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UNITED STATES
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
For the Fiscal Year Ended June 30, 1996
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
------------------------
Commission File Number 1-14198
DIGITAL TRANSMISSION SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 58-2037949
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 NORTHWOODS PARKWAY, BUILDING 330, NORCROSS, GA 30071
(Address of principal executive office) (Zip Code)
(770) 798-1300
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Units Philadelphia and Boston Stock Exchanges
Common Stock Philadelphia and Boston Stock Exchanges
Warrants Philadelphia and Boston Stock Exchanges
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, Warrants and Units
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
proceeding 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.
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Total revenues for the registrant for the fiscal year ended June 30, 1996 were:
$11,228,000.
At September 16, 1996, there were 2,700,000 shares of common stock outstanding
and 1,220,700 units (consisting of one share of common stock and one warrant to
purchase one share of common stock) outstanding. The aggregate market value of
the common stock held by non-affiliates (based upon the closing price of units
quoted on the NASDAQ National Market System on September 16, 1996) was
approximately $19,350,000.
Transitional Small Business Disclosure Format (check one): Yes { } No {x}
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held
November 7, 1996 (the "1996 Proxy Statement").
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PART I
ITEM 1. BUSINESS
GENERAL
The Company designs, manufactures, markets and services a broad range of
products for the telecommunications industry. The Company's primary customers
are long distance carriers and wireless service providers, and include MCI
(63% of fiscal 1996 net sales), PCS PrimeCo, L.P. (5.6%) and Sprint (2.2%).
The Company has recently begun selling products to PCS PrimeCo, L.P., a
Personal Communications Services ("PCS") provider. The Company's products,
consisting of proprietary software and hardware modules, facilitate the
control, monitoring and efficient transmission of high-speed digital
information through public or private telecommunications networks. The
Company's network access products enable telecommunications service providers
to give their customers economical, high quality access to public and private
networks and various telecommunications services including voice and
high-speed data transmission, the Internet and video and desktop conferencing.
The Company's network control products enable telecom service providers to
detect degradation on their networks so that appropriate action may be taken
in advance of service interruption. Principal customer requirements in these
market segments include high feature density, modularity, quality performance
and compactness. The Company's products meet these requirements and are
suitable for both wireline and wireless service environments.
DTS markets its products primarily through a direct sales force and several
reseller channels. Domestically, interexchange carriers and wireless service
providers, including cellular, SMR and PCS service providers, are serviced
directly by the Company's sales force. The Company utilizes telecommunications
equipment resellers in the United States and Canada to sell to private network
customers. In August 1995 the Company launched a campaign to establish sales
agreements with distributors worldwide in order to increase its international
sales.
BACKGROUND
The telecommunications market in general is one that is continually and
rapidly expanding. The Company believes that trends toward high-speed data and
corporate networking, wireless communications, deregulation and global
networking have created the need for network control and access products that
will allow carriers to economically build and operate networks that address
the service requirements of their customers.
Reliable High-Speed Networking.
With the proliferation of desktop personal computing, the need for reliable
communications networks has increased. In addition, as business users require
access to greater amounts of information to compete effectively, the ability to
send and receive this information at high speeds becomes more critical in the
architectural decisions surrounding the design of a corporate network.
High-speed communication translates directly into corporate savings since
computer applications can be shared, high resolution graphics can be
transmitted quickly and additional users can be easily accommodated.
The Shift to a Wireless World.
As more and more demands are placed on individuals' personal and
professional time, the ability to communicate from anywhere at any time will
become increasingly important.
New technologies and services, such as two-way paging and the forthcoming
PCS, will provide communications capabilities not only to the business user,
but to the consumer as well. The Yankee
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Group, a recognized industry analyst, has stated that if competition continues
to cause cellular costs to decrease, wireless communication may continue to
displace the use of wired telephone in the home. The use of the wireless
infrastructure for data transfer has become commonplace, increasing the
efficiency of many businesses. Overnight freight and transportation companies,
local police and security services and financial institutions have all found
significant uses for wireless data transfer, and the demand for such services
is rising steadily. The Federal Communications Commission ("FCC") recently
restructured the wireless arena through auctions of frequency spectrum. In
early 1994 and 1995 the FCC auctioned licenses for frequency spectrum in the
new PCS bands. PCS cell sites are currently being constructed and activated,
and the Company believes that most of the areas covered by these sites will be
served by new carriers in competition with existing local cellular service
providers.
Competitive Alternatives for Local Service.
Recent deregulation in telecommunication services has opened a new phase of
competition to provide telephone service to end users. Over the past five
years, several new players have entered this arena. Companies such as cable
television providers, power utilities and CAPs are now developing new systems
offering voice, video, and data services to the business and residential
customer. Several cable television companies have announced that they are
planning to offer basic telephone service and data communication services over
wireless circuits or twisted pair coaxial fiber optic backbones. In response,
the RBOCs are experimenting with hybrid fiber networks which will move their
current telephone service into broadband services in order to favorably compete
with these new players in the local access arena. The new strategic decisions
by the RBOCs and cable companies will require significant investments in
equipment that can integrate a multitude of access alternatives.
Global Networks.
As companies grow and establish satellite locations around the world,
efficient corporate communications to these new locations will become a
necessity. Creating a global network requires close adherence to international
telecommunications standards by service providers and equipment vendors. Recent
deregulation of the communications industry in Europe will increase
competition, forcing existing operators to upgrade the reliability and economy
of their networks in order to maintain market share.
Smaller Equipment Size with Higher Integration.
As telecommunications networks become more and more complicated, service
providers aim to simplify their operations by performing more functions with a
single piece of equipment. In addition, using less space at a
telecommunications site is becoming more important as space in cellular and PCS
cell sites is at a premium.
The Company believes that the above trends have created a need for highly
integrated and multifunctional products like those offered by the Company that
will facilitate rapid construction of networks which can provide a multitude
of services.
THE DTS SOLUTION
DTS has developed an integrated, systems-based network control and access
solution for wireless and wireline networks that consists of the
software-based Communications Network Control System ("CNCS"), the Network
Control Unit ("NCU") and the family of access devices - FlexT1, FlexEl,
FlexAir and SKYPLEX.
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The Communications Network Control System and Network Control Unit
The CNCS is a software-based management system with graphical user
interface which, when used with the NCU family of products, provides
telecommunications service providers tools to continuously monitor and
maintain network service. By providing problem isolation, fault correction,
performance monitoring and network data - quickly and remotely - the Company's
CNCS and NCU help efficiently manage the customer's network. Benefits of these
products include:
* Accelerated activation of new network sites yielding subscriber
revenues earlier.
* Proactive maintenance assuring minimal network downtime and lost
revenue.
* Compatibility with installed telecommunications equipment eliminating
expensive infrastructure upgrades.
The Family of Access Products
The FlexT1, FlexEl, FlexAir and SKYPLEX product lines enable businesses to
access public telecommunications services. These products are based on
modular platforms and can therefore be quickly configured to meet user
requirements. These products provide:
* Integrated Access to Public Network Services. The increased use of
telecommunications services provides market opportunities for a single
gateway device which can access these services while providing a cost-
effective use of telecommunications facilities. The FlexT1 is a device
that can access the many public services which an end user may require for
business applications and allocate telecommunications facilities among
different services, thus reducing the number of access lines the end user
must lease. The FlexEl, an international version of the FlexT1, has
similar functionality,
* Alternative Local Access, The FlexAir and SKYPLEX wireless product
lines eliminate dependency upon leased access lines. High-speed local
access lines typically have a tariff of $400 to $1,000 monthly. The
Company plans to introduce SKYPLEX wireless products capable of delivering
several high-speed lines at an anticipated average installed price of
approximately $10,000 per link, thereby delivering an economic return for
migration to wireless transport in as few as several months.
* Instant High-Speed Digital Connectivity. The use of unlicensed
frequencies by FlexAir and SKYPLEX Products means a decrease in system
installation time. Point to point microwave systems, a competing wireless
solution, require engineering studies and FCC approval prior to
installation, which can lead to significant delays in service activation.
* Competitive Performance in a Compact Package. The Company's FlexT1,
FlexEl, FlexAir and SKYPLEX products provide network access in compact,
integrated packages. This is of critical value in the cellular and PCS
markets as space in cell sites is limited. Cellular providers benefit from
the products' unique integration of channel bank functionality, the
ability to serve Cellular Digital Packetized Data ("CDPD") overlay network
requirements, integrated voice compression (32 Kbps voice via ADPCM) and
network grooming via Time Slot Shifting ("TSS") functionality.
The international opportunities for the Company's product lines are similar
to those in North America. Based on the growth in demand for
telecommunications services, the Company believes that there is significant
growth potential in the next few years for high-speed digital wireline and
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wireless circuits throughout the world. However, for high speed digital
transmission, most of the world requires compliance to the E1 (2.048 Mbps),
rather than the North American TI (1.544 Mbps), standard. The Company provides
products compliant with each standard.
COMPANY STRATEGY
The Company's goal is to become a leading worldwide supplier of network
control systems and associated network access products for public and private
telecommunications networks. In order to realize this goal the Company plans
to:
Concentrate on the Expanding Cellular and PCS Markets
Recent enhancements to the FlexT1 have been driven by the high equipment
integration requirements of tightly cramped cellular and PCS cell sites. In
addition, the FlexAir and SKYPLEX product lines target the problem of
accessing cellular and PCS network infrastructures by providing instant,
high-speed, digital wireless transport solutions. The Company's network access
products, together with the proprietary CNCS, offer what the Company believes
is a unique integrated solution to the wireless carriers' need to monitor and
control transmission facilities to hundreds or thousands of remote cell sites.
Develop and Expand on Flexible and Modular Platforms
The flexible and modular platform of the Flex product family can be quickly
modified with the use of Field Programmable Gate Array ("FPGA") devices and
software modules. The modular architecture of the product family allows
features and functions to be added to address applications as new network
services are introduced by telecommunications service providers. The Company
plans to expand the FlexT1 product line by integrating additional data
communications functionality.
Increase its International Presence
The Company will continue to expand its efforts in addressing the worldwide
market for telecommunications products. The Company intends to focus on the
transmission and multiplexer equipment segments in this market, which exceeded
$290 million in 1994. The Company recently added a Vice President of
International Sales to manage its international expansion. The Company plans
to establish strategic alliances with resellers to assume the sales,
marketing, product and customer support roles in strategic markets around the
world. To further this effort, the Company recently acquired SKYPLEX, a
product which has an existing Latin American distributor base. In addition,
the Company's future products will be developed to comply with international
telecommunications standards.
PRODUCTS AND TECHNOLOGY
The Company's products facilitate network access, bandwidth management,
network control and delivery of high-speed digital telecommunications
services. The Company's products include TI and T3 network control units, the
family of network access products and the associated network management
systems. Some of the Company's T1-based products are designed to be controlled
with the CNCS, a UNIX-based system capable of controlling and managing up to
3,000 T1 circuits.
As one of its first products, the Company pioneered the 2001 Data In Voice
("DIV") modem to transmit digitized information at T1 rates over an analog
link. This product uses Quadrature
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Amplitude Modulation ("QAM"), automatic equalization and forward error
correction algorithms to provide T1 transport over analog microwave or cable
facilities. The 2001 DIV modem is easy to install and has shown a reliable
record of performance in over 1,000 installations.
T1 Network Control Products
The 4010 and 4030 Network Control Units are T1-based products that provide
performance monitoring, frame format and line coding conversion and access to
Customer Premises Equipment ("CPE") like the FlexT1. These functions are
provided in a 12.5 inch chassis for 28 T1 circuits and the unit is typically
deployed at the service provider's central office. The main difference between
the two products is that the 4030 is designed to operate with MCI's
proprietary management systems while the 4010 is designed to work with the
Company's CNCS.
The 4010 and 4030 products are each comprised of three different modules:
- T1 Line Monitoring and Control Module - Provides conversion
features, performance monitoring and FDL access to CPE equipment.
