<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
[ ]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)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
The number of shares outstanding of the registrant's common stock as of
September 30, 1997 was 4,132,180.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
===============================================================================
<PAGE> 2
DIGITAL TRANSMISSION SYSTEMS INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
Item 1. Financial Statements:
Balance Sheets at September 30, 1997 (Unaudited) and June 30, 1997 3
Statements of Operations for the Three Months
ended September 30, 1997 and 1996(Unaudited) 4
Statements of Cash Flows for the Three Months Ended
September 30, 1997 and 1996 (Unaudited) 5
Notes to Interim Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Items 1 - 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit 11.1 Statement of Computation of per share loss 21
Exhibit 27.0 Financial Data Schedule (SEC use only) 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
DIGITAL TRANSMISSION SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
Unaudited
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,375 $ 712
Trade accounts receivable, net of allowances of $251 and
$176 at September 30 and June 30, 1996, respectively 2,784 4,223
Other receivables 15 14
Inventories 3,073 2,440
Prepaid expenses 311 295
-------- --------
Total current assets 7,558 7,684
-------- --------
Property and equipment, net of accumulated
depreciation and amortization 1,070 1,186
-------- --------
Other Assets
Deferred tax benefit 285 285
Intangible assets 1,204 1,137
Other assets 71 19
-------- --------
Total assets $ 10,188 $ 10,311
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 923 $ 1,958
Accounts payable and accrued liabilities 1,881 3,016
Accrued payroll and benefits 44 591
Warranty accrual 257 203
-------- --------
Total current liabilities 3,105 5,768
-------- --------
Long term liabilities:
Convertible debt 4,000 0
-------- --------
Total long term liabilities 4,000 0
-------- --------
TOTAL LIABILITIES 7,105 5,768
======== ========
Shareholders' equity:
Preferred stock; 3,000,000 shares authorized;
0 issued and outstanding -- --
Common stock -- $.01 par value; 15,000,000 shares authorized;
4,132,180 and 4,121,143 issued and outstanding
at September 30 and June 30, 1997, respectively 41 41
Additional paid-in capital 11,247 11,232
Deferred compensation (108) (124)
Notes receivable from stock sales (33) (33)
Accumulated deficit (8,064) (6,573)
-------- --------
Total shareholders' equity 3,083 4,543
-------- --------
Commitments and contingencies
Total liabilities and shareholders' equity $ 10,188 $ 10,311
======== ========
</TABLE>
See accompanying notes to financial statements.
Page 3
<PAGE> 4
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended September 30
-------------------------------
1997 1996
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Net sales $ 2,203 $ 3,000
Cost of sales 1,789 1,723
------- -------
Gross profit 414 1,277
------- -------
Selling, general and administrative 1,331 1,302
Product development 519 727
------- -------
Total operating expenses 1,850 2,029
------- -------
Operating income (loss) (1,436) (752)
Other income (expense), net (55) 75
------- -------
Income (loss) before income tax expense (1,491) (677)
------- -------
Income tax benefit (expense) -- --
------- -------
Net Loss (1,491) (677)
======= =======
Net loss per common and common
equivalent shares ($ 0.36) ($ 0.17)
======= =======
Weighted average common and common
equivalent shares outstanding 4,127 3,921
======= =======
</TABLE>
See accompanying notes to financial statements.
Page 4
<PAGE> 5
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended September 30
-------------------------------
1997 1996
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,491) ($ 677)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 353 138
Change in valuation reserves 90 15
Amortization of deferred compensation expense 16 12
Changes in assets and liabilities:
Trade and other accounts receivable 1,364 (48)
Inventories (648) (1,481)
Prepaid expenses (16) (79)
Accounts payable and accrued liabilities (1,682) 981
Warranty reserve 54 (7)
Other (52) --
------- -------
Net cash used in operating activities (2,012) (1,146)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (160) (261)
Additions to capitalized product development costs (145) (554)
------- -------
Proceeds from maturity of investment securities 1,001
------- -------
Net cash provided by (used in) investing activities (305) 186
------- -------
Cash flows from financing activities:
Net borrowings under
line of credit agreement (1,035) --
Proceeds from sale of convertible debentures 4,000 --
Proceeds from exercise of stock options 15 28
------- -------
Net cash provided by financing activities 2,980 28
------- -------
Net increase (decrease) in cash and cash equivalents 663 (932)
Cash and cash equivalents at beginning of year 712 1,586
------- -------
Cash and cash equivalents at end of year $ 1,375 $ 654
======= =======
Supplemental disclosure of cash paid for income taxes and interest
Cash paid for income taxes $ -- $ 1
Cash paid for interest $ 39 $ 1
</TABLE>
See accompanying notes to financial statements.
