======================
F-17
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
11. Income Taxes Continued
Deferred tax assets (liabilities) at April 30, 1997 are comprised of the
following:
Net operating loss carryforward $ 2,930,000
Depreciation (3,000)
Accrued commission 2,000
Accrued bonuses 58,000
Allowance for bad debts 112,000
Donation carryforward 8,000
-------------
3,107,000
Valuation allowance (3,107,000)
-------------
$ -
=============
At April 30, 1997, the Company has a net operating loss carryforward available
to offset future taxable income of approximately $8,600,000, 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.
12. Inventory and Software Development Write-Down
During 1997 and 1996, the Company evaluated the recoverability of costs
associated with certain inventories and software development costs and
determined the net realizable value was less than the recorded cost,
consequently, the following adjustments were recorded:
1997 1996
-----------------------
Inventory $ 1,110,000 $ 285,000
Software development costs 1,233,000 -
-----------------------
$ 2,343,000 $ 285,000
=======================
F-18
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
13. Supplemental Cash Flow Information
During the year ended April 30, 1997, the Company converted 12,900 shares of
preferred stock to 25,800 shares of common stock in accordance with the
preferred stock conversion feature.
During the year ended April 30, 1996:
> The Company acquired equipment in exchange for long-term debt
of $151,000.
> The Company reduced certain accounts payable and long-term debt
in the amount of $360,000 in exchange for common stock.
> The Company reduced related party receivable by $133,000,
accounts payable by $103,000, 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
$9,000 in exchange for a vehicle.
> The Company converted 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).
Years Ended
April 30,
1997 1996
-----------------------
Interest $ 241,000 $ 211,000
======================
Income taxes $ - $ -
======================
F-19
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
14. Major Customers and Export Sales
Sales to major customers which exceeded 10 percent of net sales are as
follows:
Years Ended
April 30,
1997 1996
-----------------------
Company A $ 972,000 $ -
Company B 675,000 -
Company C 299,000 -
Company D - 1,110,000
Company E - 911,000
Company F - 398,000
Export sales to unaffiliated customers were as follows:
Years Ended
April 30,
1997 1996
-----------------------
Region
North America (excluding the U.S.) $ 324,000 $1,402,000
Asia 972,000 1,235,000
South America - 332,000
Australia 227,000 227,000
Europe - 106,000
-----------------------
$1,523,000 $3,302,000
=======================
15. Stock Options
Information regarding the Company's stock options are summarized below:
Number of Option Price
Options Per Share
----------------------------
Outstanding at April 30, 1996 1,255,000 $ .05 - 1.25, *
Granted 335,000 $1.00 - 1.50
Expired (200,000) $ .50 - 2.00
----------------------------
Outstanding at April 30, 1997 1,390,000 $ .50 - 1.50,*
============================
Options exercisable at April 30, 1997 and 1996 are 1,390,000 and 1,185,000,
respectively.
* Some option prices are based on the stock trading price. At
April 30, 1997 and 1996, the Company's stock was not trading
and, therefore, this amount could not be determined.
F-20
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
16. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123) which established financial accounting and reporting
standards for stock-based compensation. The new standard defines a fair value
method of accounting for an employee stock option or similar equity
instrument. This statement gives entities the choice between adopting the
fair value method or continuing to use the intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25 with footnote disclosures of
the pro forma effects if the fair value method had been adopted. The Company
has opted for the latter approach. Accordingly, no compensation expense has
been recognized for the stock option plans. Had compensation expense for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in 1997 and 1996 consistent with the provisions of FAS
No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
Years Ended
April 30,
1997 1996
-------------------------
Net loss applicable to common stock-
as reported $(5,971,000) $(1,872,000)
Net loss applicable to common stock-
pro forma $(6,010,000) $(1,911,000)
Loss per share - as reported $ (.56) $ (.19)
Loss per share - pro forma $ (.56) $ (.20)
==========================
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
April 30,
1997 1996
-----------------------
Expected dividend yield $ - $ -
Expected stock price volatility 39.85% $ -
Risk-free interest rate 4.5% 4.5%
Expected life of options - 3-5 years
=======================
The weighted average fair value of options granted during 1997 and 1996 are
$-0- and $1.00, respectively.
