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, 1998
[ ] 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 OTC Bulletin Board
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)
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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: 1998 - $3,190,000
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 Registrant's voting stock
held by non-affiliates of the Registrant was approximately 9,282,475 at April
30, 1998, computed at the closing quotation for the Registrant's common stock of
$1.00 as of April 30, 1998.
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, 1998 there were
12,807,755 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
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
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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 are used to train personnel in the petroleum, transportation, and
construction industries. The Company began marketing its first simulator
training systems in 1979 and currently markets a variety of simulator training
systems for crane operations, petroleum operations and heavy duty truck driving.
Going Concern Qualification
- ---------------------------
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. For the year ended April 30, 1998 the
"going concern" assumption is qualified due to the Company's current financial
condition and the Company's inability to achieve and sustain profitable
operations in recent years. The company's operations were greatly affected by a
shareholder lawsuit which began in 1992 and was fully satisfied in July of 1998.
Bankruptcy
- ----------
During this period Digitran Systems, Incorporated, the holding Company, filed
for protection from the shareholder litigation under provisions of Chapter 11 of
the U.S. Bankruptcy code. This was done as a precautionary measure in
anticipation of a judgement against the Company. This judgement was later
settled and paid. After settlement, the Company withdrew its bankruptcy
petition. No debts were compromised by the bankruptcy. Full details of the
Bankruptcy were included in previous filings.
Simulator Training Systems
- --------------------------
The Company's simulator training systems generally consist of an instructor's
console; various student consoles; visual, motion and sound subsystems; 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.
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Training simulators offer higher quality, more frequent 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 are lower than the
costs associated with using actual equipment dedicated to training. Also, the
use of the simulator allows 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 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:
Type of Crane Where Mounted Principal Purpose
- --------------------------------------------------------------------------------
Gantry-Single Lift Port Dock Container Management
Gantry-Twin Lift Port Dock Container Management
Gantry-Rubber Tire Port Dock Container Management
Pedestal Port Dock Cargo/Supplies Management
Ship Gantry Ship Cargo/Supplies Management
Ship Pedestal Ship Container/Cargo/Supplies Management
Offshore Lattice Oil Drilling Rig Container/Cargo/Supplies Management
Lattice Truck Bulk Materials Management
Telescopic Truck Precision Materials Management
Tower Stationary Heavy Construction Management
Simulated training addresses the two major concerns regarding the operation of
cranes: safety and efficiency. Competitive and cost pressures drive the industry
to improve its overall levels of safety, thus reducing the risk of injury and
damage. In addition, crane operators need to operate as efficiently as possible.
The Company's products have proven to improve both crane operation safety and
efficiency.
Simulator training helps reduce the operator's exposure to liabilities for an
accident should it occur. First, by providing a standard by which competencies
can be measured and maintained, thus reducing the chance of an accident.
Secondly, by providing standardized documentation of the operator's achieved
skill level, thus reducing the chance that the operator can be found liable for
not providing sufficient training to its employees.
The Company's crane simulation systems provide customers with simulation
equipment that can be tailored to the various specific needs of each customer.
The cab enables users to simulate many different kinds of cranes with the same
system. The universal cab features interchangeable control panels designed to
closely resemble crane controls. 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
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knowledge of computers. The hydraulic motion system is designed to imitate the
variety of movements an operator experiences in an actual crane.
Included within the simulation experience is the capability to modify and
complicate a scenario so that it resembles actual working conditions. The
Company's crane operations simulator training systems have been designed to give
the trainee hands-on experience in picking up and moving cargo loads under
varying normal, abnormal and emergency conditions and to develop the hand-eye
coordination needed to operate a large crane. Once a trainee has completed a
simulation scenario, the computer analyzes his performance and generates a
printed summary for review. The Company's simulators are created with the
possibility of future upgrades to include additional training applications.
Petroleum Operations Simulator Training Systems
- -----------------------------------------------
The market for simulator training systems for the petroleum industry originated
in the mid-1970's and grew in response to increased use of advanced technologies
in petroleum operations. Because of the high costs and environmental risks of
accidents in the petroleum industry, particularly in off-shore locations, there
is an increasing need to train production and engineering personnel in order to
reduce the risk of accidents caused by operator error. The Company's main
petroleum products are briefly summarized below:
TYPE OF SIMULATOR/SOFTWARE TRAINING AREAS
- --------------------------------------------------------------------------------
Drilling and Well Control Day to day operations and emergencies:
- ------------------------- --------------------------------------
Full size, portable and Drilling techniques
ultra lite versions Blowout Prevention
Land or off-shore operations Cementing
Directional Drilling
Mud analysis's Treatment
Drill Stem Testing, etc.
Production and Workover Procedures and Theory of Production and
- ----------------------- ---------------------------------------
Full size and portable versions Workover operations:
Land and off-shore operations --------------------
Forward and reverse circulation
Reservoir flow testing
Bullheading
Lubricate and Bleeding
Formation fracturing
Equipment failures, etc.
Student Training Programs
- --------------------------
Drill Track Directional Drilling
Drill Trainer Cost Estimation
- --------------------------------------------------------------------------------
Many other products are currently under development.
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Truck and Heavy Vehicle Operations Simulation Systems.
- ------------------------------------------------------
The Company has developed a heavy duty truck simulator for use in training
drivers in varying types of truck use, from mining and over-the-road hauling
using single, double, triple and tanker trailers, to localized applications such
as those found within ports, terminals and airports. The truck simulator
consists of a truck cab, motion base, projection screen and instructor's console
similar to those found in the Company's crane simulation systems.
The truck simulator 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. 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 5."