Each shelf can contain 28 of these modules.
- Shelf Control Unit - Provides the interface to the Communication
Network Control System. There is one control unit per shelf.
- Shelf Power Supply - Provides power to the shelf. There are two
power supplies per shelf, providing full redundant operation.
T3 Network Control Products
The 4060 Network Control Unit provides performance monitoring and alarms for T3
circuits. The 4060 provides this function in a 10.5 inch chassis for 90 T3
circuits and the unit is typically deployed at the service provider's central
office.
The 4060 is comprised of two different modules:
- T3 Line Monitoring Units - Provides performance monitoring and
alarm information for six T3 circuits. Each 4060 unit can
contain 15 of these modules.
- Shelf Control Unit - Provides the interface to T3 network monitoring
systems. There is one control unit per shelf.
The 4070 Network Control Unit provides performance monitoring and alarms for T3
circuits and their constituent T1 circuits. The 4070 provides this function in
a 10.5 inch chassis for four T3 circuits and 112 constituent T1s. The 4070 is
typically deployed at the service provider's central office.
The 4070 is comprised of four different modules:
- T3 Line Monitoring and Demultiplexer Units - Provides performance
monitoring and alarm information for two T3 circuits and
demultiplexes the constituent T1s for the T1 Line Monitoring Units.
Each shelf can contain two of these modules.
- T1 Line Monitoring Units - Provides performance monitoring and alarm
information for four T1 circuits. Each shelf can contain 28 of these
modules.
- Shelf Control Unit - Provides the interface to a Bellcore-compliant
network managed system. There is one control unit per shelf.
- Power Supply - Provides power to the shelf. There is one power supply
per shelf. Since the 4070 is a non-intrusive control device,
redundant power supplies are not required.
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Communications Network Control System
Global control of 4010 Network Control Units is provided by the CNCS, a
UNIX-based, graphically driven management system that can control up to 3,000
Tl circuits per user system. CNCS provides alarm information, archiving of
circuit history and provisioning of T1 equipment, including FlexT1 network
access devices. The system uses a Client Server architecture in which servers
running on a primary workstation provide basic functions such as alarm
collection and performance data gathering. Clients running on either the
primary or secondary workstations provide the operator interfaces.
The primary objective of this system is to detect and report network
problems in the most timely manner possible. The CNCS will retrieve
performance and alarm information from the NCUs as well as from the remote CPE,
like the FlexTl or other competitive network access equipment.
The CNCS is designed to aid the operator in determining the exact location
and nature of problems by providing the appropriate software "tools." The
system uses mouse-driven, graphics-based displays which are organized to allow
the operator to identify the source of circuit problems Quickly. Displays are
projected on the operator's screen in "windows" and multiple windows can be
present on the screen at the same time. Finally, the system allows the operator
to log the performance of the circuits in the network automatically, thereby
providing the operators with a mechanism to implement a preventive maintenance
system.
The CNCS provides the following operations and features:
* Automatic reporting and time stamping of alarm conditions
* Operator alert upon alarm initiation
* Graphics-oriented and text-oriented performance displays
* Archiving of performance information
* Circuit routing database
* Schematic display of network elements and remote setup capability
* Password-controlled operator access
* Logging of operator- and network-initiated events.
FlexT1 and FlexE1 Product Family
The FlexTl family of products, introduced in fiscal year 1995, provides
integrated access to public network telecommunications services. The FlexTl
consists of single and multi-slot enclosures that are customized with various
card sets to satisfy a wide range of network access applications. The FlexE1
provides much of the same functionality currently available in the FlexT1 for
countries using the E1 (international) standard.
Customer equipment needs include N x 56/64 Kbps and full T1 interfaces
for data. voice and video applications.
FlexT1 System Architecture. The FlexT1 bandwidth management features are
derived from an advanced architecture with two independent Time Division
Multiplexed ("TDM") busses available to each card position within a FlexT1
enclosure. This architecture allows users to pay only for the functions and
features needed for a particular application. Bandwidth managers connect
directly to
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the service provider's network and user traffic is interfaced through card sets
that connect directly to voice, data and video terminals. All card sets within
the product family can be upgraded with software as new features become
available.
The Company offers its complete set of products to wireless service
providers and long distance carriers through a direct sales force. Network
access products and the DIV modems are sold directly to utilities and railways.
The family of network access products is sold to corporate end users through a
network of domestic and international resellers (Value Added Resellers or
"VARs"). A secondary channel to telecommunications service providers exists
through selected OEM arrangements. The Company has had long-standing supplier
relationships with MCI and Sprint and has recently expanded its list of
customers to include three major wireless service providers (AirTouch, PCS
PrimeCo, L.P. and Nextel).
DTS has been and currently is a major supplier for T1 and T3 network
control systems to MCI and T1 network control systems to Sprint. These systems,
which provide important network functions such as performance monitoring, test
access, timing insertion and signaling, have been deployed to both customers.
The Company's equipment is used to monitor the circuit quality for private line
services as well as point of presence interconnections with local telephone
companies. The Company has been significantly dependent on MCI in each of the
last four fiscal years, and, during the fiscal year ended June 30, 1996, MCI
accounted for 63% of the Company's sales. The Company plans to decrease its
dependence on its principal customers as it diversifies both its product
offerings and customer base in the future.
COMPETITION
The market for telecommunications products is highly competitive and
subject to rapid technological change, regulatory developments and emerging
industry standards. The Company believes that the principal competitive factors
in its markets are: support for multiple types of carrier services, conformance
of products to multiple public carrier standards, reliability and safety, the
development and rapid introduction of new product features, price, performance,
and quality of customer support.
The Company's principal competition to date has come from major
telecommunications equipment suppliers active in certain market segments,
including, among others, Tautron (a division of General Signal Corporation) and
Hekemian (a division of Axel Johnson Corporation) in the network control
marketplace, Kentrox Industries (a subsidiary of ADC Telecommunications Inc.),
Premisys Corporation, Digital Link Corporation, Adtran. Inc. and Newbridge
Networks, Inc. in the network access market segment and Western Multiplex,
P-COM, Inc., California Microwave Inc. and Cylink in the wireless transport
business. The Company expects increased competition from existing competitors
as they develop products with functionality similar to that of the Company's
products. In addition, the Company expects to compete with other new entrants
to the telecommunications access equipment marketplace, including those
targeting bandwidth on demand services and broadband integrated access
products. To the extent that current or potential competitors can expand their
current offerings to include monitoring and maintaining network facilities in
an integrated product, the Company's business and operating results could be
materially adversely affected.
MANUFACTURING
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DTS currently outsources subassembly kitting, board assembly and testing to
high quality suppliers which are ISO 9002 certified and were space program
suppliers to NASA and other United States Government agencies.
Subassemblies and finished circuit boards are brought to DTS headquarters
for final assembly, system integration, testing and product burn-in. Defective
subassemblies are returned to the contract manufacturers for root cause
analysis and process problem resolution. System test development is jointly
done by the Company's engineering and quality assurance personnel. Most DTS
product board assemblies contain surface mount technology ("SMT") components so
that only minor touch-up is possible by DTS manufacturing personnel.
Extremely high quality is demanded by all the Company's customers. The
Company believes that quality in the design and the manufacturing of products
is a competitive advantage that it enjoys. The failure rate of network control
products shipped by the Company to two major customers and under warranty is
below 1% in a base of over 42,000 units, demonstrating the extent to which the
quality control department and associated manufacturing processes have
succeeded in satisfying stringent product quality requirements, All key
procedures in the Company have been documented and Company policy requires that
employees follow these procedures. It is the Company's belief that this policy
promotes consistency in the delivery of value to the customer. This effort led
to ISO 9001 certification for the Company in December, 1994 and two successful
follow-up compliance surveillance's. The Company believes that ISO 9001
certification has become important for international trade, since overseas
customers can feel assured that quality-based processes have been followed.
PRODUCT DEVELOPMENT
The market value of the Company's diversified network access and control
systems is based upon its core technologies in customer terminal interfaces for
voice and high-speed data applications, Tl networking and microwave radio
applications. Additionally, the Company has valuable experience in public,
private and cellular T1 networking standards and control systems. The Company's
product development efforts are currently concentrated in the Tl and T3 network
access, transport and control areas. In addition, core hardware and software
technologies have been developed by the Company's product development staff in
subTl areas such as ISDN Basic Rate Interface ("BRI") and high speed (1.5 Mbps)
digital modem technology. In order to quickly implement the Company's network
access product plans, the Company intends to develop or acquire additional
technologies in ISDN Primary Rate Interface ("PRI"), radio frequency
interfaces, E1 international access and transport, and frame relay protocols.
The experience of supplying equipment to telecommunications service
providers has given DTS a comprehensive understanding of high-speed networking
requirements. This knowledge, when coupled with LAN connectivity technologies,
will be used by the Company's product development group to develop products
allowing end users to access standard network services more cost-effectively
while allowing wireline and wireless service providers a broader selection of
network access alternatives. New product ideas and input are also provided
through direct customer contacts and participation in industry forums such as
the CDPD Forum and several American National Standards Institute ("ANSI")
committees.
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The Company's resident core technologies resulting from the developments of
the Flex product family, network control and transport products include:
* T1 / E1 multiplexing of voice and high speed data signals
* T1 / E1 alarm reporting and trunk conditioning
* High-speed digital timing insertion
* Network performance monitoring and testing
* Network Management software with graphical user interfaces
* TI ESF data link message transport
* SNMP protocol processing
* TCP/IP protocol message handling
* 10Base5 and 10BaseT ethernet Media Access Control
* Microprocessor-based product design
* Signal processing algorithms such as modulation, automatic
equalization and forward error correction
* Real time processing of control and data signals
* Design of programmable logic device
* Basic rate ISDN transport signal design and control
The Company's product development efforts have also resulted in the
development of a number of relevant technologies for products targeted toward
the wireless infrastructure and CAP market segments. These technologies include
hardware and software modules for high-speed digital modems, high data rate QAM
modulation algorithms, error correcting coding, automatic equalization methods
utilizing digital signal processing, VLSI devices, RF filtering for microwave
products, point to point and multipoint networking protocols, X.25 interfaces,
voice compression. voice telephony interfaces, ISDN signaling and interfaces
and T3/T1 digital cross connects.
The technologies listed above are being used by the Company's product
development group to design wireless products and enhancements for the
FlexT1/El platform. Additional technologies will be developed or acquired for
the Company's wireless product lines. Local, domestic and international
outsourced design suppliers have been identified for assisting in the
development of spread spectrum, RF signal and antenna modules. The Company
plans to incorporate access technologies (e.g., multiplexing) as well as
management (e.g., SNMP protocols) into the FlexAir product line.
INTELLECTUAL PROPERTY
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The Company's proprietary technology is protected by one patent granted
and two patents pending which relate to channel bank design and ISDN signal
coding. Core technologies described in the "Product Development" section are
incorporated in the Company's products through proprietary hardware and
software modules which embed original algorithmic and device circuitry.
Although some of these original designs are protected by the patents or patent
applications mentioned above. most of the designs are secured only by a claim
of trade secret rights. Two software modules used in several of the Company's
products have been licensed from outside suppliers. Although the loss of these
licenses might adversely affect the Company's performance if it were unable to
license replacement technology, the Company believes that such replacement
technology, is readily available from other suppliers on favorable terms.
