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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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
---- ----
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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 (IRS 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, 1999 was 4,646,221.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
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DIGITAL TRANSMISSION SYSTEMS INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1999
(Unaudited) and June 30, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 30, 1999 and 1998 (Unaudited) 5
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Items 1 - 5 Not applicable 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27.0 Financial Data Schedule (for SEC use only) 16
</TABLE>
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DIGITAL TRANSMISSION SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
ASSETS 1999 JUNE 30, 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 46 217
Trade accounts receivable, net of allowances for
returns and doubtful accounts of $906 and $1,238
at September 30, 1999 and June 30, 1999, respectively 468 1,133
Accounts receivable from related parties 43 43
Inventories 992 903
Prepaid expenses and other current assets 13 25
------------ ------------
Total current assets 1,562 2,321
Property and equipment, net of accumulated depreciation
and amortization 324 410
Note receivable from a related party 127 127
Intangible assets 362 423
Other assets 564 526
------------ ------------
Total assets $ 2,939 3,807
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 602 1,365
Accounts payable and accrued liabilities 1,688 1,749
Accounts payable to related parties 80 69
Accrued payroll and benefits 274 167
Notes payable 382 561
Warranty accrual 197 197
------------ ------------
Total current liabilities 3,223 4,108
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Long-term liabilities:
Convertible debentures 2,000 2,000
Deferred gain on sale of subsidiary 127 127
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Total long-term liabilities 2,127 2,127
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Shareholders' deficit:
Preferred stock - 3,000,000 shares authorized; 1,314,333 shares
issued and outstanding 1,314 1,314
Common stock - $.01 par value; 15,000,000 shares
Authorized; 4,646,221 shares issued and outstanding
at September 30, 1999 and June 30, 1999 47 47
Additional paid-in capital 11,651 11,651
Notes receivable from stock sales (63) (63)
Accumulated deficit (15,360) (15,377)
------------ ------------
Total shareholders' deficit (2,411) (2,428)
Commitments and contingencies
------------ ------------
Total liabilities and shareholders' deficit $ 2,939 3,807
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------
1999 1998
Unaudited Unaudited
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<S> <C> <C>
Net sales $ 2,619 $ 1,519
Cost of sales 1,704 1,073
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Gross profit 915 446
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Selling, general and administrative 544 835
Product development 236 503
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Total operating expenses 780 1,338
------------ ------------
Operating income(loss) 135 (892)
Interest expense, net (118) (185)
Income (loss) before income tax expense 17 (1,077)
Income tax benefit (expense) -- --
------------ ------------
Net income (loss) $ 17 $ (1,077)
============ ============
Net income (loss) per share - basic and diluted $ 0.004 $ (0.26)
============ ============
Weighted average shares outstanding - basic and diluted 4,646 4,160
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------
1999 1998
Unaudited Unaudited
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ 17 $ (1,077)
Adjustments to reconcile net loss
to net cash used in (provided by) operating activities:
Depreciation and amortization 162 220
Amortization of deferred compensation expense -- 16
Changes in assets and liabilities:
Trade and other accounts receivable 595 709
Inventories (89) 316
Prepaid expenses and other current assets 46 44
Accounts payable and other accrued expenses (123) 212
Warranty accrual -- (5)
------------ ------------
Net cash provided by operating activities 608 435
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment
(10) (22)
Additions to capitalized product development costs (5) (25)
------------ ------------
Net cash used in investing activities (15) (47)
------------ ------------
Cash flows from financing activities:
Net payments under line of credit agreement (764) (298)
------------ ------------
Net cash used in financing activities (764) (298)
------------ ------------
Net increase in cash and cash equivalents (171) 90
Cash and cash equivalents at beginning of period 217 91
------------ ------------
Cash and cash equivalents at end of period $ 46 $ 181
============ ============
Supplemental disclosure of cash paid for:
Interest $ 42 $ 43
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
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
wireless service providers, including those offering cellular telephone
services and Personal Communications Services ("PCS") and domestic and
international resellers who sell to and service end users with telecom
equipment. Customers include Nextel Communications, ALLTEL, AirTouch Cellular,
and GTE Mobilnet.