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Sales
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Revenues for the year ended April 30, 1998 were as follows:
Simulators % Support Contracts % Total %
---------- - ----------------- - ----- -
Crane $ 1,563,208 49 333,930 10 1,897,138 59
Petroleum 1,088,967 34 44,346 2 1,133,313 36
Vehicle 160,000 5 -0- - 160,000 5
- --------------------------------------------------------------------------------
Total $ 2,812,175 88% $ 378,276 12% $ 3,190,451 100%
- --------------------------------------------------------------------------------
Significant fluctuations in the relative percentages are expected between
periods due to the high dollar value and contracts as a one contract difference
may have a significant effect on relative percentages.
Marketing
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Since the Company's traditional products require considerable customer education
and post sales support, the Company primarily markets its simulators through
direct contacts between its own 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.
Trade Shows
- -----------
Large simulators are most conveniently marketed through demonstrations at trade
shows. Potential customers from all over the world attend up to a dozen shows.
The Company had not been able to afford to participate in these events from 1992
through 1997. However, in 1998, the Company did attend 6 significant trade
shows. Responses and new contacts were very favorable. Through attendance at
these trade shows, the Company was able to re-establish its presence in the
industry.
Web Site
- --------
The Company continues to invest in internet technology and in its web site.
Marketing brochures, price lists and Company information, etc. are all being
built into the web site. This greatly reduces mailing costs, time and
misunderstandings. The Company expects the web site to ultimately be the primary
vehicle for communicating information to existing and potential customers.
Marketing Strategy
- ------------------
The target markets for the Company's crane products include maritime
universities and training centers, major world ports (or minor port
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"cooperatives"), port authorities and port terminals, insurance risk management
centers, unions and industry trade associations, construction contractors and
crane manufacturers. In the petroleum industry, the target markets include large
oil companies, major drilling contractors, petroleum engineering institutions,
colleges, universities and petroleum training centers. 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) The existence, or lack thereof, of competing and comparable simulation
products.
2) Customers see the need for the application of simulation technology in
their training.
3) Potential customers have the resources to justify expenditures for
simulation equipment.
4) There is a sufficient profit potential.
5) The Company has the possibility of gaining market dominance.
6) The market is not sufficiently large to attract larger, more established
simulation competitors.
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, 1998 and 1997, net sales to the
following customers accounted for more than 10% of the Company's sales:
1998 1997
------- -------
Customer A 890,000
Customer B 345,000
Customer C 306,000
Customer D 972,000
Customer E 675,000
Customer F 299,000
The Company's significant customers usually change from year to year.
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Competition
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The overall simulator training system market, which includes aviation, military,
nuclear power plant and petroleum 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
petroleum operations simulator training systems market. Drilling Systems, Ltd.
has been in the business of making petroleum operations simulator training
systems since 1988. CS Manufacturing has been in business for approximately 6
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. Maritime Dynamics has
relatively few installations and does not compete well against the Company.
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
- -----------------------------------
The Company generally will not build a simulator without an order. On occasion,
however, it will build one of each kind of significant simulator to use for
demonstrations and trade shows. This practice also allows for quicker deliveries
of contracted sales.
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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
system is subject to acceptance procedures by the customer, before and/or after
shipment.
The Company chooses to procure certain simulator components from single sources.
A majority of the components of the simulation systems are available from
multiple sources and 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.
Since many components used in the simulators are unique to the Company's
products, suppliers sometimes require lead times and minimum orders. The Company
is careful to manage its projects so as to keep its investment in inventory
parts relatively low, yet ample.
Product Warranty and Service
- ----------------------------
The Company warrants its simulator training systems to be free of defects in
materials and workmanship for a period of 12 months following delivery. During
the warranty period, the Company will repair or replace the defective part
without charge. At the end of the warranty period, customers can purchase
extended maintenance agreements.
The Company's simulator training systems are equipped with built-in hardware
diagnostic abilities which help identify failures, if any. Users of petroleum
systems are given a spare parts kit which contains parts and tools to enable
them to routinely maintain the simulator. Most of the Company's simulator
training systems also are equipped with a modem so that the Company can monitor
a system via telecommunications to 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
relatively low to date.
Research and Development
- ------------------------
In the past, the Company did not invest in research and development unless a
customer had engaged it to develop a project or unless the market demanded
certain product enhancements. The Company did not spend much on research and
development during the fiscal year due to economic constraints. However, the
Company expects to devote considerable resources to product development
beginning in Fiscal Year 1999 in order to be more pro-active in its product
offering.
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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 to the equipment by virtue of the terms of its contracts 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, the Company may incur additional expenses to collect
the receivable or repossess the simulator. 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 protects 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, 1998, the Company had 39 full-time employees and 2 part time
employees. As of April 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. The Company is not a party to
any collective bargaining agreements.
ITEM 2 DESCRIPTION OF PROPERTY
- -------------------------------
The facilities of the Company consist of two separate buildings located in North
Logan, Utah. The administration and engineering offices of the Company are
located at 2176 North Main, North Logan, Utah. This building was purchased in
February 1991 and has approximately 10,000 square feet of space. Approximately
1700 square feet is leased to other businesses on a month to month basis. As of
April 30, 1998, the property was subject to mortgages and deeds of trust of
approximately $237,000.
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In January 1993 the Company completed construction of an 11,250 square foot
production facility adjacent to the building described above. The building is
utilized by all manufacturing divisions for production, storage and offices. As
of April 30, 1998, the property was subject to mortgages and deeds of trust of
approximately $125,000.
The Company's former administrative offices, located at 90 North 100 East,
Logan, Utah is currently listed for sale. The building, purchased in 1989, has
approximately 9,000 square feet, 1,500 of which was leased to other businesses
on a month to month basis. As of April 30, 1998, the property was subject to
mortgages and deeds of trust of approximately $587,000.
Subsequent to the year end April 30, 1998, the Company entered into a
sale-leaseback of the buildings in North Logan with a significant shareholder.
The properties are now subject to a 10 year lease.
ITEM 3 LEGAL PROCEEDINGS
- -------------------------
As of April 30, 1998, the Company owed $200,000 toward the settlement of a
judgement in a shareholder suit. On July 21, 1998 the $200,000 payment was made.