The patent positions of high technology firms, including those of the
Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved. In addition, the
coverage claimed in a patent application can be significantly reduced before a
patent is issued. Consequently, even though patent applications covering the
technology used by the Company are being prosecuted with the United States and
certain foreign patent offices, there can be no assurance that any of such
patent applications will result in the issuance of patents or, if any patents
are issued, that they will provide significant proprietary protection and will
not be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue or foreign counterparts,
if any, publish, and since publication of discoveries in scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first creator of inventions covered by pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, the Company might have to participate in one or more
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
cost to the Company, whether or not the result of such proceedings was
favorable to the Company. There can be no assurance that any patents which may
be issued based upon the Company's patent application would be held valid and
enforceable by a court or that any given competitor's technology or product
would be found to infringe upon such patents. Litigation, which could result in
substantial cost to the Company, might be necessary to attempt to enforce the
Company's rights under the patents owned by the Company or to determine the
scope and validity of other parties' proprietary rights. If the outcome of any
such litigation were to be adverse, the Company's business could be materially
and adversely affected. The Company is unable to predict how courts would
resolve any future issues relating to the validity and scope of the patents
licensed by the Company, or any patents that may be issued to the Company in
the future.
A number of companies have developed technologies, filed patent
applications or received patents on various technologies that may be related to
the Company's technology. Many of these entities are larger and have
significantly greater resources than the Company. Some of the technologies,
applications or patents of these entities may conflict with the Company's
technologies, patents or patent applications. Such conflict could limit the
scope of the patents that the Company has or may be able to obtain or could
result in denial of the Company's patent applications. In addition, if patents
that cover the technologies used by the Company are issued to other companies,
there can be no assurance that the Company would be able to license these
patents at a reasonable cost or be able to develop or obtain alternative
non-infringing technology.
The Company has recently acquired the trademark "SKYPLEX" and has the
trademarks of "FlexT1," "FlexE1," and "FlexAir." The Company has recently
registered the name FlexT1 as a trademark with the federal Patent and Trademark
Office. It has also filed federal trademark applications for FlexE1 and FlexAir
and these applications were published for opposition in the Trademark Office
after examination. The applications were formally opposed by Fujitsu Network
Transmission Systems, Inc. which has alleged that the trademark registrations
should be denied
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because of the prior rights of Fujitsu in a registered trademark for FlexR,
claimed by Fujitsu for certain access controllers. The opposition proceeding is
in a very early stage, and the Company intends to contest the allegations of
the trademark opposer and to assert the company's right to register the three
trademarks in the federal Patent and Trademark Office.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that competitors or
potential competitors of the Company will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its trade secrets. Failure to obtain
needed patents or licenses or proprietary information held by others could have
a material adverse effect on the Company.
RESEARCH AND DEVELOPMENT COSTS
During fiscal years 1996, 1995 and 1994, the Company's expenditures in
product development were $2.7 million, $1.9 million and $3.0 million,
respectively. The decrease in spending from 1994 to 1995 was primarily due to
efficiencies achieved in consolidating a California-based engineering operation
into the Company's Norcross, Georgia facility.
GOVERNMENT REGULATION
The FCC has regulated the design of telecommunications equipment for use in
the United States by restricting radio frequency signal emissions and by
licensing frequency usage. Compliance with electronic product safety
regulations is also required for every new product design. It is possible that
a government agency such as the FCC could issue regulations which would require
the modification of DTS equipment in order to comply with the new regulations.
This change in FCC rules may impact sales of DTS products should it occur.
International standards for electronic product design in the areas of safety
and signal emissions are different in many cases from those issued by United
States government agencies. Sales of telecommunications equipment in a foreign
country are often restricted by equipment design standards and regulations
adopted by a centralized governmental agency similar to the FCC. The Company
has to date experienced no material difficulties in complying with the various
laws and regulations affecting its business.
EMPLOYEES
As of June 30, 1996, the Company had approximately 53 full-time employees,
of whom approximately 20 are technical personnel engaged in developing the
Company's products, approximately 15 are marketing and sales personnel,
approximately 13 are quality assurance, customer service and operations
personnel and approximately 5 are involved in administration and finance.
Substantially all of the Company's employees are full-time. The Company's
employees are not unionized and the Company believes that its employee
relations are good.
BACKGROUND OF THE COMPANY
A predecessor by merger to the Company was incorporated in Delaware in 1984.
The Company was originally incorporated in Delaware in 1992 as Netra Inc. and
changed its name to Digital Transmission Systems, Inc. in 1995 in conjunction
with the merger with its wholly-owned subsidiary Digital Transmission Systems,
Inc., a California corporation. On March 4, 1996, the
Page 11
<PAGE> 14
Company completed the Offering of 1,220,700 units each consisting of one share
of common stock and one warrant to purchase one share of common stock at a
price of 120% of the unit offering price of $7.50.
ITEM 2. PROPERTIES
The Company's operations are located in an approximately 20,000 square foot
facility in a technology park in Norcross (in the greater Atlanta, Georgia
area). In May of 1993, the Company entered into a six year lease for its
current facility. The base annual triple-net rate for this space is $6.75 per
square foot, including amortization of buildout costs of approximately
$150,000, and escalates by 4% per year. The Company believes its facilities are
suitable and adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. From time to
time, the Company is involved in various routine legal proceedings incidental
to the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
On March 4, 1996, the Company completed a public offering of 1,220,700 Units
("Units"), each consisting of one share of Common Stock ("Common Stock") and
one Warrant ("Warrant") to purchase one share of Common Stock at an exercise
price per share equal to 120% of the initial public offering price of the
units. The shares of Common Stock and Warrants are not detachable or
separately transferable, and may be traded only as part of a Unit until 365
days from the date of the initial public offering, or such earlier date as
the underwriter may determine (the "Separation Date"). The Units, Common
Stock and Warrants have been approved for quotation on the NASDAQ SmallCap
Market, the Company's principal market, under the symbols DTSXU, DTSX and
DTSXW, respectively, and have been approved for listing on the Philadelphia
Stock Exchange and the Boston Stock Exchange under the symbols DTS.U, DTS and
DTS.W, respectively. The units currently trade on the NASDAQ Market and the
Philadelphia and Boston exchanges. The price per Unit reflected in the table
below represents the range of low and high closing sale prices for the
Company's Units as reported by the NASDAQ Stock Market for the quarters
indicated:
<TABLE>
<CAPTION>
Fiscal Period High Price Low Price
----------------------------------------------------------------------------------------------
<S> <C> <C>
Commencing March 4, 1996 and ending March 30 $ 9 3/8 $8
June 30, 1996 $14 3/4 $9
</TABLE>
The closing sale price of the Company's Units as reported by the NASDAQ
Stock Market on September 16, 1996 was $14.75.
The Company also has 2,700,000 shares of common stock which is outstanding
but has not been registered as part of the Company's public offering. The
Company has approximately 46 shareholders of this common stock.
The total number of shareholders of record of both the Company's Units and
unregistered common shares as of September 16, 1996, was approximately 58.
Because many shares are held by brokers and other institutions on behalf of
shareholders, the Company is unable to estimate the total number of
shareholders represented by these record holders.
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain any earnings for use in the business and does not
anticipate paying any cash dividends in the foreseeable future.
Page 13
<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited
financial statements and notes thereto.
OVERVIEW
The Company has been dependent on MCI for a significant amount of its sales
(63% of net sales in fiscal year 1996 and 84% of net sales in fiscal year
1995), which sales have been primarily of its network control products. The
Company is maintaining its established relationship with MCI while obtaining
new customers for the sales of current and future products in the FlexT1,
FlexEl, FlexAir and SKYPLEX product lines. The Company's strategy is to
leverage its technology to develop these products and to continue its customer
diversification to enable it to achieve higher sales and net income over time.
However, this shift in products and customers has and may be expected to
continue to negatively impact the gross profit margin of the Company. The cost
of materials for the Company's new products will initially be higher as a
percentage of sales than the cost of materials for the products currently being
sold to MCI. The initial higher cost of materials is due to lower volume
production runs of the recently introduced FlexT1 and the Company's radio-based
products.
Industry trends which may also affect the Company's operating results
include the rate of demand for cellular and PCS services, the market acceptance
of high speed wireline service from telecommunications service providers, and
the level of investment in telecommunications infrastructure by developing
countries over the next few years.
COMPARISON OF YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995
The following table sets forth certain financial data derived from the Company's
Statement of Operations (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
----------------------- ---------------------
% of % of
$ Sales $ Sales
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Net sales $11,228 100 $10,228 100
Gross profit 4,272 38 5,410 53
Product development 2,495 22 1,926 19
Selling, general and administrative 4,206 37 3,082 30
Net income (loss) (2,383) (21) 407 4
</TABLE>
Page 14
<PAGE> 17
Net Sales. Net sales increased by 10%, to $11,228,000 for the year ended
June 30, 1996, from $10,228,000 for the year ended June 30, 1995. The sales
mix, and the resulting percentage of total sales, is shown in the table below
(dollars in thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
FISCAL YEAR FISCAL YEAR
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------
1996 1995 1996 1995
-------- -------- ------ ------
<S> <C> <C> <C> <C>
MCI network control $7,113 $8,620 63 84
Other network control 592 281 5 3
FlexT1 1,905 456 17 4
FlexAir and SKYPLEX 1,111 0 10 0
DIV modem 381 694 3 7
Other products 126 177 2 2
</TABLE>
No customer, other than MCI, accounted for more than 10% of sales during
either of these fiscal years. Revenues from the Company's FlexT1/E1 product
line increased over 300% from $456,000 to $1,905,000 and aggregate revenues
from FlexAir and SKYPLEX, in their first year of sales, were $1,110,000.
Total international sales increased by approximately 150% from $483,000 in
the year ended June 30, 1995 to $1,200,000 in the year ended June 30, 1996.
Gross Profit. Gross profit decreased by 21%, to $4,272,000 for the year ended
June 30, 1996 from $5,410,000 for the year ended June 30, 1995. This decrease
is primarily due to the shift in product mix from higher margin network
control products to the newer products in the Flex product line which
currently have lower margins due to smaller production runs and higher
materials costs which are typically related to products in early stages of
production. As a percentage of sales, gross profit decreased from 53% in the
year ended June 30, 1995 to 38% in the year ended June 30, 1996.
Product Development. Product development expenses increased from $1,926,000
for the year ended June 30, 1995 to $2,495,000 for the year ended June 30,
1996. This increase represents increased spending on engineering for new
products which was funded, in part, by the proceeds of a public stock
offering in March, 1996. As a percentage of sales, total product development
costs increased from 19% in the year ended June 30, 1995 to 22% in the year
ended June 30, 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 36% from $3,082,000 for the year ended June 30, 1995 to
$4,206,000 for the year ended June 30, 1996. Selling expenses increased by
39% from $2,317,000 in the year ended June 30, 1995 to $3,213,000 in the year
ended June 30, 1996. The increase resulted from expanded sales activity in
the U.S. as well as from expansion of sales activity outside the U.S. Selling
expenses as a percentage of net sales increased from 23% for the year ended
June 30, 1995 to 29% for the year ended June 30, 1996. General and
administrative expenses increased from $765,000 in the year ended June 30,
1995 to $993,000 in the year ended June 30, 1996 due primarily to increases
in legal and accounting costs to support business growth and the Company's
position as a publicly traded entity. As a percentage of net sales, general
and administrative expenses increased from 7% in the year ended June 30, 1995
to 9% in the year ended June 30, 1996.
Net Income / (loss). Net income decreased from $407,000 for the year ended
June 30, 1995 to a loss of $2,383,000 for the year ended June 30, 1996. This
decrease resulted primarily from the
Page 15
<PAGE> 18
shift in product mix to lower margin products, as well as increased spending in
product development and sales and marketing.