Page 5
<PAGE> 6
DIGITAL TRANSMISSION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
UNAUDITED
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Digital Transmission Systems, Inc. (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. 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 accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
information included herein is unaudited; however, the information reflects all
adjustments (consisting solely of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the three months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's Form 10-KSB for the year ended June
30, 1997.
There have been no changes to the accounting policies of the Company during the
periods presented. For a description of these policies, see Note 1 of the Notes
to Financial Statements in the Company's Annual Report on Form 10-KSB.
2. INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share for the three months ended September 30, 1997, is
computed using the weighted average number of outstanding shares of common stock
and common stock equivalents (when dilutive). Common stock equivalents consist
of the Company's common stock issuable upon the exercise of stock options and
warrants using the treasury stock method. Net income (loss) 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.
Page 6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Digital Transmission Systems, Inc., a Delaware corporation ("DTS" or the
"Company"), designs, manufactures, and markets a broad range of products for the
telecommunications industry. The Company's primary customers are domestic and
international long distance carriers and wireless service providers, including
those offering cellular telephone services and Personal Communications Services
("PCS"). Customers include Nextel, PrimeCo Personal Communications L.P.,
360(Degree) Communications, AirTouch, Sprint, MCI, Tele2000 in Peru and
TeleBahia in Brazil.
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. These services include voice
and high-speed data transmission, the Internet and video and desktop
conferencing. The Company's network control products enable service providers to
detect degradation on their networks so that appropriate action may be taken in
advance of service interruption. Important product 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 through a direct sales force and several reseller
channels. Domestically, inter-exchange carriers and wireless service providers,
including cellular, Specialized Mobile Radio ("SMR") and PCS service providers,
are serviced directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States and Canada to sell
to private network customers. Within the last eighteen months, the Company has
signed thirty-four reseller agreements in Latin America, Asia Pacific, Europe
and the Middle East.
Page 7
<PAGE> 8
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
The following table sets forth certain financial data derived from the Company's
statement of operations for the three months ended September 30, 1997 and
September 30, 1996.
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1997 September 30, 1996
------------------ ------------------
% of % of
$ Sales $ Sales
------- ----- ------ ------
<S> <C> <C> <C> <C>
Net sales $2,203 100 $3,000 100
Gross profit 414 19 1,277 43
Product development 519 24 727 24
Selling, general and administrative 1,331 60 1,285 43
Net income (loss) (1,491) (68) (677) (23)
</TABLE>
Net Sales. Net sales decreased by 27%, to $2,203,000 for the three months ended
September 30, 1997 from $3,000,000 for the three months ended September 30,
1996. The sales mix, and the corresponding percentage of total sales of the
Company's products, is set forth in the chart below:
<TABLE>
<CAPTION>
Percentage of
total
Three months ended Three months ended
September 30, September 30,
--------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
MCI network control $0 $1,340 0 45
Other network control 1 371 0 12
FlexT1/E1 867 584 40 20
SKYPLEX 1,281 605 58 20
DIV modem 1 94 0 3
Other products 53 6 2 0
----- ----- --- ---
Totals 2,203 3,000 100 100
===== ===== === ===
</TABLE>
For the three months ended September 30, 1996, MCI accounted for 45% of net
sales. For the three months ended September 30, 1997, there were no sales of the
proprietary products developed for MCI. Results for the three months ended
September 30, 1997 reflect a shift in product mix to the Company's newer
products-FlexT1/E1 and SKYPLEX. The Company's Flex product line accounted for
40% of sales for the three months ended September 30, 1997, as compared to 20%
for the three months ended September 30, 1996. The SKYPLEX line grew by 112% to
account for 58% of sales for the three months ended September 30, 1997,
reflecting sales to markets in Latin America and Asia, up from 20% of sales for
the three months ended September 30, 1996.