In the normal course of business, there may be various other legal actions and
proceedings pending which seek damages against the Company. The Company is not
current in all of its obligations. The potential resolution of these obligations
could cause the Company harm. Since the Company's management believes that it
will ultimately be successful in reorganizing its capital and debt structure, in
their opinion 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 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.
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PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------
Market Information
- ------------------
Since trading of the Company's stock was suspended on May 21, 1993, the
securities were not listed on a public exchange until April 7, 1998 when the
stock (symbol DGTS) was listed on the OTC Bulletin Board.
Market information follows:
1999 1998 1997
---- ---- ----
High Low High Low High Low
---- --- ---- --- ---- ---
1st Quarter 1 3/8 41/72 n/a n/a n/a n/a
2nd Quarter 3/4 1/4 n/a n/a n/a n/a
3rd Quarter 19/48 7/32 n/a n/a n/a n/a
4th Quarter n/a n/a 1 3/8 1 n/a n/a
Shareholders
- ------------
As of April 30, 1998, the Company had 731 record holders of its Common Stock and
one (1) record holder of its Class B Common Stock as well as 22 record holders
of its Series 1, Class A 8% Cumulative Convertible Preferred Stock (the
Preferred Stock) as reflected on the books of the Company's transfer agent.
Dividends
- ---------
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.
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. No dividends have been paid since March 15, 1993 resulting in dividends in
arrears of $402,548 as of April 30, 1998. Dividends on Preferred Stock cannot be
paid as long as there exists an Accumulated Deficit. Given the amount of the
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Accumulated Deficit, it is not likely that Dividends will be allowed for several
years. Therefore, the Company has offered, and most shareholders have agreed, to
convert the preferred shares into common shares under the belief that the share
price of common stock would recover its value and exceed the continued accrual
of dividends on Preferred Stock.
There are not sufficient preferred shares (left unconverted) to trade publicly.
The Company will continue to encourage Preferred shareholders to convert their
shares into common stock so they might recover their investment more quickly.
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".
Plan of Operation.
- ------------------
One of Management's primary objectives is to improve the balance sheet and
financial condition of the Company. Significant improvement was achieved during
the fiscal year. The Company's financial condition as of April 30, 1997
reflected a negative net book value of $2,926,000. Book value does not always
reflect a company's fair market value or intrinsic value. The Company's current
condition is mostly due to aggressive write-offs of all intangible assets
including the Company's software. The software has significant fair market value
although it is carried on the books at no value. In addition, the Company's tax
net operating loss carryforward will have value up to approximately $3.4 million
when and if the Company achieves and sustains profitable operations.
The Company improved its financial condition by 39% by reducing its negative net
book value to $1,778,000 versus $2,926,000 at April 30, 1997. The components of
the change during the year ended at April 30, 1998 reflected in the Company's
book value are summarized below:
Book value at April 30, 1997 ($ 2,926,000)
Proceeds from Sale of Stock in Private Placement 932,000
Issuance of Shares and Warrants for Services 473,000
Conversion of Accounts and Notes Payable to Stock 1,107,000
Net Loss for Year Ended April 30, 1998 ( 1,364,000)
--------------
Book Value at April 30, 1998 ($ 1,778,000)
==============
The Company's resources have been strained severely by the cost of business
interruptions, litigation and settlement of the shareholder lawsuit. The Company
paid $800,000 of its $1,000,000 settlement during the current year.
Nevertheless, 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
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with international customers, and the fact that the Company did not have access
to traditional credit and reasonably priced bank financing. The Company's
operations did not generate sufficient cash flow in fiscal year 1998.
The Company's continued existence as a going concern is dependent upon achieving
profitable operations and receiving long term debt or equity financing.
Therefore, the Company is making every effort to bring to closure sufficient of
the proposals currently outstanding to potential customers, to locate additional
customers, and to maximize utilization of available resources.
Management's Future Plans
- -------------------------
To allow the Company to move forward, grow and have sufficient liquidity for
future operations, the Company is seeking to restructure its finances as
follows. In the absence of this or a similar refinancing, the Company will
experience cash flow problems on a chronic basis until operations can generate
positive cash flow:
(1) Equity Financing $3,000,000
Senior Debt 1,500,000
Line of Credit 500,000
----------
Total $5,000,000
==========
(1) The Company is seeking to sell common stock in a Private Placement
Offering. However, other potential equity instruments such as a
separate class of Preferred Shares is also possible.
The Use of Proceeds from the financing are described as follows:
Commissions $ 300,000
Payments for Short Term Debt 500,000
Overdue Payables - Key Vendors 500,000
Payment for Long Term Debt 500,000
Product Development 350,000
Increased Marketing Efforts 150,000
Increased Engineering Personnel 150,000
Stock Market Relations 50,000
Working Capital and General Corporate
Purposes to Finance Growth 2,500,000
----------
Total $5,000,000
==========
15
<PAGE>
Management's Discussion and Analysis of the Results of Operations 1998 vs. 1997.
- --------------------------------------------------------------------------------
Net Sales. Net Sales for 1998 were $3,190,000 as compared to $2,900,000 in 1997
for a 10% increase. The sales mix between foreign and domestic sales for 1998
versus 1997 remained relatively consistent at 67% and 33% respectively.
In 1998, the Company sold 1 crane simulator and an upgrade for $1,563,000 versus
2 crane simulator sales for $1,800,000 in 1997, contributing to a 15% decline in
crane revenues. Petroleum revenues, on the other hand, increased 59% to
$1,089,000. Support and other revenue increased 30% to $538,000. The Company was
adversely affected by currency difficulties in Asia and the Pacific Rim
Countries. The Company estimates nearly $4 million in sales were lost or
postponed because of market conditions in Asia and surrounding countries.
In spite of Digitran's condition, there are dozens of sizeable active projects
currently in various stages of approval for crane, petroleum and vehicle
simulators. In many situations, Digitran is the sole or recognized superior
bidder. Only a few of these potential contract awards can change the condition
of Digitran significantly. The Company is also introducing a new line of smaller
simulators that will be more affordable to smaller organizations.