COMPARISON OF YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994
The following table sets forth certain financial data derived from the
Company's statement of operations for the fiscal years ended June 30, 1995 and
June 30, 1994 (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1995 June 30, 1994
------------------ --------------------
% of % of
$ Sales $ Sales
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Net sales $10,228 100 $ 9,069 100
Gross profit 5,410 53 4,571 50
Product development 1,926 19 2,951 33
Selling, general and administrative 3,082 30 2,781 31
Net income (loss) 407 4 (860) (9)
</TABLE>
Net Sales. Net sales increased by 13%, to $10,228,000 for the year ended
June 30, 1995, from $9,069,000 for the year ended June 30, 1994. The sales mix,
and the resulting percentage of total sales, is shown in the table below
(dollars in thousands):
<TABLE>
<CAPTION>
Percentage of
Total
Fiscal Year Fiscal Year
Ended June 30, Ended June 30,
------------------ --------------------
1995 1994 1995 1994
--------- ------- --------- -------
<S> <C> <C> <C> <C>
MCI network control $ 8,620 $8,128 84 90
Other network control 281 44 3 -
FlexT1/E1 456 3 4 -
FlexAir and SKYPLEX - - - -
DIV modem 694 545 7 6
Other products 177 349 2 4
</TABLE>
For the years ended June 30, 1995 and 1994, product sales to MCI accounted for
84% and 90% of net sales, respectively. No other customer accounted for more
than 10% of sales during either of these fiscal years. Although product sales to
MCI as a percentage of sales decreased, product sales to MCI in absolute dollars
grew due to MCI purchases of the third generation of a network control product
introduced by the Company during the year ended June 30, 1995. The first
significant sales generated by the Company's OEM reseller, Wiltron Company, of
network control products and sales derived from the newly introduced FlexT1 were
contributing factors in the sales growth from the year ended June 30, 1994 to
the year ended June 30, 1995. Sales generated by the DIV
Page 16
<PAGE> 19
modem product increased due to additional sales efforts for the product. Sales
from Other Products decreased as the Company reduced the marketing and sales
resources applied to sales of these products.
Gross Profit. Gross profit increased by 18%, to $5,410,000 for the year ended
June 30, 1995 from $4,571,000 for the year ended June 30, 1994. This increase
resulted from increased sales of the Company's Network Control Products to
MCI and increased sales of its DIV modem products during the year ended June
30, 1995. As a percentage of sales, gross profit increased to 53% for the
year ended June 30, 1995 from 50% for the year ended June 30, 1994. This
increase resulted from larger order quantities and a decrease in material
costs on products sold to MCI, resulting in improved margins on such sales,
and increased sales of high margin DIV modem products as a percentage of the
Company's sales, which were only partially offset by the increase in sales of
OEM Network Control Products and FlexT1 products which, because of initial
low volume production, resulted in lower margins.
Product Development. Product development expenses decreased by 35%, to
$1,926,000 for the year ended June 30, 1995 from $2,951,000 for the year
ended June 30, 1994. This decrease resulted primarily from the consolidation
of the engineering group previously located in Milpitas, California into the
Company's Norcross, Georgia facility, which resulted in savings of
approximately $900,000 and greater utilization of variable cost labor in the
form of temporary consultants employed in fiscal year 1995.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 11%, to $3,082,000 for the year ended June 30, 1995
from $2,781,000 for the year ended June 30, 1994. Selling expenses increased
by 71%, to $2,317,000 for the year ended June 30, 1995 from $1,357,000 for
the year ended June 30, 1994. This was primarily due to the addition of sales
and marketing staff which resulted in expenses of $711,000, and increased
trade show and advertising expenses associated with the introduction of the
FlexT1/E1 product line. General and administrative expenses decreased by 46%
to $765,000 for the year ended June 30, 1995 from $1,424,000 for the year
ended June 30, 1994. This decrease was achieved primarily by consolidating
administrative functions from Milpitas, California into the Company's
Norcross, Georgia operations. In addition, recruiting and severance expenses
of $177,000 experienced in the year ended June 30, 1994 did not recur during
the year ended June 30, 1995.
Net Income /(loss). Net income increased to $407,000 for the year ended June
30, 1995 from a loss of $860,000 for the year ended June 30, 1994. This
increase resulted from increased sales and decreased General and
Administrative and Product Development expenses.
LIQUIDITY AND CAPITAL RESOURCES
On March 4, 1996 the Company completed an initial public offering (the
"Offering") of units consisting of one share of the Company's common stock and
one redeemable warrant to purchase one share of common stock at a price of
120% of the initial unit offering price. Through this Offering, the Company
raised approximately $6,931,000 net of expenses. Of the net proceeds,
$200,000 was used to pay accrued dividends on the Series C Preferred Stock.
In September 1995, the Company renewed its bank line of credit agreement with
SunTrust Bank, Atlanta which makes available $1,200,000 in borrowings secured
by the Company's accounts receivable and inventories. The line is
additionally secured by an assignment of $600,000 of the company's investment
securities. On June 30, 1996, there were no outstanding borrowings on the
line of credit. Borrowings under this facility bear an interest rate of prime
plus 1 percent (9.25% at
Page 17
<PAGE> 20
June 30, 1996). A commitment fee of one quarter of one percent is due on the
unused portion of the facility. The line of credit agreement expires on October
31, 1996.
At June 30, 1996, the Company had approximately $3,587,000 in cash, cash
equivalents and investment securities. For the year ended June 30, 1996, the
Company used $3,077,000 of cash in operating activities, reflecting a net loss
of $2,383,000, an increase in accounts receivable of $1,597,000 and an increase
in inventory of $1,021,000. Cash was provided for operations through an
increase in accounts payable of $1,282,000. Accounts receivable were high at
the end of June as a result of high sales activity during the month of June.
Inventory levels were increased to support the expansion of product lines and
in anticipation of continued growth in sales volumes.
The Company purchased $585,000 and $263,000 of property, plant and equipment
during the years ended June 30, 1996 and 1995, respectively. This 1996 total
was primarily related to the purchase during the year ended June 30, 1996 of
additional equipment necessary for the production of the Company's new
products. Approximately $100,000 of expenditures related to improvements on the
Company's current facilities.
During 1996, the Company capitalized $207,000 of product development
expenditures relating to products expected to be made commercially available
during the year ended June 30, 1997. In December, 1995, the Company purchased
SKYPLEX, a product line with an existing distribution network in Latin America,
for $200,000 financed by the seller.
At June 30, 1996, the Company's net current assets position was approximately
$7,731,000. The Company has no significant purchase commitments other than
those incurred in the normal course of business and commitments under
facilities and operating leases. The Company believes its available funds and
its line of credit will satisfy the Company's projected working capital
requirements over the next 12 months.
SEASONALITY
The Company's sales are subject to quarterly fluctuations mainly due to the
purchasing cycle of the Company's primary customer, MCI. The Company's business
plan is to continue the diversification of its product offerings, further
develop its distribution channels and further expand its customer base. The
Company believes that the implementation of this plan will decrease the
seasonality of its sales. The Company typically operates with a backlog of
orders for its network control equipment, but carries very little or no backlog
for the FlexTl/E1 and FlexAir and other products.
NEW ACCOUNTING PRONOUNCEMENTS
On October 25, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 allows companies to retain the
current approach set forth in APB Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") for recognizing stock-based expense in their
financial statements in lieu of the new accounting method prescribed by SFAS No.
123 based on the estimated fair value of employee stock options. Companies that
do not follow the new fair value based method will be required to provide
expanded footnote disclosures. The provisions of SFAS No. 123 are effective for
fiscal years beginning after December 15, 1995.
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<PAGE> 21
However, disclosure of the pro forma net income and earnings per share, as if
the fair value method of accounting for stock-based compensation had been
elected, is required for all awards granted in fiscal years beginning after
December 15, 1994.
The Company intends to continue accounting for stock related compensation using
APB Opinion No. 25 and will provide the expanded footnote disclosures required
under SFAS No. 123 beginning with its fiscal 1997 financial statements.
IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS
It should be noted that this discussion contains forward-looking statements
which are subject to substantial known and unknown risks and uncertainties.
There are a number of factors which could cause actual results to differ
materially from those anticipated in statements made herein. Such factors
include, but are not limited to, changes in general economic conditions, the
growth rate of the market for the Company's products and services, the effect of
competitive products and pricing, and the irregular pattern of revenues, as well
as a number of other risk factors which could affect the future performance of
the Company.
Page 19
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see pages F-1 through F-18
Page 20
<PAGE> 23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 11, 1996, the Company dismissed its independent public
accountants, Price Waterhouse LLP. Prior to July 11, 1996, Price Waterhouse LLP
was engaged as the principal accountant to audit the Company's financial
statements. The reports by Price Waterhouse LLP on the Company's financial
statements for the fiscal years ended June 30, 1995, June 30, 1994, and
subsequent interim periods did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. The dismissal of the former accountants was recommended
by the Company's Audit Committee and approved by the Company's Board of
Directors.
During the Company's fiscal years ended June 30, 1995 and June 30, 1994,
and during the subsequent interim fiscal periods through the date of dismissal,
there were no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Price Waterhouse LLP, would have caused it to make reference to the subject
matter of the disagreement in their reports. Also, there were no reportable
events of the nature described in Rule 304(a)(1)(v) during the Company's fiscal
years ended June 30, 1995 and June 30, 1994, or during the subsequent interim
fiscal periods following the Company's fiscal year ended June 30, 1995 through
the date of dismissal.
On July 11, 1996, the Company announced the appointment of KPMG Peat
Marwick LLP as independent public accountants to audit the Company's financial
statements as of and for the year ended June 30, 1996.
Page 21
<PAGE> 24
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this will be included in the Company's Proxy
Statement for the Annual Meeting of Shareholders expected to be filed with
the Commission on October 7, 1996 under the captions "Election of Directors"
and "Executive Officers," and is incorporated by reference herein.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders expected to be filed
with the Commission on October 7, 1996 under the caption "Executive
Compensation" and is incorporated by reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders expected to be filed
with the Commission on October 7, 1996 under the caption "Security Ownership
of Certain Beneficial Owners and Management" and is incorporated by reference
herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders expected to be filed
with the Commission on October 7, 1996 under the caption "Related
Transactions" and is incorporated by reference herein.
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<PAGE> 25
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits:
The Exhibits are listed in the Index to Exhibits on page 25.
(b) Reports on Form 8-K. The Company filed the following report on Form 8-K
during the quarter ended June 30, 1996:
Report on Form 8-K with respect to the dismissal of Price Waterhouse
LLP filed on July 16, 1996.
Page 23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DIGITAL TRANSMISSION SYSTEMS, INC.