F-21
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
16. Stock-Based Compensation
The following table summarizes information about fixed stock options
outstanding at April 30, 1997
Options Outstanding Options Exercisable
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted
Number Average Number
Range of Outstand- Remaining Weighted Exercis- Weighted
Exercise ing at Life Average able at Average
Prices 4/30/97 (Years) Price 4/31/97 Price
-------------------------------------------------------------------
$ 0.00 50,000 3.75 $ 0.00 50,000 $ 0.00
0.50 100,000 1.00 0.50 100,000 0.50
1.00 905,000 2.99 1.00 905,000 1.00
1.25 to 1.50 325,000 1.23 1.46 325,000 1.46
2.00 10,000 0.42 2.00 10,000 2.00
-------------------------------------------------------------------
$ .002 to 2.00 1,390,000 2.45 $ 1.04 1,390,000 1.04
===================================================================
</TABLE>
17. Fair Value of Financial Instruments
All financial instruments are held for purposes other than trading. The
Company estimates that the fair value of all financial instruments at
April 30, 1997, 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 judgment 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.
18. Shareholder Litigation
The Company was a Defendant in a class action lawsuit filed by certain
stockholders of the Company alleging that the company published or released
false or misleading information relating to the recognition of revenue on
certain contracts and improperly capitalizing certain simulator development
costs. Following a trial, which commenced on September 30, 1996, the Company
was found to be twenty-five (25%) percent liable to the Class Members in the
lawsuit. In addition, the Company's subsidiary, Digitran, Inc., was also
found liable for twenty-five (25%) percent of the damages, and the Company's
former President, Donald G. Gallent, was found to be fifty (50%) percent
liable, and a Judgement was rendered at the time in the amount of $13,000,000,
F-22
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
which judgement was rendered in total against all three defendants, without
attribution of pro rata fault. The Company reached a court approved
Settlement Agreement with Class Counsel as of July 15, 1997. The Settlement
Agreement calls for Digitran to pay the sum of $600,000 within forty-five days
of the date of the preliminary district court approval by the United States
District Court for the District of Utah, and two additional payments of
$200,000 each. The first installment payment of $200,000 will be due six
months after preliminary approval of the Settlement, and the second and final
payment of $200,000 will be due within 12 months from the date of the
preliminary approval of the Settlement by the court. The Company paid the
initial payment of $600,000 within the due date called for in the settlement
agreement. All other parties to the action have dismissed their claims and
there will be no appeal by any party to the Company's knowledge at this time.
Based on this settlement agreement, as of April 30, 1997, the Company has
included $1,000,000 in accrued expenses.
19. Bankruptcy
The Company filed bankruptcy under the provisions of Chapter 11 on September
27, 1996. The action was a precautionary measure in view of the pending class
action lawsuit filed by certain shareholders as discussed more thoroughly in
Note 18. The lawsuit was settled in July 1997, and the U.S. Bankruptcy Court
dismissed the action in bankruptcy on August 8, 1997. The Company is no
longer in bankruptcy.
20. Commitments and Contingencies
The Company has been named as a defendant in a lawsuit filed by a former
employee of the Company alleging breach of contract. In addition, subsequent
to April 30, 1997, certain other former employees have threatened action
against the Company alleging breach of contract. Based on information
currently available, the damages from such litigation, 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 these cases.
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.
F-23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIGITRAN
SYSTEMS, INCORPORATED AND SUBSIDIARY APRIL 30, 1997 FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 39,000
<SECURITIES> 0
<RECEIVABLES> 308,000
<ALLOWANCES> 80,000
<INVENTORY> 515,000
<CURRENT-ASSETS> 793,000
<PP&E> 1,373,000
<DEPRECIATION> 536,000
<TOTAL-ASSETS> 1,780,000
<CURRENT-LIABILITIES> 3,950,000
<BONDS> 1,714,000
0
4,000
<COMMON> 106,000
<OTHER-SE> (3,036,000)
<TOTAL-LIABILITY-AND-EQUITY> (2,926,000)
<SALES> 2,900,000
<TOTAL-REVENUES> 2,900,000
<CGS> 1,662,000
<TOTAL-COSTS> 4,287,000
<OTHER-EXPENSES> 4,247,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259,000
<INCOME-PRETAX> (5,763,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,763,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,763,000)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