Cost of Goods Sold. Cost of Goods Sold improved from 57% in 1997 to 47% in 1998.
This was due primarily to the lack of amortization of capitalized software
costs, (which were written off in previous years) and better inventory control.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses for 1998 were $2,549,000 versus $2,196,000 for 1997 for
a 16% increase. The increase was due primarily to several expenses in 1998 that
were directly related to the final settlement of the shareholder suit and the
condition in which it left the Company:
Legal Fees $ 190,000
Professional Consulting 195,000
Financing Fees 75,000
-----------
Subtotal $ 460,000
Interest Expense 400,000
-----------
Total $ 860,000
===========
The Legal fees and Professional Consulting fees are not expected to continue at
this level. The interest and finance fees will continue until the Company can
restructure its finances, at which time it hopes to reduce interest costs by 50%
or eliminate it totally. In addition, the Company spent $355,000 on travel and
lodging in an effort to stimulate sales and attend trade shows. As the web site
is improved, travel costs should decrease significantly.
There were no capital expenditures for the year ended April 30, 1998. However,
both of the Truck Simulators were repossessed during the year. One was
16
<PAGE>
capitalized on the books as a fixed asset and carries an estimated value of
$150,000. It will be depreciated over two years (the remaining life of its
lease). The other simulator is currently carried at no value on the books.
Year 2000 Disclosure.
- ---------------------
Some of the Company's software products have to be modified to operate in the
year 2000. Planned product upgrades are expected to remedy this condition. These
upgrades are expected to be completed by the fall of 1999. In addition, the
Company's own internal network software is not year 2000 compliant.
Management estimates it will cost approximately $100,000 to make the product
software modifications and an additional $50,000 to replace its own internal
network software. Management believes the risk of not being able to complete the
upgrades on its product software, is remote. Financial constraints might
endanger the timely replacement of the internal network software. In the event
the replacement is delayed, the Company feels that it can adequately operate
with the addition of a few manual procedures, until such time as the replacement
is made.
RESULTS OF OPERATIONS 1997 VS. 1996
- -----------------------------------
Net Sales. Net Sales for 1997 were $2,900,000 as compared to $3,432,000 in 1996.
Net sales decreased by $532,000, about 19%, 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.
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
17
<PAGE>
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.
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
18
<PAGE>
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.
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, 1998 and
1997.
ITEM 7 FINANCIAL STATEMENTS
- ----------------------------
The Consolidated Financial Statements are filed as part of this Annual Report on
Form 10-KSB.
<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>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
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, 1998, and the related consolidated statements of operations,
shareholders' deficit, and cash flows for the years ended April 30, 1998 and
1997. 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, 1998, and the results of their operations and their
cash flows for the years ended April 30, 1998 and 1997, 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
September 11, 1998
F-2
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1998
- --------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 65,000
Accounts receivable 295,000
Inventories 696,000
--------------
Total current assets 1,056,000
Property, plant and equipment, net 878,000
--------------
$ 1,934,000
--------------
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable $ 916,000
Accrued expenses 644,000
Current portion of notes payable 1,099,000
--------------
Total current liabilities 2,659,000
--------------
Notes payable 1,053,000
--------------
Commitments and contingencies -
Shareholders' deficit:
Preferred stock, $.01 par value, 1,000,000 authorized,
143,767 shares issued and outstanding (aggregate
liquidation preference $1,409,000), (entitled to
one-tenth vote per share) 1,000
Common stock, $.01 par value; 25,000,000 shares
authorized, 12,807,755 shares issued and outstanding
(entitled to one-tenth vote per share) 128,000
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 value 8,784,000
Accumulated deficit (10,711,000)
--------------
(1,778,000)
--------------
$ 1,934,000
--------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statement of Operations
Years Ended April 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Net sales $ 3,190,000 $ 2,900,000
Cost of sales 1,515,000 1,662,000
-----------------------------------
Gross profit 1,675,000 1,238,000
Selling, general and administrative expenses 2,549,000 2,196,000
Depreciation and amortization 109,000 136,000
Bad debt expense - 293,000
-----------------------------------
Loss from operations (983,000) (1,387,000)
Other income (expense):
Interest expense (399,000) (259,000)
Inventory and software development write-down - (2,343,000)
Litigation settlement and related costs - (1,539,000)
Stock compensation expense - (318,000)
Equity in loss from partnership - (47,000)
Other income 18,000 130,000
-----------------------------------
Loss before income taxes (1,364,000) (5,763,000)
Income tax benefit - -
-----------------------------------
Net loss $ (1,364,000)$ (5,763,000)
-----------------------------------
Dividends on convertible preferred stock; unpaid (81,000) (208,000)
-----------------------------------
Net loss applicable to common stock $ (1,445,000)$ (5,971,000)
-----------------------------------
Loss per common share-basic and fully diluted $ (.12)$ (.56)
-----------------------------------
Weighted average number of common stock and common
equivalent shares 11,800,000 10,732,000
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statement of Shareholders' Deficit
Years Ended April 30, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------
Class B Capital in Accumu-
Preferred Stock Common Stock Common Stock Excess of lated
--------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Par Value Deficit
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 1, 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 -
Shares issued as
payment of liabilities - - 1,702,000 17,000 - - 1,085,000 -
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)
Shares issued for cash - - 931,731 10,000 - - 922,000 -
Shares issued for
services - - 1,041,038 10,000 - - 463,000 -
Shares issued in
payment of liabilities - - 1,574,533 16,000 - - 1,092,000 -
Conversion of preferred
stock to common stock (215,028) (3,000) 639,584 6,000 - - (4,000) -
Net loss - - - - - - - (1,364,000)
-------------------------------------------------------------------------------------
Balance at April 30, 1998 143,767 $ 1,000 12,807,755 $ 128,000 2,000,000 $ 20,000 $8,784,000 $(10,711,000)
--------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Consolidated Statement of Cash Flows
Years Ended April 30,
- ----------------------------------------------------------------------------------------------------------
1998 1997
-----------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (1,364,000) $ (5,763,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 109,000 136,000
Inventory and software development write-down - 2,343,000
Issuance of common stock for services 1,580,000 163,000
Issuance of stock warrants for services - 168,000
Gain on forgiveness of debt - (95,000)
Payment of loan fees by related party in exchange for reduction
of related party receivable - 83,000
Payment of services in exchange for notes payable 309,000 -