/s/ Andres C. Salazar
------------------------------------
by: Andres C. Salazar,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Andres C. Salazar
- -------------------------- Chief Executive Officer, September 27,1996
Andres C. Salazar Director (Principal Executive Officer)
/s/ Roger Maloch
- -------------------------- Vice-President-Fianance and Secretary September 27, 1996
Roger Maloch (Principal Financial and Accounting Officer)
/s/ Thomas C. Mock
- -------------------------- Director September 27, 1996
Thomas C. Mock
- -------------------------- Director September , 1996
Frank LaHaye
- -------------------------- Director September , 1996
Gene Miller
/s/ Robert D. Francis
- -------------------------- Director September 27, 1996
Robert D. Francis
/s/ Edwin Kantor
- -------------------------- Director September 27, 1996
Edwin Kantor
</TABLE>
Page 24
<PAGE> 27
DIGITAL TRANSMISSION SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1996 AND 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,586 $ 1,357
Investment securities (note 7) 2,001 --
Trade accounts receivable, net of allowance
of $50 and $0 in 1996 and 1995, respectively 3,595 1,882
Other receivables 75 141
Inventories (note 4) 2,341 1,393
Prepaid expenses 262 168
Deferred tax benefit (note 8) 250 226
========== ==========
Total current assets 10,110 5,167
========== ==========
Property and equipment, net of accumulated
depreciation and amortization (note 5) 445 335
========== ==========
Deferred tax benefit (note 8) 35 59
Intangible assets (note 3) 368 18
Other assets 26 18
---------- ----------
Total assets $ 10,984 $ 5,597
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,901 $ 619
Accrued liabilities (note 6) 376 295
Accrued dividends (note 9) -- 465
Warranty accrual 102 76
Line of credit (note 7) -- 450
---------- ----------
Total current liabilities 2,379 1,905
========== ==========
Redeemable convertible preferred stock, at liquidation value,
par value $.01 per share, 2,010,449 shares authorized,
1,813,289 issued and outstanding on June 30, 1995 0 3,385
Shareholders' equity:
Preferred stock; 3,000,000 shares authorized;
0 shares issued and outstanding -- --
Common stock -- $.01 par value; 15,000,000 shares authorized;
issued and outstanding, 3,920,700 and 772,001 issued and out-
standing at June 30, 1996 and 1995 respectively 39 8
Additional paid-in capital 11,137 299
Deferred compensation (188) --
Accumulated deficit (2,383) --
---------- ----------
Total shareholders' equity 8,605 307
========== ==========
Commitments and contingencies (notes 9 and 11)
========== ==========
8,605 307
========== ==========
Total liabilities and shareholders' equity $ 10,984 $ 5,597
========== ==========
See accompanying notes to financial statements
</TABLE>
F-1
<PAGE> 28
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Years Ended June 30, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales (note 10) $ 11,228 $ 10,228 $ 9,069
Cost of sales 6,956 4,818 4,498
---------- ---------- ----------
Gross profit 4,272 5,410 4,571
---------- ---------- ----------
Selling, general and administrative 4,206 3,082 2,781
Product development 2,495 1,926 2,951
---------- ---------- ----------
Total operating expenses 6,701 5,008 5,732
---------- ---------- ----------
Operating income (loss) (2,429) 402 (1,161)
Other income 46 7 29
---------- ---------- ----------
Income (loss) before income tax expense (2,383) 409 (1,132)
Income tax benefit (expense) -- (2) 272
---------- ---------- ----------
Net income (loss) $ (2,383) $ 407 $ (860)
========== ========== ==========
Accretion of redemption value and
dividends accrued on redeemable
preferred stock 225 317 299
---------- ---------- ----------
Net income (loss) attributable to
common shareholders (2,608) 90 (1,159)
========== ========== ==========
Weighted average common and
equivalent shares outstanding 3,228 2,935 2,587
========== ========== ==========
Pro forma net income (loss) per share:
Net income (loss) (2,383) 407
========== ==========
Pro forma net income (loss) per share $ (0.74) $ 0.13
========== ==========
Pro forma common shares outstanding 3,228 3,229
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 29
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,383) $ 407 $ (860)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 532 366 228
Change in valuation reserves 23 -- --
Change in deferred taxes -- 179 (135)
Amortization of deferred compensation expense 81 -- --
Changes in assets and liabilities:
Trade and other accounts receivable (1,596) 254 (885)
Inventories (1,021) (627) 248
Prepaid expenses (94) (132) (2)
Trade accounts payable 1,282 39 292
Accrued liabilities 81 (205) (356)
Warranty accrual 26 -- --
Other (8) -- (127)
---------- ---------- ----------
Net cash provided by (used in) operating activities (3,077) 281 (1,597)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (585) (263) (15)
Additions to capitalized product development costs (207) -- --
Purchase of product rights (200) -- --
Purchases of held-to-maturity
investment securities (2,001) -- --
---------- ---------- ----------
Net cash used in investing activities (2,993) (263) (15)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (payments) under
line of credit agreement (450) 100 350
Preferred dividends paid (200) -- --
Proceeds from exercise of stock options 18 -- --
Proceeds from issuances of common
stock, net of $2,155,000 in expenses 6,931 47 6
---------- ---------- ----------
Net cash provided by financing activities 6,299 147 356
---------- ---------- ----------
Net increase in cash and cash equivalents 229 165 (1,256)
Cash and cash equivalents at beginning of year 1,357 1,192 2,448
---------- ---------- ----------
Cash and cash equivalents at end of year $ 1,586 $ 1,357 $ 1,192
========== ========== ==========
Supplemental disclosure of cash paid for income taxes and interest
Cash paid for income taxes $ 3 $ 26 $ --
Cash paid for interest $ 59 $ 26 $ --
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 30
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended June 30, 1996 and June 30, 1995 and June 30, 1994
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ Retained
Number Additional Deferred earnings Total
of shares paid-in comp- (accumulated shareholders'
issued Amount capital ensation deficit) equity
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 580 $ 6 $ 808 $ -- $ 554 $ 1,368
Exercise of stock options 131 1 5 -- -- 6
Dividends accrued on
Series C preferred stock -- -- (116) -- -- (116)
Accretion of redemption
value of Series A and
Series B preferred stock -- -- (183) -- -- (183)
Net loss -- -- -- -- (860) (860)
------- ------- ------- ------- ------- -------
Balance at June 30, 1994 711 7 514 -- (306) 215
Exercise of stock options 61 1 46 -- -- 47
Cancellation of shares
granted under stock
incentive plan -- -- (45) -- -- (45)
Dividends accrued on
Series C preferred stock -- -- (15) -- (101) (116)
Accretion of redemption
value of Series A and
Series B preferred stock -- -- (201) -- -- (201)
Net income -- -- -- -- 407 407
-------- ------- ------- ------- ------- -------
Balance at June 30, 1995 772 8 299 -- -- 307
Exercise of stock options 46 0 18 -- -- 18
Shares granted under
stock incentive plan -- -- 269 (269) -- --
Compensation expense -- -- -- 81 -- 81
Dividends accrued on
Series C preferred stock -- -- (58) -- -- (58)
Accretion of redemption --
value of Series A and
Series B preferred stock -- -- (167) -- -- (167)
Conversion of Series A,
Series B and Series C
preferred stock
to common stock 1,813 18 3,534 -- -- 3,552
Units issued in public offering
net of $2,155,000 of expenses 1,221 12 6,919 -- -- 6,931
Payment of accrued
dividends on Series C
preferred stock 69 1 323 -- -- 324
Net loss -- -- -- -- (2,383) (2,383)
------- ------- ------- ------- ------- -------
Balance at June 30, 1996 3,921 $ 39 $11,137 $ (188) $(2,383) $ 8,605
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 31
DIGITAL TRANSMISSION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Digital Transmission Systems, Inc. (the "Company"), formerly NETRA Inc. (see
Note 2), designs, manufactures, markets and services a broad range of products
for the telecommunications industry. The Company's primary customers are long
distance carriers and wireless service providers. The Company sells its products
both in the U.S., as well as key international markets, including Latin America,
the Asia / Pacific region and eastern Europe. The Company's products, consisting
of proprietary software and hardware modules, facilitate the control, monitoring
and efficient transmission of high speed digital information in
telecommunications networks. The Company sub-contracts the kitting and assembly
of its products to various manufacturers.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(c) INVESTMENT SECURITIES
Investment securities at June 30, 1996 consist of short-term holdings in U.S.
Government agency mortgage-backed debt securities. In accordance with the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity (SFAS 115), these investments have
been classified as held-to-maturity. Accordingly, they are measured at
amortized cost and temporary unrealized gains or losses are not recognized.
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
average cost which approximates the first-in, first-out (FIFO) method.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets as follows:
Computer and Test Equipment 3 years
Software 1 years
Furniture and Fixtures 3 years
Leasehold Improvements 3 years
F-5
<PAGE> 32
(f) INTANGIBLE ASSETS AND RESEARCH AND DEVELOPMENT EXPENDITURES
Capitalized product development costs, goodwill and other intangible assets are
being amortized on a straight line basis over a three year period. The Company
evaluates the recoverability of these intangible assets at each period end
using the undiscounted estimated future cash flows expected to be derived from
such assets. If such evaluation indicates a potential impairment, the Company
uses fair value in determining the amount of these intangible assets that
should be written off. During the years ended June 30, 1996, 1995 and 1994, no
write-offs were recognized due to impairment of net realizable value.
Research and development costs related to new product development that has not
reached product design phase are expensed as incurred. The Company capitalizes
product development costs for outside contractors from the time that product
design has been completed for the product to the time that the product is ready
for production. The determination of completion of the product design phase and
the ongoing assessment of recoverability of capitalized product development
costs require considerable judgement by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life, and changes in technologies.
(g) WARRANTY COSTS
The Company provides, by a current charge to income, an amount it estimates will
be needed to cover future warranty obligations for products sold during the
year. The accrued liability for warranty costs is included in the caption
"Warranty accrual" in the accompanying balance sheets.
(h) INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." SFAS 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Using
the enacted rate in effect for the year in which the differences are expected to
reverse, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and income tax basis of the
assets and liabilities.
(i) REVENUE RECOGNITION
Revenue from the sale of equipment is recognized at the time of shipment.
(j) EARNINGS PER SHARE
Net income (loss) per common share has been computed using the weighted average
number of outstanding shares of common stock and common stock equivalents (when
dilutive) during 1996, 1995 and 1994. The weighted average number of shares
includes common stock and common stock equivalents issued within one year prior
to the filing of the initial public offering for all periods presorted, without
regard to whether the inclusion of the securities was dilutive. Net income per
share computed on a fully diluted basis is not significantly different than
the weighted average number of shares computed using the primary method
described above.
F-6
<PAGE> 33
The pro forma earnings per share gives effect to the conversion of 1,813,289
shares of redeemable convertible preferred stock into an equal number of shares
of common stock in conjunction with the Company's public stock offering as if
such conversion had occurred. Additionally, the pro forma earnings
per share gives effect to the approximately 69,383 shares of common stock which
were exchanged in partial consideration of accrued dividends (see note 9).
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(l) STOCK BASED COMPENSATION
On October 25, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 generally allows companies to
retain the current approach set forth in APB Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25") for recognizing stock-based
expense in their financial statements in lieu of the new accounting method
prescribed by SFAS No. 123 based on the estimated fair value of employee stock
options. Companies that do not follow the new fair value based method will be
required to provide expanded footnote disclosures. The provisions of SFAS No.
123 are effective for fiscal years beginning after December 15, 1995.
The Company accounts for stock related compensation using APB Opinion No. 25
and will elect to continue using this method in its fiscal 1997 financial
statements while providing the expanded footnote disclosures under SFAS No.
123.
(m) RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform to classifications adopted in 1996.
2. CHANGES IN CORPORATE STRUCTURE
DTS Acquisition Corporation (DTS AC) was incorporated on August 14, 1990 for
the purpose of acquiring all stock of DTS, Inc. The acquisition was consummated
on August 20, 1990 and DTS AC commenced operations on that date.
NETRA Inc. ("NETRA"), a Delaware corporation, was formed on October 28, 1992 to
effect the purchase of Able Telecommunications, Inc. ("Able"). On February 5,
1993, Able stockholders contributed all outstanding shares of Able to NETRA in
a tax-free reorganization pursuant to Section 351 of the Internal Revenue Code
of 1986. Able Series A Preferred, Series B Preferred and common stockholders
received one share of the respective NETRA shares for each share of Able.
F-7
<PAGE> 34
Simultaneously with the NETRA/Able merger described above, DTS AC merged with
and into NETRA, leaving NETRA as the surviving entity, in a tax-free
reorganization. Following the merger of DTS AC into NETRA, DTS AC's
wholly-owned subsidiary, DTS, Inc., was merged with and into Able leaving Able
as the surviving entity. Able subsequently changed its name to DTS, Inc. At the
consummation of the transaction, NETRA was the parent company with one
wholly-owned subsidiary, DTS, Inc. DTS, Inc.'s operations include those of the
former DTS, Inc. and Able Telecommunications, Inc. During fiscal year 1994, the
Company consolidated the operations of Able from its California location to its
Georgia facility. On November 11, 1995, the Board of Directors of NETRA and
DTS, Inc. voted to formally merge Digital Transmission Systems, Inc. into
NETRA; on December 13, 1995, the name of NETRA was changed to Digital
Transmission Systems, Inc. As the NETRA consolidated financial statements prior
to and for the year ended June 30, 1995 included DTS, Inc. as a wholly-owned
subsidiary, this merger will have no effect on the financial statements
included herein.