Page 8
<PAGE> 9
Total sales of products other than to MCI increased from $1,660,000 in the three
months ended September 30, 1996 to $2,203,000 in the three months ended
September 30, 1997, an increase of $543,000, or 33%. However, this increase was
not large enough to make up for the decrease of revenue to MCI.
Gross Profit. Cost of sales consists of component costs, compensation costs and
the overhead costs related to the production and shipping of the Company's
products, along with the support and warranty expense associated with such
products. Gross profit decreased by 68%, to $414,000 for the three months ended
September 30, 1997 from $1,277,000 for the three months ended September 30,
1996. As a percentage of sales, gross profit decreased to 19% for the three
months ended September 30, 1997 from 43% for the three months ended September
30, 1996. This decrease is a result of the decreased sales volumes for the three
month period which created less utilization of the Company's fixed operations
costs. In addition, MCI proprietary sales were replaced with sales of the new
SKYPLEX product line, which currently has lower gross margins.
Product Development. Product development expense consists of personnel costs,
consulting, prototyping, supplies and depreciation expenses. Product development
expenses decreased by 29%, to $519,000 for the three months ended September 30,
1997 from $727,000 for the three months ended September 30, 1996. Additionally,
the Company incurred $145,000 of costs of sub-contracted development that were
capitalized. Product development expenditures decreased as resources were
shifted from SKYPLEX I development to testing and customer service functions as
the new product was released for sale. Management expects that product
development expense will increase as the Company continues to develop new
products. As a percentage of sales, product development costs were 24% for the
three months ended September 30, 1997 and 24% for the three months ended
September 30, 1996.
Selling, General and Administrative. Selling expense consists primarily of
compensation costs for sales and marketing personnel, travel, consulting, trade
show and advertising expenses. General and administrative expense consists
primarily of compensation expenses for administrative and finance personnel, as
well as accounting, legal and consulting fees. Selling, general and
administrative expense increased by 4%, to $1,331,000 for the three months ended
September 30, 1997 from $1,285,000 for the three months ended September 30,
1996. Total selling, general and administrative costs were 60% of total sales
for the three months ended September 30, 1997, which was up from 43% of sales
for the three months ended September 30, 1996. Selling expense decreased by 6%,
to $711,000 for the three months ended September 30, 1997 from $759,000 for the
three months ended September 30, 1996. This decrease was due to the lower
commission costs associated with the decreased sales level for the three months
ended September 30, 1997 as compared to the three months ended September 30,
1996. This increase was partially offset by the continued expansion of the
Company's international sales efforts. Management expects to continue to expand
the Company's international and domestic sales and marketing effort and intends
to increase the Company's sales and marketing expenditures. Marketing
expenditures increased from $247,000 to $258,000 during the same period, due to
the continuation of certain marketing programs which had not been started during
the three months ended September 30, 1996. General and administrative expenses
increased by 30%, to $362,000 for the three months ended September 30, 1997 from
$279,000 for the three months ended September 30, 1996. This increase is a
result of the continued expansion of the support infrastructure needed to
support the anticipated business activities for the remainder of the year.
Page 9
<PAGE> 10
Net Loss. The net loss increased to $1,491,000 for the three months ended
September 30, 1997 from $677,000 for the three months ended September 30, 1996.
This decrease was the result of the decrease in total revenues of $797,000 and
the decrease in gross margin to 19% in the three months ended September 30, 1997
from the three months ended September 30, 1996..
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had approximately $1,375,000 in cash and cash
equivalents.
On April 10, 1997, the Company established a bank line of credit agreement with
Silicon Valley Bank which makes available $2,500,000 in borrowings with
availability based on the Company's accounts receivable. The loan is secured by
the Company's assets and bears interest at the rate of prime plus 2.25% (10.75%
at September 30, 1997). The loan requires a monthly monitoring fee of $1,000 and
a commitment fee of 0.125% due monthly on the unused portion of the facility.
The line of credit agreement term is one year with an automatic renewal each
year unless written notice of termination is given by one of the parties.