Payment for inventories in exchange for notes payable 30,000 -
Provision for losses on accounts receivable (80,000) 281,000
Equity in loss from joint venture - 47,000
(Increase) decrease in:
Accounts receivable 13,000 (71,000)
Inventory (151,000) 172,000
Costs in excess of billings - 485,000
Prepaids and other current assets 11,000 (10,000)
Note receivable - -
Increase in:
Accounts payable and other current liabilities (1,154,000) 1,699,000
Billings in excess of costs (267,000) 154,000
-----------------------------------
Net cash (used in) provided by
operating activities (964,000) (208,000)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment - (21,000)
Increase in capitalized simulator costs - (144,000)
-----------------------------------
Net cash used in
investing activities - (165,000)
-----------------------------------
Cash flows from financing activities:
Proceeds from notes payable 817,000 1,723,000
Payments on notes payable (759,000) (1,382,000)
Issuance of common stock 932,000 -
-----------------------------------
Net cash provided by
financing activities 990,000 341,000
-----------------------------------
Net increase (decrease) in cash 26,000 (32,000)
Cash, beginning of year 39,000 71,000
-----------------------------------
Cash, end of year $ 65,000 $ 39,000
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1998 and 1997
- --------------------------------------------------------------------------------
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. The effect of such recurring operating
losses and litigation has been to render the Company unable to obtain
competitive borrowing facilities or equity financing. 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 additional equity financing and profitable
operations through increased sales.
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 valued at net realizable value.
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.
- --------------------------------------------------------------------------------
F-8
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Continued
Amortization of the capitalized simulator development costs is computed on a
product by product basis over the estimated useful life of the product,
generally seven years. Software costs are carried at the net of unamortized cost
or net realizable value. Net realizable value is reviewed on an annual basis
after assessing potential sales of the product in that the unamortized
capitalized cost relating to each product is compared to the net realizable
value of that product and any excess is written off as required by SFAS No. 86.
During the years ended April 30, 1998 and 1997, the Company wrote off
approximately $-0- and $1,233,000, 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, 1998. 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. As of April 30,
1998, there were no significant contracts in progress.
- --------------------------------------------------------------------------------
F-9
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Continued
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.
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.
- --------------------------------------------------------------------------------
F-10
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Business and Significant Accounting Policies Continued
The Company has cash in bank and short-term investments which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and short-term investments.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain accounts in the 1997 financial statements have been reclassified to
conform with the current year.
2. Detail of Certain Balance Sheet Accounts
Inventories:
Parts and supplies $ -
Work-in-process 126,000
Finished goods 570,000
------------------
$ 696,000
------------------
Accrued expenses:
Accrued expenses $ 378,000
Deferred revenue 66,000
Accrued lawsuit settlement (see Note 16) 200,000
------------------
$ 644,000
------------------
3. Related Party Transactions
At April 30, 1998, the Company included approximately $89,000 of advances and
commissions payable to a shareholder/officer and employees, and $110,000 of
accrued stock compensation to employees in accrued expenses.
- --------------------------------------------------------------------------------
F-11
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
Buildings and improvements $ 765,000
Computer equipment 402,000
Simulator (see Note 5) 150,000
Land 15,000
-----------------
1,332,000
Less accumulated depreciation and amortization (454,000)
-----------------
$ 878,000
-----------------
5. 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, consisting of cash of $50,000 and a note
receivable of $550,000. During the year ended April 30, 1998, the Company
repurchased the 50% interest in the simulator in exchange for relief of the note
receivable of $150,000. The Company, subsequently, entered into an operating
lease agreement with TLC, which calls for monthly payments of $5,000 over a
two-year period. The simulator is included in property, plant, and equipment and
is being depreciated over the two-year lease period.
Summarized unaudited financial information for TLC have not been presented since
the Company has no obligation to fund losses incurred by TLC, and no investment
recorded for the net assets of TLC.
- --------------------------------------------------------------------------------
F-12
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Notes Payable
Notes payable at April 30, 1998 are comprised of the following:
Notes payable to stockholder officers or directors
with interest at a rates ranging from 12% to 25%,
due on demand, unsecured or secured by
receivables $ 553,000
Note payable to a stockholder with interest due
monthly at a rate of 15%, secured by receivables,
due July 1, 1999 462,000
Unsecured note payable to an individual with
interest at 15% due monthly and the total principal
balance due December 31, 1999 250,000
Note payable to an individuals in monthly
aggregate installments of $2,150, including
interest at 8-8.5%, unsecured or secured by a
building 241,000
Note payable to a financial institution due with
interest at a rate of 2% per month, on demand,
secured by receivables 148,000
Note payable to a bank with interest due monthly,
at a rate of prime plus 2.5% (10.75% at April 30,
1998) 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,
with total principal balance due December 27,
1998, secured by a building 125,000
- --------------------------------------------------------------------------------
F-13
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Notes Payable Continued
Note payable to a bank in monthly installments of
$1,362, including interest at 10.5%, due July 3,
2009, secured by a building 108,000
Notes payable to a banks, due on demand with
interest at prime plus 2% (10.25% at April 30,
1998), secured by accounts receivable, 88,000
equipment, inventory and a note receivable
Note payable to a vendor in monthly installments
of $7,540, including interest at prime plus 2%
(10.25% at April 30, 1998), secured by equipment 70,000
Unsecured note payable to a financial institution in
monthly installments of $1,000, including interest
at 12% 56,000
Note payable to a stockholder, with interest at
12%, due when the market price of the Company's
common stock reaches $2.00 per share, secured
by common stock of the Company 40,000
Notes payable to a Company, with interest at 18%,
due on demand, secured by receivables 11,000
-----------------
2,152,000
Less current portion 1,099,000
-----------------
Long-term debt $ 1,053,000
-----------------
Future maturities of notes payable are as follows:
- --------------------------------------------------------------------------------
F-14
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
Year Ending Amount
-----------------
1999 $ 1,099,000
2000 718,000
2001 243,000
2002 7,000
2003 8,000
Thereafter 77,000
-----------------
$ 2,152,000
-----------------
7. 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.