The DTS, Inc./Able combination described above was accounted for using the
purchase method of accounting for financial reporting purposes, with Able
deemed to be the purchased entity. In accordance with the purchase method of
accounting, the excess of the purchase price over specifically identifiable
tangible and intangible net assets of Able was recorded as goodwill. The
results of operations of DTS, Inc. and Able have been included in the Company's
financial statements from the dates of their respective acquisitions.
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of June 30, 1996 and 1995
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Capitalized product development costs $ 207 $ --
Intangible asset related to the acquisition
of SKYPLEX rights 200 --
Goodwill related to the acquisition of Able -- 504
---------- ----------
407 504
Less: Accumulated amortization 39 486
---------- ----------
$ 368 $ 18
========== ==========
</TABLE>
Amortization expense recorded for the years ended June 30, 1996, 1995 and
1994 was $57,000, $183,000 and $121,000 respectively.
4. INVENTORIES
Inventories consist of the following at June 30, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 1,853 $ 806
Work in process 204 195
Finished goods 284 392
---------- ----------
$ 2,341 $ 1,393
========== ==========
</TABLE>
F-8
<PAGE> 35
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Computer and test equipment $ 1,202 $ 708
Software 167 163
Furniture and fixtures 42 72
Leasehold Improvements 117 --
-------- --------
1,528 943
Less: Accumulated depreciation and amortization 1,083 608
-------- --------
$ 445 $ 335
======== ========
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30, 1996 and 1995
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Commissions $ 127 $ 64
Professional fees 122 23
Employee vacation 106 87
Other 21 121
-------- --------
$ 376 $ 295
======== ========
</TABLE>
7. LINE OF CREDIT
DTS, Inc. has a line of credit agreement with a bank whereby it may
borrow up to $1,200,000 through October 31, 1996. Amounts outstanding
under this agreement were $0 and $450,000 at June 30, 1996 and 1995,
respectively. Borrowings bear interest at the prime rate plus 1%
(9.25% and 9% at June 30, 1996 and 1995) and are secured by accounts
receivable and inventories. The line is additionally secured by an
assignment of $600,000 of the company's investment securities. A
commitment fee of .25% is charged on the unused portion of the line of
credit.
8. INCOME TAXES
The components of the income tax expense (benefit) are as follows (in
thousands):
F-9
<PAGE> 36
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ 0 $ 10 ($ 186)
State 0 31 (54)
Deferred
Federal 0 (33) (27)
State 0 (6) (5)
-------- -------- --------
$ 0 $ 2 ($ 272)
======== ======== ========
</TABLE>
The income tax effects of the temporary differences that give rise to
significant portions of the Company's deferred tax assets at June 30, 1996 and
1995 are presented below (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 19 $ 0
Inventory valuation allowance 136 163
Accrued expenses not deducted
for tax purposes 39 114
Property and equipment depreciation 35 8
Net operating loss carryforwards 1,486 744
Product and development tax credit carryforwards 441 345
-------- --------
Gross deferred tax asset 2,156 1,374
Less valuation allowance (1,871) (1,089)
-------- --------
Net deferred tax assets $ 285 $ 285
======== ========
</TABLE>
The difference between income taxes at the statutory federal income tax rate of
34 percent and income taxes reported in the statement of operations are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Computed expected income tax expense
(benefit) at federal statutory rate of 34% $ (810) $ 139 $ (385)
State income taxes, net of federal benefit (94) 25 (49)
Increase (decrease) in valuation allowance 782 (233) 118
Other, net 122 71 44
-------- -------- --------
$ -- $ 2 $ (272)
======== ======== ========
</TABLE>
F-10
<PAGE> 37
The valuation allowance for deferred tax assets as of June 30, 1996 and 1995
was $1,871,000 and $1,089,000 respectively. The net change in the total
valuation allowance for the years ended June 30, 1996 and 1995 was an increase
of approximately $782,000 and a decrease of $233,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. In order to
fully realize the deferred tax asset, the Company will need to generate future
taxable income of approximately $750,000 prior to the expiration of the net
operating loss carryforwards in 2005. Taxable (loss) income for the years ended
June 30, 1996 and 1995 was approximately ($2,200,000) and $580,000
respectively. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at June 30, 1996. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At June 30, 1996, the Company has net operating loss carryforwards for federal
income tax purposes of $4,371,000 which are available to offset future federal
taxable income, if any, through 2005. In addition, the Company has product
development tax credit carryforwards of approximately $441,000 which are
available to reduce future federal regular income taxes, if any, and have
expiration dates ranging from June 30, 2003 through June 30, 2009.
The amount of net operating loss and research and experimentation credit
carryforwards may be limited if the Company has an ownership change, as defined
in the Internal Revenue Service regulations. In the event of an ownership
change, the amount of taxable income of a loss corporation for any postchange
year which may be offset by prechange losses shall not exceed the Internal
Revenue Code Section 382 limitation for such year. Generally, an ownership
change occurs if a 5% stockholder or any equity structure shift increases the
percentage of the stock of the loss corporation owned by more than 50
percentage points over the lowest percentage of stock of the loss corporation
owned by such stockholders at any time during a three-year look back testing
period. The annual Section 382 limitation is equal to the value of the old loss
corporation (before the ownership change) multiplied by the Federal long-term,
tax exempt rate.
9. SHAREHOLDERS' EQUITY
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
Effective March 4, 1996, the date of the Company's public stock offering
(the "offering"), the Company's Board of Directors amended the
certificate of incorporation of Digital Transmission Systems, Inc. to
declare a 3.35 to 1 reverse stock split on all common and redeemable
convertible preferred shares authorized, change the par value on both the
common stock and the redeemable convertible preferred stock from their
original par value of $.00001 and $.0001, respectively to $.0l, and
reduce the number of authorized shares of common stock from 20,000,000 to
15,000,000. The amendment also authorized 3,000,000 shares of $.01 par
preferred stock. All shares and per share amounts have been restated to
F-11
<PAGE> 38
reflect the reverse stock split and the change in par value and
authorized number of shares of common stock.
CONVERSION OF SERIES A, SERIES B AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED
STOCK
Concurrent with the Offering, the Company converted the 358,563, 90,850,
and 1,363,876 outstanding shares of Series A, Series B and Series C
Redeemable Convertible Preferred Stock respectively, to shares of $.01
par value Common Stock on a 1:1 basis. At the time of the conversion,
$523,400 was accrued in dividends on the redeemable convertible preferred
stock. The Company paid $200,000 in cash and issued 69,383 shares of
common stock as payment for the remainder. The owners of this common
stock have retained certain demand registration rights. As of June 30,
1996, the Company has no redeemable convertible preferred stock
authorized, issued, or outstanding.
INITIAL PUBLIC OFFERING
On March 4, 1996, the Company completed the Offering of 1,220,700 units
each consisting of one share of common stock and one warrant to purchase
one share of common stock at a price of 120% of the unit offering price
of $7.50. Through this Offering, the Company raised approximately
$6,931,000 net of expenses.
The shares of common stock and warrants are not detachable or separately
transferrable, and may be traded only as part of units until 365 days
from the offering date or such earlier date as the underwriter may
determine (the "Separation Date").
Each warrant entitles the holder to purchase one share of common stock
commencing on the separation date and continuing until March 4, 2001 at
an exercise price of $9 (120% of the initial unit offering price). As of
June 30, 1996, 1,220,700 warrants were issued and outstanding. The
Company has issued no warrants other than those included in the units
sold in the offering.
A majority of holders of the 2,700,000 shares of common stock outstanding
prior to the Offering have entered into agreements that they will not
sell any common stock owned by them without the prior written consent of
the underwriter for a period of one year from the date of the offering.
In accordance with the Underwriter's Agreement, the Company issued
options to purchase 107,000 units at an exercise price per unit of 165%
of the unit offering price of $7.50. The options expire on March 4, 2001.
STOCK OPTION PLANS
Effective October 1992, the Board of Directors adopted the 1992 Stock
Incentive Plan (the "1992 Plan") which provides for the grant of stock
options for up to 840,946 shares of common stock. The 1992 Plan also
permits the Board of Directors to grant stock appreciation rights, stock
bonuses, and restricted stock awards in accordance with the provisions of
the Plan. The Plan remains in effect until October 2002 unless sooner
terminated by the Board of Directors.
F-12
<PAGE> 39
Options granted under the 1992 Plan may be incentive stock options or
non-qualified stock options, as determined by the Board of Directors at
the time of grant. Incentive stock options are granted at a price not
less than the fair market value of the stock on the grant date, and
non-qualified options are granted at a price to be determined by the
Board of Directors provided that such exercise price is not less than 85%
of the fair market value of the stock on the grant date. Option vesting
terms are established by the Board of Directors at the time of grant, and
presently range from one to four years. The expiration date of options
granted under the 1992 Plan is determined at the time of grant and may
not exceed ten years from the date of the grant. At June 30, 1996, there
were options outstanding to purchase 593,067 shares of the Company's
common stock, of which 309,821 shares were exercisable. There were no
options available for grant at June 30, 1996 under the 1992 Plan.
Effective January 1996, the Board of Directors adopted the 1996 Stock
Incentive Plan (the "1996 Plan") which provides for the grant of stock
options for up to 200,000 shares of common stock. The 1996 Plan also
permits the Board of Directors to grant stock appreciation rights, stock
bonuses, and restricted stock awards in accordance with the provisions of
the Plan. The Plan remains in effect until January 2006 unless sooner
terminated by the Board of Directors.
Options granted under the 1996 Plan may be incentive stock options or
non-qualified stock options, as determined by the Board of Directors at
the time of grant. Incentive stock options are granted at a price not
less than the fair market value of the stock on the grant date, and
non-qualified options are granted at a price to be determined by the
Board of Directors provided that such exercise price is not less than 85%
of the fair market value of the stock on the grant date. Option vesting
terms are established by the Board of Directors at the time of grant, and
presently range from one to four years. The expiration date of options
granted under the 1996 Plan is determined at the time of grant and may
not exceed ten years from the date of the grant. At June 30, 1996, there
were options outstanding to purchase 125,076 shares of the Company's
common stock, of which no shares were exercisable. There were 74,924
options available for grant at June 30, 1996 under the 1996 Plan.
The following summarizes stock option activity for the three years ended
June 30, 1996:
<TABLE>
<CAPTION>
Number
of Shares Exercise Price
--------- ---------------
<S> <C> <C>
Outstanding at July 1, 1993 685,444 $.0084 - 1.6750
Granted 190,448 .0670 - .7370
Exercised 130,662 .0084 - .6365
Canceled or expired 90,242 .0084 - .6365
------- ---------------
Outstanding at June 30, 1994 654,988 $.0084 - 1.6750
Granted 63,846 .5025 - .8375
Exercised 60,920 .5025 - .5360
Canceled or expired 115,713 .0670 - .5360
------- ---------------
Outstanding at June 30, 1995 542,201 $.0084 - 1.6750
Granted 308,335 .8710 - 10.500
Exercised 45,327 .0084 - 1.1725
Canceled or expired 87,066 .0670 - 1.1725
------- ---------------
Outstanding at June 30, 1996 718,143 $.0084 - 10.500
======= ===============
</TABLE>
F-13
<PAGE> 40
Unearned compensation expense of $269,000 was recorded as a debit to
shareholders' equity for the fiscal year ended June 30, 1996 for 62,089
options issued at an exercise price less than market value. Compensation
expense of $81,040 was recorded in the Statement of Operations during the
year ended June 30, 1996 for these options that vested during that year.
10. CONCENTRATION OF SALES AND CREDIT RISKS
For the years ended June 30, 1996, 1995 and 1994, 63%, 84% and 90%,
respectively, of the Company's revenues were derived from MCI. Additionally,
the Company's accounts receivable from MCI represented 52% and 77% of total
accounts receivable at June 30, 1996 and June 30, 1995 respectively. There was
no bad debt expense related to MCI recorded for any of the years presented.
For the years ended June 30, 1996, 1995 and 1994, international sales were
approximately 10%, 5% and 0%, respectively, of total sales of the Company.