For the three months ended September 30, 1997, the Company used $2,012,000 in
cash from operating activities as compared to $1,897,000 for the same period the
previous year. The net loss for the period was $1,491,000. In addition, accounts
payable and accrued liabilities were reduced by $1,682,000 with the funds
provided by the sale of debentures to Tandem Capital (see below). Inventories
increased by $648,000 due primarily to higher than normal receipts of products
just prior to the end of the three month period, which had not been shipped to
customers as of September 30, 1997. Cash was provided by the collection of
accounts receivable. Accounts receivable decreased by $1,364 primarily due to
the low volume of sales experienced during the three months ended September 30,
1997.
The Company purchased $160,000 and $261,000 of property, plant and equipment
during the three months ended September 30, 1997 and 1996, respectively. In
addition, the Company capitalized certain product development expenses paid to
outside contractors. During the three months ended September 30, 1997, the
Company capitalized $145,000 of such costs as compared to capitalized costs of
$554,000 for the three months ended September 30, 1996.
On September 25, 1997, the Company issued $4 million of 11.5% subordinated
debentures due September 25, 2002. The Debenture Purchase Agreement contains
numerous rights, privileges, conditions, etc., in favor of the lender, only
certain of which have been included herein. Accordingly, the Debenture Purchase
Agreement should be read in conjunction with this summary note. The debentures
are convertible at any time by the lender into common stock of the Company at a
conversion price of $10.25 per share, subject to adjustment in certain events.
The debentures are redeemable by the Company after September 1999 provided that
(a) the Company pays the lender additional interest such that the lender would
receive an effective compounded 20% interest rate from inception of the loan or
(b) the 20-day average bid price for the Company's stock exceeds $15.00 per
share.
The debentures may be required to be redeemed by the Company at the option of
the lender at any time prior to maturity if there is a change in control, as
defined in the debenture agreement, at the repayment prices set forth in the
debenture agreement, subject to adjustment, together with accrued interest. The
debenture agreement specifies certain covenants with which the Company
Page 10
<PAGE> 11
must comply. Funds provided by the sale of the debentures were used to reduce
the Company's working capital line of credity by $1,035,000.
The Company expects its cash balances and available borrowing facilities will be
sufficient to fund its currently anticipated level of cash needs for the next
twelve months.
SEASONALITY
The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's large customer, MCI. Other fluctuations
occur due to increased buildout of the telecommunications infrastructure during
the summer months. 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 and the expected decrease of sales to MCI will
decrease the seasonality of its sales. The Company operates with a moderate
level of backlog for each product line due to advance purchase commitments and
production lead times.
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 11
<PAGE> 12
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- ------------------------
<S> <C>
11.1 Statement of computation of per share earnings (loss)
27.0 Financial Data Schedule (for SEC use only)
</TABLE>
(B) REPORTS ON FORM 8-K
The registrant did not file any reports on Form 8-K during the three months
ended September 30, 1997.
Page 12
<PAGE> 13
SIGNATURES
Pursuant to the requirements 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.
Date: November 13, 1997 By: /s/ Andres C. Salazar
-----------------------------------
Andres C. Salazar, President and
Chief Executive Officer
Date: November 13, 1997 By: /s/ Roger E. Maloch
-----------------------------------
Roger E. Maloch, Chief Financial
Officer, Vice President of Finance
and Administration (Principal
Financial Officer and
Principal Accounting Officer)
Page 13
<PAGE> 1
Exhibit 11.1
DIGITAL TRANSMISSION SYSTEMS, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
For the quarter ended September 30, 1997
<TABLE>
<S> <C>
Net loss $(1,491,000)
===========
Adjusted weighted average common and
common equivalent shares outstanding 4,127,285
===========
Net loss per common and common
equivalent shares $ (0.36)
===========
</TABLE>
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL TRANSMISSION FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,375
<SECURITIES> 0
<RECEIVABLES> 3,050
<ALLOWANCES> 251
<INVENTORY> 3,073
<CURRENT-ASSETS> 7,558
<PP&E> 2,735
<DEPRECIATION> 1,665
<TOTAL-ASSETS> 10,188
<CURRENT-LIABILITIES> 3,105
<BONDS> 4,000
0
0
<COMMON> 41
<OTHER-SE> 3,042
<TOTAL-LIABILITY-AND-EQUITY> 10,188
<SALES> 2,203
<TOTAL-REVENUES> 2,203
<CGS> 1,789
<TOTAL-COSTS> 1,789
<OTHER-EXPENSES> 1,850
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,491)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,491)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