- --------------------------------------------------------------------------------
F-15
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
The Series 1 Class A 8 percent Cumulative Convertible Preferred Stock has a par
value of $.01 per share. As of April 30, 1998, there were 143,767 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 semi-annually on September 15 and March 15. No
dividends have been paid since March 15, 1993, resulting in dividends in arrears
for 1998 and 1997 of approximately $403,000 and $804,000, respectively, or $2.80
and $2.24 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.
8. Income Taxes
The income tax benefit differs from the amount computed at federal statutory
rates as follows:
Years Ended
April 30,
-----------------------------------
1998 1997
-----------------------------------
Income tax benefit at statutory rate $ 442,000 $ 1,959,000
Change in valuation allowance (373,000) (1,800,000)
Stock warrants granted - (57,000)
Life insurance and meals (4,000) (21,000)
Other (65,000) (81,000)
-----------------------------------
$ - $ -
-----------------------------------
- --------------------------------------------------------------------------------
F-16
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) at April 30, 1998 are comprised of the
following:
Net operating loss carryforward $ 3,366,000
Depreciation (3,000)
Accrued commission 31,000
-----------------
3,394,000
Valuation allowance (3,394,000)
-----------------
$ -
-----------------
At April 30, 1998, the Company has a net operating loss carryforward available
to offset future taxable income of approximately $9,900,000, 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.
9. Inventory and Software Development Write-Down
During 1997, 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:
Inventory $ 1,110,000
Software development costs 1,233,000
-----------------
$ 2,343,000
-----------------
10. Supplemental Cash Flow Information
During the year ended April 30, 1998:
o The Company acquired equipment in exchange for extinguishment of a note
receivable of $150,000.
o The Company reduced certain accrued liabilities in exchange for notes
payable of $150,000.
- --------------------------------------------------------------------------------
F-17
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
o The Company reduced short-term notes payable in exchange for long-term debt
of $402,000.
o The Company converted 215,028 shares of preferred stock to 639,584 shares
of common stock in accordance with the preferred stock conversion feature.
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.
Years Ended
April 30,
-----------------------------------
1998 1997
-----------------------------------
Interest $ 288,000 $ 241,000
-----------------------------------
Income taxes $ - $ -
-----------------------------------
- --------------------------------------------------------------------------------
F-18
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Major Customers and Export Sales
Sales to major customers which exceeded 10 percent of net sales are as follows:
Years Ended
April 30,
-----------------------------------
1998 1997
-----------------------------------
Company A $ 890,000 $ -
Company B 345,000
Company C 306,000
Company D - 972,000
Company E - 675,000
Company F - 299,000
Export sales to unaffiliated customers were as follows:
Years Ended
April 30,
-----------------------------------
1998 1997
-----------------------------------
Region
North America (excluding the U.S.) $ 634,000 $ 324,000
Asia - 972,000
Australia - 227,000
Europe 890,000 -
-----------------------------------
$ 1,524,000 $ 1,523,000
-----------------------------------
- --------------------------------------------------------------------------------
F-19
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Earnings Per Share
Information related to earnings per share is as follows:
Years Ended
April 30,
-----------------------------------
1998 1997
-----------------------------------
Basic EPS:
Net loss available to common
stockholders $ (1,445,000) $ (5,971,000)
-----------------------------------
Weighted average common
shares 11,800,000 10,732,000
-----------------------------------
Net loss per share $ (.12) $ (.56)
-----------------------------------
Diluted EPS:
Net loss available to common
stockholders $ (1,445,000) $ (5,971,000)
-----------------------------------
Weighted average common
shares 11,800,000 10,732,000
-----------------------------------
Net income per share $ (.12) $ (.56)
-----------------------------------
- --------------------------------------------------------------------------------
F-20
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Options and Warrants
Information regarding the Company's stock options and warrants are summarized
below:
Number of Option Price
Options and Per Share
Warrants
-----------------------------------
Outstanding at April 30, 1997 1,390,000 $ .40 - 1.50, *
Granted 1,680,000 $ 1.00 - 1.50
Expired or canceled (100,000) $ .40
-----------------------------------
Outstanding at April 30, 1998 2,970,000 $ .50 - 1.50,*
-----------------------------------
Options and warrants exercisable at April 30, 1998 and 1997 are 2,970,000 and
1,390,000, respectively.
* Some option prices are based on the stock trading price.
- --------------------------------------------------------------------------------
F-21
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. 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 1998 and 1997
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,
------------------------------------
1998 1997
------------------------------------
Net loss applicable to common stock-
as reported $ (1,445,000) $ (5,971,000)
Net loss applicable to common stock-
pro forma $ (1,645,000) $ (6,010,000)
Loss per share - as reported $ (.12) $ (.56)
Loss per share - pro forma $ (.14) $ (.56)
------------------------------------
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,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - -
Expected stock price volatility .01% .01%
Risk-free interest rate 5.0% 4.5%
Expected life of options 1-5 years 3-5 years
-----------------------------------
- --------------------------------------------------------------------------------
F-22
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Stock-Based Compensation Continued
The weighted average fair value of options granted during 1998 and 1997 are $.13
and $.19, respectively.