International sales and gross profit were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales $ 1,200 $ 483 $ --
Gross profit $ 254 $ 258 $ --
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases a building and certain equipment under
noncancelable operating lease agreements which expire at various times
through 2001 and provide for minimum annual rentals as follows:
<TABLE>
<CAPTION>
Year ending
June 30, (in thousands)
---------------- ------------
<S> <C>
1997 $321
1998 210
1999 74
2000 15
2001 3
------------
$623
============
</TABLE>
Rental expense under all lease agreements for the years ended June 30, 1996,
1995 and 1994 was approximately $450,000, $404,000 and $408,000 respectively.
(b) 401(K) PLAN
F-14
<PAGE> 41
The Company sponsors the Digital Transmission Systems, Inc. 401(k)
Savings Plan (the "Plan") for the benefit of eligible employees and their
beneficiaries. Employees may elect to contribute from 1% to 20% of their
gross compensation to the Plan. The Company can make an annual matching
contribution equal to a percentage of the amount contributed by the
employee. The Company can also make an additional annual discretionary
contribution that is allocated to employees based upon relative levels of
compensation. The Company elected to make no contributions to the Plan
during the years ended June 30, 1996, 1995 and 1994.
(c) R&D AGREEMENTS
The Company has agreements with certain outside sub-contractors for the
development of new product technology. The agreements define milestones
which, upon completion, call for the payment of agreed upon fees.
Portions of these payments are capitalized (see note 1).
12. SUBSEQUENT EVENTS
On August 9, 1996, one of the Company's suppliers, Comptronix Corporation,
filed for protection under Chapter 11 of the Federal Bankruptcy Code. The
Company has not experienced delays in any shipments from that date through the
present time.
F-15
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Digital Transmission Systems, Inc.
We have audited the accompanying balance sheet of Digital Transmission
Systems, Inc. as of June 30, 1996 and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. The accompanying financial statements of Digital Transmission
Systems, Inc. as of June 30, 1995 and for the two year period then ended,
were audited by other auditors whose report thereon dated July 25, 1995,
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of Digital
Transmission Systems, Inc. as of June 30, 1996, and the results of operations
and its cash flows for the year ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Atlanta, Georgia
August 22, 1996
F-16
<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Digital Transmission Systems, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Digital
Transmission Systems, Inc. at June 30, 1995 and the results of its operations
and its cash flows for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Atlanta, Georgia
July 25, 1995
F-17
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
*3.1 - Form of Amended and Restated Certificate of Incorporation of the Company.
*3.2 - Form of Amended and Restated Bylaws of the Company.
*4.1 - See Article 4 of the Company's Amended and Restated Certificate of Incorporation -- located within
Exhibit 3.1.
*4.2 - See Article 3 of the Company's Amended and Restated Bylaws located within
Exhibit 3.2.
*10.1 - Loan Agreement, dated October 10, 1995, by and between the Company and
SunTrust Bank.
*10.2 - Lease Agreement, dated September 14, 1994, by and between the Company and
Advanta Leasing Corp.
*10.3 - The Company's 401 (K) Savings Plan.
*10.4 - Lease Agreement, dated January 28, 1991, by and between the Company and
Colonial Pacific Leasing Corporation.
*10.5 - Lease Agreement, dated January 4, 1994, by and between the Company
and Amplicon, Inc.
*10.6 - Form of Reseller Agreement.
*10.7(1) - Proprietary Information, Noncompetition and Inventions Agreement, dated
August 20, 1990, by and between the Company and Thomas C. Mock
*10.8 - Form of Confidentiality and Invention Assignment Agreement.
*10.9(1) - Proprietary Information, Noncompetition and Invention Agreement, dated August
20, 1990, by and between the Company and James W. Chamberlin
*10.10 - Acquisition Agreement, dated December 1, 1995, by and between the Company
and Technology Ventures International, Inc.
*10.11 - Lease Agreement, dated March 19, 1993, by and between New England Mutual
Life Insurance Company and the Company.
*10.12 - Manufacturing Agreement, dated May 8, 1995, by and between the
Company and Comptronix Corporation.
*10.13(1) - FY95 Employee Profit Sharing Plan.
*10.14(1) - FY96 Management Bonus Plan.
*10.15(1) - 1992 Stock Incentive Plan.
*10.16(1) - FY96 Sales Commission Plan for Bobby Boykin.
*10.17 - Equipment Lease, dated December 17, 1991, by and between the Company and
General Electric Capital Corporation.
*10.18(1) - Form of Employment Agreement to be entered into by and between the Company and
each of Mr. Salazar, Mr. Boykin and Mr. Nelson.
*10.19(1) - 1996 Incentive Compensation Plan.
*10.20 - Form of Consent of Series C Preferred Stockholders.
*10.21 - Agreement, dated January 7, 1994, by and between the Company and Wiltron
Company.
10.22(1) - Digital Transmission Systems, Inc. Employee Stock Purchase Plan
</TABLE>
Page 25
<PAGE> 45
<TABLE>
<S> <C>
11.1 - Form of Statement of computation of per share earnings (loss)
27 - Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated by reference to the corresponding exhibit of the
Registrant's registration statement on Form SB-2 (File Number
1-14198).
(1) Constitutes a management contract or compensatory plan or
arrangement required to be filed.
Page 26
<PAGE> 1
Exhibit 10.22
DIGITAL TRANSMISSION SYSTEMS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
Digital Transmission Systems, Inc., a Delaware corporation (hereinafter
referred to as the "Sponsoring Employer" or as an "Employer"), has
adopted the following Employee Stock Purchase Plan for the benefit of its
eligible employees.
The number of shares of the Sponsoring Employer's $.0l par value common
stock (the "Common Stock") presently reserved for issuance under the plan
is ________ shares.
The purpose of this plan is to provide an opportunity for eligible
employees of an Employer to share in the growth and prosperity of the
Sponsoring Employer through acquisition of shares of the Common Stock.
The Company intends that options issued under this plan (hereinafter
"Options") constitute options issued pursuant to an "employee stock
purchase plan" within the meaning of Section 423 of the internal Revenue
Code of 1986, as amended (the "Code").
ARTICLE I
TITLE
SECTON 1.01 This plan shall be known as the Digital Transmission
Systems, Inc. 1996 Employee Stock Purchase Plan (hereinafter referred to
as the "Plan").
ARTICLE II
DEFINITIONS
As used herein, the following words and phrases shall have the meanings
specified below, unless a different meaning is plainly required by the
context, viz.:
SECTION 2.01 The term "Board of Directors" or "Board" shall mean the
Board of Directors of the Sponsoring Employer.
SECTION 2.02 The term "Closing Market Price" shall mean the price paid
in the last sale in the Nasdaq Stock Market's SmallCap Market
(hereinafter referred to as "NASDAQ") as reported by NASDAQ as of the
applicable date; provided that, if there shall be any material alteration
in the present system of reporting prices of such stock, or if such stock
shall no longer be reported by NASDAQ, the fair market value of the,
stock as of a particular date shall be determined by such method as shall
be provided by the Compensation Committee of the Board and, provided
further, that for so long as the common stock is only traded as part of a
unit, the price of the common stock shall be
Page 48
<PAGE> 2
determined by using the price paid for a unit as described above and
attributing a price of $1.75 to the warrant which is part of the unit.
SECTION 2.03 The term "Continuous Service" shall mean an Employee's
number of completed days or months of continuous employment with an
Employer from his last hiring date to his date of severance of employment
for any reason. Continuous Service shall not be broken by reason of and
shall be credited for absence due to vacation, temporary sickness or
"injury.
SECTION 2.04 The term "Contribution Account" shall mean the account
established on behalf of a Member to which shall be credited the amount
of the Member's contribution, pursuant to Article IV.
SECTION 2.05 The term "Employee" shall mean each current or future
employee of an Employer, except highly compensated employees of the
Employer (within the meaning of Section 414(q) of the Code), whose
customary employment is at least twenty (20) hours a week and is or will
be more than five (5) months in a calendar year.
SECRION 2.06 The term "Employer" shall mean any corporation
designated by the Board of Directors of the Sponsoring Employer as an
Employer under this Plan and which is either the Sponsoring Employer or a
Subsidiary of the Sponsoring Employer.
SECTION 2.07 The term "Exercise Date" shall man the last NASDAQ
trading date of the Plan Period.
SECTION 2.08 The term "Grant Date" shall mean the first NASDAQ
trading date of the Plan Period.
SECTION 2.09 The "Issue Price" shall mean the price of the stock to
be charged to participating Members at the Exercise Date as provided in
Article IV.
SECTION 2.10 The term "Member" shall mean any Employee of an
Employer who has met the conditions and provisions for becoming a Member
as provided in Article III.
SECTION 2.11 The term "Member's Contribution Rate" shall be that
exact number of dollars a Member elects to contribute by regular payroll
deductions to his Contribution Account as provided by Section 4.02.
SECTION 2.12 For hourly Employees the, term "Normal Monthly Pay"
shall be computed by annualizing the Employee's hourly base pay and his
regular scheduled hours of work as of the first day of the Plan Period in
question and dividing by twelve. For salaried Employees the "Normal
Monthly Pay" shall be the Employee's regular monthly base pay as of the
first day of the Plan Period in question.
SECTION 2.13 The term "Plan Period" shall mean the twelve (12) month
Period beginning on July 1 of a calendar year and ending on the next
succeeding June 30.
SECTION 2.14 The term "Sponsoring Employer" shall mean Digital
Transmission Systems, Inc., a Delaware corporation, the plan sponsor for
all purposes.
Page 49
<PAGE> 3
SECTION 2.15 The term "Sponsoring Employer Stock" shall mean those
shares of the Common Stock which pursuant to section 4.01 are reserved
for issuance upon the exercise of the options granted under this Plan.
SECTION 2.16 The term "Subsidiary" shall mean any corporation having a
relationship to the Sponsoring Employer described in Section 424(f) of
the Code, as amended.
SECTION 2.17 Any words herein used in the masculine shall be read and
construed in the feminine where they would so apply. Words in the
singular shall be read and construed as though in the plural in all cases
where they would so apply.
ARTICLE III
MEMBERSHIP IN PLAN
SECTION 3.01 Employee will be eligible to become a Member in the Plan
for any Plan Period if he has completed ninety (90) days of Continuous
Service with an Employer on or before the first day of the Plan Period.
SECTION 3.02 Upon becoming a Member, said Member shall be bound by the
terms of this Plan, including any amendments hereto.
SECTION 3.03 Each Employee who becomes eligible to become a Member
shall be furnished a summary of the Plan and a request for participation.
If such Employee elects to participate hereunder for a Plan Period, he
shall complete such form and file it with his Employer prior to the first
day of the Plan Period (provided, however, that for the first Plan period
under this Plan, elections to participate may be filed by a date
determined by the Board of Directors). An Employee may only become a
Member in the Plan at the beginning of a Plan Period. The complete
request for participation shall indicate the Member's Contribution Rate
authorized by the Member for such Plan Period.
ARTICLE IV
ISSUANCE OF STOCK OPTIONS
SECTION 4.01 The Sponsoring Employer shall reserve ________ shares of
Sponsoring Employer Stock for issuance upon the exercise of the options
granted hereunder. These shares may be either authorized and unissued
shares, issued shares held in or acquired for the treasury of the
Sponsoring Employer, or shares of stock reacquired by the Sponsoring
Employer upon purchase in the open market or otherwise.
SECTION 4.02 Subject to the provisions of this Plan, including the
limitations contained in Section 4.06, on the Grant Date for each Plan
Period each Employee is hereby granted an Option for each Plan Period to
purchase the number of shares of Common Stock which may be purchased, at
the Issue Price determined under Section 4.04, with the aggregate amount
of the Member's contributions during the Plan Period. In order to
participate in the Plan for a Plan Period and be granted an option
hereunder, an Employee
Page 50
<PAGE> 4
must authorize his Employer to deduct through payroll deduction an exact
number of dollars per month, but not less than $10.00 per month
("Member's Contribution Rate"). The maximum deduction shall be 10% of his
Normal Monthly Pay from his Employer as of the first day of the Plan
Period. Such authorization shall be in writing and on such forms as shall
be provided by the Sponsoring Employer. Such deductions shall begin as of
the first pay period beginning on or after the first day of the Plan
Period. For all purposes of this Plan, such contributions shall be deemed
a part of the Member's Contribution Account. Member contributions will
not be permitted to begin at any time other than the beginning of the
Plan Period. No interest shall accrue on any amounts withheld under this
Plan.
At any time during the Plan Period, a Member may notify the Sponsoring
Employer that he wishes to discontinue his contributions. This notice
shall be in writing on such forms as provided by the Sponsoring Employer
and shall become effective as of a date specified by the Member but not
more than (30) days following its receipt by the Sponsoring Employer.
Members may elect to withdraw their contributions at any time during
the Plan Period. However, if contributions are withdrawn during the Plan
Period, no further contributions will be permitted during the Plan
Period.
The fact that an Employee elects to participate for a Plan Period, or
fails so to elect, shall not affect his right to participate, or not to
participate, for any other Plan Period.
SECTION 4.03 If the total number of shares to be purchased under
options by all Members for any Plan Period exceeds the number of times
remaining authorized under this Plan, a pro rata allocation of the
available shares will be made among all Members authorizing such payroll
deductions based on the amount of the respective aggregate payroll
deductions up to the Exercise Date.
SECTION 4.04 The Issue Price of the Sponsoring Employer Stock under
this Plan will be the lesser of (a) 85% of the Closing Market Price on
the last trading date of the Plan Period (being the Exercise Date for the
Plan Period) or (b) 85% of the Closing Market Price on the first trading
date of the Plan Period (being the Grant Date for the Plan Period).
SECTION 4.05 On the Exercise Date a Member's Contribution Account
shall be used to purchase the maximum number of whole shares of
Sponsoring Employer Stock determined by dividing the Issue Price, defined
in Section 4.04 into the Member's Contribution Account, unless the Member
has notified the Sponsoring Employer in writing ten (10) business days
prior to the Exercise Date that the Member does not want to exercise any
options. Notwithstanding the foregoing, no Member may purchase more than
______ shares of Sponsoring Employer Stock under the Plan during any Plan
Period. Any money remaining in a Member's Contribution Account that is
not used to purchase Sponsoring Employer Stock shall be returned to the
Member. Options granted under this Plan shall be subject to such
amendment or modification as the Sponsoring Employer shall deem necessary
to comply with any applicable law or regulation, and shall contain such
other provisions as the Sponsoring Employer shall from time to time
approve and deem necessary.
SECTION 4.06 In no event may a Member (i) receive an option which
permits his rights to purchase stock under all employee stock purchase
plans of the Employer and its
Page 51
<PAGE> 5
parent and subsidiary corporations to accrue at a rate which exceeds
$25,000 of fair market value of such stock (determined at the time such
option is granted) for each calendar year in which such option is
outstanding at any time, or (ii) receive an option if he owns (within the
meaning of Section 423(b)(3) of the Code), immediately after the option
is granted, stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Sponsoring
Employer or its parent or subsidiary corporation, or (iii) transfer or
otherwise alienate any option granted to him under this plan, other than
by will or the laws of descent and distribution.
SECTION 4.07 The Sponsoring Employer stock certificates purchased
through the exercise of the option granted hereunder shall be issued to
the Member as soon as practicable after the date of such exercise. All
shares of Sponsoring Employer Stock purchased in accordance with Section
4.05 hereof shall be issued in the name of the Member or former Member
and shall be kept in such name by the Member or former Member until until
the earlier of the date the shares are disposed of or the expiration of
both of the periods described in Section 4. 11 hereof.
SECTION 4.09 Any Employee whose employment with the Employer is
terminated for any reason, except death or retirement, during a Plan
Period shall cease being a Member immediately. The balance of the
Member's Contribution Account shall be paid to such Member, or his legal
representative, as soon as practicable after his termination. Any options
granted to such Member shall be deemed null and void.
SECTION 4.09 If a Member shall die during the Plan Period, no
further contributions on behalf of the deceased Member shall be made. The
Executor or administrator of the deceased Member may elect to withdraw
the balance in said Member's Contribution Account by notifying the
Employer in writing prior to the last day of the Plan Period. In the
event no election to withdraw has been made, the balance accumulated in
the Member's Contribution Account shall be used to purchase shares of
Sponsoring Employer's Stock in accordance with Section 4.05 hereof.
SECTION 4.10 If a Member shall retire during a Plan Period, no
further contributions on behalf of the retired Member shall be made. The
Member May elect to withdraw the balance in his Contribution Account by
notifying the Employer in writing prior to the last day of the Plan
Period. In the event no election to withdraw has been made, the balance
accumulated in the retired Member's Contribution Account shall be used to
purchase shares of the Sponsoring Employer's Stock in accordance with
Section 4.05 hereof.
SECTION 4.11 If a Member or former Member disposes of a share of
Sponsoring Employer Stock obtained under this Plan (i) prior to two (2)
years after the Grant Date of such share, or (ii) prior to one (1) year
after the Exercise Date, then that Member or former Member must notify
the Sponsoring Employer immediately of such disposition in writing.
ARTICLE V
MISCELLANEOUS
SECTION 5.01 The Sponsoring Employer or an individual delegated such
authority by the Sponsoring Employer shall administer the Plan and keep
records of individual
Page 52
<PAGE> 6
Member benefits. The Compensation Committee of the Board shall interpret
the terms and intent of the Plan and shall determine all questions
arising in the administration, interpretation and application of the
Plan, and all such determinations by the Compensation Committee shall be
conclusive and binding on all persons.
SECTION 5.02 Each Member, former Member, or any other person who
shall claim any right or benefit under this Plan, shall be entitled only
to look to the Employer for such benefit.
SECTION 5.03 The Compensation Committee of the Board may, at any time
or from time to time, amend the Plan in any respect, except that approval
of the stockholders of the Sponsoring Employer will be required for any
amendment for which stockholder approval is required under Section 423 of
the Code or any other applicable law. The Compensation Committee may at
any time terminate the Plan effective as of the last day of any Plan
Period or may terminate the right of Members to make contributions or
further contributions under the Plan during any Plan Period.
SECTION 5.04 The Employer will pay all expenses of administering this
Plan that may arise in connection with this Plan.
SECTION 5.05 Any rules, regulations, or procedures that may be
necessary for the proper administration or functioning of this plan that
are not covered in this Plan shall be promulgated and adopted by the
Compensation Committee of the Board.
SECTION 5.06 Any headings or subheadings in this Plan are inserted
for convenience of reference only and are to be ignored in the
construction of any Provisions hereof.
SECTION 5.07 This Plan shall be construed in accordance with the
laws of the State of Georgia.
SECTION 5.08 A misstatement of fact as to an Employee's length of
Continuous Service, date of employment or any such other matter shall be
corrected when it becomes known that any such misstatement of fact has
occurred.
SECTION 5.09 The options granted hereunder are not transferrable by
the Member otherwise than by will or the laws of descent and distribution,
and are exercisable during the Member's lifetime only by him. If a Member
attempts such assignment, transfer or alienation, his Employer shall
disregard that action.
SECTION 5.10 This Plan is intended to be an "employee stock purchase
plan" qualified under Section 423 of the Code, and it shall be interpreted
and administered by the Sponsoring Employer in such a manner as to insure
that the Members receive the benefits provided by such a plan.
SECTION 5.11 This Plan shall not be deemed to constitute a contract
between an Employer and any Member or to be a consideration or an
inducement for the employment of any Member or Employee. Nothing contained
in this Plan shall be deemed to give any Member or Employee the right to
be retained in the service of an Employer or to interfere
Page 53
<PAGE> 7
with the right of an Employer to discharge any Member or Employee at any time
regardless of the effect which such discharge shall have upon him as a Member
of the Plan.
SECTION 5.12 No liability whatever shall attach to or be incurred by
any past, present or future shareholders, officers or directors, as such, of
the Employer, under or by reason of any of the terms, conditions or agreements
contained in this Plan or implied therefrom, and any and all liabilities of,
and any and all rights and claims against, the Employer, or any shareholder,
officer or director as such, whether arising at common law or in equity or
created by statute or constitution or otherwise, pertaining to this Plan, are
hereby expressly waived and released by every Member, as a part of the
consideration for any benefits by the Employer under this Plan.
SECTION 5.13 Notwithstanding any other provisions of this Plan, in
order for this plan to continue as effective, it must be approved by the
shareholders of the Sponsoring Employer during the period commencing twelve
(12) months prior to and ending twelve (12) months after it is adopted by the
Board.
SECTION 5.14 The aggregate number of shares of Sponsoring Employer
Stock reserved for purchase under the Plan as provided in Section 4.01 hereof,
and the calculation of the Issue Price per share as provided in Section 4.04
hereof and the maximum number of shares which may be purchased by each Member
pursuant to Section 4.05 hereof shall be appropriately adjusted to reflect any
increases or decreases in the number of issued shares of Sponsoring Employer
Stock resulting from a subdivision or consolidation of shares or other capital
adjustment, or payment of a stock dividend, stock split, or other such increase
or decrease in such shares of Sponsoring Employer Stock. In the event of a
dissolution or liquidation of the Sponsoring Employer or a merger or
consolidation in which the Sponsoring Employer is not the surviving corporation
or survives only as a subsidiary of another corporation, each outstanding
option granted under this Plan shall terminate except to the extent that
another corporation assumes such option or substitutes another option therefor.
SECTION 5.15 The Sponsoring Employer's obligation to sell and deliver
stock under the Plan is at all times subject to all approvals of any
governmental authorities required in connection with the authorization,
issuance, sale or delivery of such stock.
SECTION 5.16 Any notice which the Sponsoring Employer or Member may be
required or permitted to give to each other shall be in writing, and may be
delivered personally or by mail, postage prepaid, addressed as follows: if to
the Sponsoring Employer to the Chief Financial Officer, Digital Transmission
Systems, Inc., 3000 Northwoods Parkway, Building 330, Norcross, Georgia 30071,
or at such other address as the Sponsoring Employer, by notice to the Members,
may designate in writing from time to time; if to any other Employer, to the
address designated by such Employer in a written notice to the Members; and if
to the Member, at the address shown on the records of the Sponsoring Employer,
or at such other address as the Member, by notice to the Sponsoring Employer,
may designate in writing from time to time.
Page 54
<PAGE> 1
Exhibit 11.1
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
For the year ended June 30, 1996
<TABLE>
<S> <C>
Net loss $(2,608,000)
===========
Weighted average outstanding common shares 1,770,085
Increase due to assumed issuance of shares
related to outstanding stock options issued
within one year of initial public offering 163,296
Increase due to assumed conversion to common
stock of redeemable convertible preferred
shares outstanding 1,294,660
-----------
Adjusted weighted average outstanding common
shares and common share equivalents 3,228,041
===========
Net loss per common share and common
share equivalent $ (0.81)
===========
</TABLE>
Page 55
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL TRANSMISSION FOR THE YEAR ENDED JUNE 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,586
<SECURITIES> 2,001
<RECEIVABLES> 3,645
<ALLOWANCES> 50
<INVENTORY> 2,341
<CURRENT-ASSETS> 10,110
<PP&E> 1,528
<DEPRECIATION> 1,083
<TOTAL-ASSETS> 10,984
<CURRENT-LIABILITIES> 2,379
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 8,566
<TOTAL-LIABILITY-AND-EQUITY> 10,984
<SALES> 11,228
<TOTAL-REVENUES> 11,228
<CGS> 6,956
<TOTAL-COSTS> 6,956
<OTHER-EXPENSES> 6,701
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (2,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,608)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