The following table summarizes information about stock options outstanding at
April 30, 1998
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 4/30/98 (Years) Price 4/30/98 Price
- --------------------------------------------------------------------------------
$ .002 50,000 2.49 $ .002 50,000 $ .002
.004 25,000 2.49 .004 25,000 .004
.50 265,000 2.77 .50 265,000 .50
.98 - 1.25 2,065,000 2.39 1.00 2,065,000 1.00
1.50 - 2.00 565,000 1.04 1.51 565,000 1.51
- --------------------------------------------------------------------------------
$.002- 2.00 2,970,000 2.17 $ 1.03 2,970,000 $ 1.03
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. 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, 1998,
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.
- --------------------------------------------------------------------------------
F-23
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
16. 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, 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 called 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 Company has paid the
payments 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, 1998, the Company has included $200,000 in accrued
expenses. Such remaining liability of $200,000 was paid subsequent to April 30,
1998.
17. Bankruptcy
The Company filed bankruptcy under the provisions of Chapter 11 on September 27,
1996. The action was a precautionary measure in view of a pending class action
lawsuit filed by certain shareholders as discussed more thoroughly in Note 16.
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.
18. 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, 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.
- --------------------------------------------------------------------------------
F-24
<PAGE>
DIGITRAN SYSTEMS, INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
18. Commitments and Contingencies Continued
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-25
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- --------------------------------------------------------------------------------
DISCLOSURE
- ----------
None
19
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ---------------------------------------------------------------------
The names, ages and positions of the directors and executive officers of the
Company are as follows:
NAME AGE POSITION
- ---- --- --------
Loretta Trevers 49 President and Chairman of the Board
S. Emerson Lybbert 40 Chief Financial Officer
Sandeep Gupte 32 Executive Vice President of Engineering
Gary Blum 57 Director
Jamie Levey 37 Director
Phillip P. Andrews 49 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 is one of the original founders of the Company in 1979, has
served as President and CEO since March of 1994 and as Chairman of the Board
since 1985. She has been a trustee for the Utah Information Technology
Association since 1990 and is on the board of directors of Biowave, Inc., a
technology company. She received her B.S. degree in Chemistry in 1974 and her
M.S. degree in Biochemistry in 1975.
S. Emerson Lybbert was appointed Chief Financial Officer on March 1, 1998. Prior
to joining the Company, Mr. Lybbert, a certified public accountant and a
certified managerial accountant, was Manager with the public accounting firm of
Price Waterhouse in Tampa, Florida, until 1991. From 1991 to 1994 Mr. Lybbert
was the CFO for HBA Distributors, Inc. He was also employed by Edwards
Manufacturing from 1994 to 1998, holding the position of Chief Financial
Officer. Mr. Lybbert received a B.A. in Accounting in 1983 and his Master of
Professional Accountancy in 1984, from the University of Utah. Mr. Lybbert has
been a shareholder since 1991.
Sandeep Gupte is the Vice President of Engineering at Digitran. He has a B.S.
Degree in Computer Engineering and an M.S. Degree in Computer Science. He began
20
<PAGE>
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.
Gary Blum was appointed director of the Company in October 1994. Mr. Blum is the
principal of the Law offices of Gary Blum, Los Angeles, California, which he
founded in June 1988. Mr. Blum currently serves as a director of PCC Group,
Inc., a publicly held company specializing in the manufacturing and distribution
of personal computers and equipment and training devices. Mr. Blum received an
MBA and JD from the University of Southern California in 1978.
Jamie Levey was appointed director of the Company in November 1994. Jamie Levey
is an independent financial consultant, specializing in international investment
banking activities in the global marketplace. She started her career in finance
based in various locales overseas as a financial manager of an international
travel corporation. After a brief time as an associate of an international
mergers and acquisitions boutique in New York, she spent several years as a
financial analyst at Prudential Bache Capital Funding and, most recently, as a
financial consultant at Merrill Lynch. Ms. Levey has an MBA in Finance and
Investments, is multi-lingual and currently resides in New York and Zurich.
Phillip P. Andrews was appointed director of the Company in July 1998. Mr.
Andrews is the Director of Information Technology of Case Corporation. From 1991
to early 1998, he was employed by EDS in various capacities including Vice
President of Strategic Planning and Strategic Alliance. He has extensive
experience in management and computer technology in several highly-regarded
companies such as Deloitte & Touche, General Electric, IBM and Ford Motor
Company. He is an author and offers expertise regarding megatrends in
information technology to the Pentagon, and is a member of several information
technology organizations. Mr. Andrews received his MBA from Florida Institute of
Technology in 1984 and BSIE in Industrial Engineering from the University of
Toledo in 1974.
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as
- --------------------------------------------------------------------------------
amended.
- --------
During the fiscal year ended April 30,1999, Loretta P. Trevers, officer,
director and beneficial owner of more than 10% of the Common Stock, will file
several late reports on Form 5 relating to sales of stock and gift transactions.
21
<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 $100,000 (the Named
Executive Officers).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------- --------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Awards(s) Options/ Payout sation
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) ($)
- -------- ---- --------- -------- ------- ----------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loretta Trevers
(Chairman of the Board
and Chief Executive Officer)
1998 $140,000 $ -0- (1) -0- 200,000 -0- -0-
1997 $175,000 $ -0- (1) -0- 15,000 -0- -0-
1996 $175,507 $ -0- (1) -0- 100,000 -0- -0-
1995 $176,943 $ -0- (1) -0- -0- -0- -0-
1994 $140,561 $ -0- (1) -0- -0- -0- -0-
</TABLE>
(1) Loretta Trevers also received the use of automobiles purchased by
the Company and personal benefits paid by the Company. The aggregate incremental
cost of these items is less than 10% of the total annual salary and bonus paid
to Loretta Trevers.
Advances
- --------
At the beginning of the year, the Company owed Loretta Trevers $99,582. This
debt was settled by Ms. Trevers accepting stock for $83,000 and cash for
$16,582. At April 30, 1998 the Company owed Ms. Trevers $13,250.17.
Other Items
- -----------
There were no exercises of stock options (or tandem stock appreciation rights)
and freestanding appreciation rights (or unexercised options or stock
appreciation rights) made during the fiscal year ended April 30, 1998 by any
Named Executive Officer. The following table represents outstanding options by
officers of the Company:
22
<PAGE>
Options and Stock Issuances
- ---------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ---- --------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Loretta Trevers
(Chief Executive Officer)
1998 -0- -0- 315,000/0 $20,000/0
1997 -0- -0- 115,000/0 $20,000/0
Sandeep Gupte
(Executive Vice President of Engineering)
1998 -0- -0- 200,000/0 $2,000/0
1997 -0- -0- 100,000/0 $2,000/0
S. Emerson Lybbert
(Chief Financial Officer)
1998 -0- -0- 150,000/0 $ -0-/0
1997 -0- -0- -0-/0 $ -0-/0
</TABLE>
There were no long term incentive plan awards by the Company during the fiscal
years ended April 30, 1998 and 1997, 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, at 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, 1998 or 1997.
During the year ended April 30, 1998 Gary Blum, a director of the Company
received 10,000 shares of the Company's stock in lieu of $10,000 of directors
fees.
23
<PAGE>
During the year ended April 30, 1998 Jamie Levey, a director of the Company
received 10,000 shares of the Company's stock in lieu of $10,000 of directors
fees.
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..
Employment Agreement
- --------------------
In August 1997 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 October 16, 1998 and as adjusted to give
effect to the sale of the maximum 2,000,000 shares of Common Stock included in
this offering, the number of shares of Common Stock, Series 1 Class A 8%
Cumulative Convertible Preferred Stock (the "Preferred Stock") and Class B
Common Stock beneficially owned by each person known to be the beneficial owner
of more than five percent of the outstanding shares of the Company's Common
Stock, Preferred Stock and Class B Common Stock, by each director and each
officer of the Company 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.
24
<PAGE>
<TABLE>
<CAPTION>
Name and Number Number Percent of
Address of of shares Percent of of shares outstanding Number and
Beneficial of outstanding of Class B shares of Percent Percent of
Owner\Identity Common Common Common Class B of Preferred Total Voting
of Group Stock Stock Stock Common Stock Shares Power
- ----------------- --------------- ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Loretta P. Trevers*
2176 North Main
N. Logan, UT 84341 3,047,800(1)(2) 23.80% 2,000,000 100% 0 70.3%
Clayton Paul Hilliard
P.O. Box 52745
Lafayette, LA 70505 1,105,593 8.63% 0 0 0 3.4%
S. Emerson Lybbert*
2176 North Main
N. Logan, UT 84341 175,000 1.37% 0 0 0 **
Sandeep Gupte*
2176 North Main
N. Logan, UT 84341 163,334 1.28% 0 0 0 **
Gary Blum*
3278 Wilshire Blvd, #603
Los Angeles, CA 90010 132,480 1.03% 0 0 0 **
Jamie Levey*
40 Wall Street, 59th Fl.
New York, NY 10005 6,666 ** 0 0 0 **
Phillip P. Andrews*
4829 Cypress Rd
Frisco, TX 75034 0 ** 0 0 0 **
- ------------------------------------------------------------------------------------------------------------------------
All executive officers
and directors as a
group (6 persons) 3,525,280(1)(2) 27.48% 2,000,000 100% 0 73.7%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Indicates current officer or director of the Company.
**Less than one percent
(1) Includes 2,000,000 shares of Class B Common Stock convertible into 2,000,000
shares of Common Stock.
(2) Includes 700,000 shares of Common Stock and 200,000 shares of Class B Common
Stock held by a trust of which Ian Frenche is the Trustee. Ms Trevers retains
full voting rights of these shares until such time as the shares are sold or
traded. Beneficiaries of the trust include three of Ms Trever's children.
25
<PAGE>
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)
(21) Subsidiaries (5)
(1) Filed as an Exhibit to the Company's Form 10 Registration Statement, (File
Number 0-19470) as amended and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Form 10-Q for the Quarter ended January
31, 1992 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's S-1 Registration Statement (File Number
33-47406) as amended and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1992 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Form 10KSB for the fiscal years ended
April 30, 1994 and 1993 and incorporated by reference.
* Indicates management contract or compensatory agreement
(b) Reports on Form 8-K None
26
<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 _____ day of March, 1999.
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 March 31, 1999
- ---------------------- (Chief Executive Officer,
Loretta Trevers & President)
/s/ S. Emerson Lybbert Chief Financial Officer March 31, 1999
- ---------------------- Corporate Secretary
Scott E. Lybbert
/s/ Gary Blum Director March 31, 1999
- ----------------------
Gary Blum
/s/ Jamie Levey Director March 31, 1999
- ----------------------
Jamie Levey
/s/ Phillip P. Andrews Director March 31, 1999
- ----------------------
Phillip P. Andrews
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIGITRAN
SYSTEMS, INCORPORATED, FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-04-1998
<PERIOD-END> APR-04-1998
<CASH> 65,000
<SECURITIES> 0
<RECEIVABLES> 295,000
<ALLOWANCES> 0
<INVENTORY> 696,000
<CURRENT-ASSETS> 1,056,000
<PP&E> 1,332,000
<DEPRECIATION> 454,000
<TOTAL-ASSETS> 1,934,000
<CURRENT-LIABILITIES> 2,659,000
<BONDS> 1,053,000
0
1,000
<COMMON> 148,000
<OTHER-SE> (1,927,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,934,000
<SALES> 3,190,000
<TOTAL-REVENUES> 3,208,000
<CGS> 1,515,000
<TOTAL-COSTS> 4,173,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 399,000
<INCOME-PRETAX> (1,364,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,364,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,364,000)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