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. 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, wireless service providers, including cellular,
Specialized Mobile Radio ("SMR") and PCS service companies, are targeted as
prospective customers directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States to market to public
and private network customers.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred significant losses in recent periods. The Company has a net capital
deficit of $2,411,000 as of September 30, 1999. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern for a reasonable period of time.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of its financing agreements, and to obtain
additional financing or refinancing as may be required. The Company is actively
pursuing additional equity financing through discussions with potential
investors, and is also pursuing potential merger or acquisition candidates.
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, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ended June 30, 2000. For further information, refer to the
financial statements and footnotes thereto included in the Company's Form
10-KSB for the fiscal year ended June 30, 1999.
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
The Company has presented earnings (loss) per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share ("SFAS 128"), which requires
companies that have publicly held common stock or potential common stock to
present both basic and diluted earnings (loss) per share (EPS) on the face of
the income statement. Basic EPS is calculated as income (loss) available to
common
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shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted EPS is calculated as income (loss)
available to common shareholders divided by the weighted-average number of
common shares outstanding during the period plus any dilutive potential common
shares, such as convertible debt or stock options. The Company has restated its
earnings (loss) per share for all periods presented to conform to the
provisions of SFAS 128.
3. LEGAL MATTERS
The Company is not 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.
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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
wireless service providers, including those offering cellular telephone
services and Personal Communications Services ("PCS") and domestic and
international resellers who sell to and service end users with telecom
equipment. Customers include Nextel Communications, Alltel, AirTouch Cellular,
and GTE Mobilnet.
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. 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, wireless service providers, including cellular,
Specialized Mobile Radio ("SMR") and PCS service companies, are targeted as
prospective customers directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States to market to public
and private network customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
The following table sets forth certain financial data derived from the
Company's statement of operations for the three months ended September 30, 1999
and September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
$ % OF SALES $ % OF SALES
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 2,619 100 1,519 100
Gross profit 915 35 446 29
Product development 236 9 503 33
Selling, general and administrative 544 21 835 55
Net income (loss) 17 1 (1,077) (71)
</TABLE>
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NET SALES. Net sales increased 72% to $2,619,000 for the three months ended
September 30, 1999 from $1,519,000 for the three months ended September 30,
1998. 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,
------------- -------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Flex T1/E1 $2,619 $ 969 99 64
SKYPLEX -- 527 -- 35
Other products -- 23 1 1
---------------------------------------------------------
Totals $2,619 $1,519 100 100
=========================================================
</TABLE>
For the three months ended September 30, 1999, revenues from the Company's
FlexT1/E1 product line increased 167% from $969,000 for the three months ended
September 30, 1998 to $2,589,000 for the three months ended September 30, 1999.
For the three months ended September 30, 1999, the Company did not record any
revenue with respect to its previous SKYPLEX product line. SKYPLEX revenue for
the same period last year was $527,000. The overall decrease in SKYPLEX
revenues reflects the overall decrease in international sales as a result of
the sale of the Company's international subsidiary on February 5, 1999.
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 increased 105% from $446,000 for the three month period
ended September 30, 1998 to $915,000 for the three month period ended September
30, 1999 primarily due to the accompanying increase in sales noted for the same
period. As a percentage of sales, gross profit increased 6% from 29% of sales
to 35% of sales for the three month period ended September 30, 1999. The
increase is primarily attributable to reduced compensation and overhead costs
related to production and shipping of the Company's products.
PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 53%, to $236,000 for the three months ended September 30, 1999 from
$503,000 for the three months ended September 30, 1998. The decrease in product
development expense for the three month period ended September 30, 1999 is
primarily due to reduced spending on new development projects and reduction in
overall research and development charges following the sale of the Company's
international subsidiary, SouthTech, Inc., on February 5, 1999. Approximately
$5,000 of development costs related to new projects were capitalized for the
three month period ended September 30, 1999 as compared to $25,000 for the
three month period ended September 30, 1998. As a percentage of sales, product
development costs were 9% for the three months ended September 30, 1999 and 33%
for the three months ended September 30, 1998.
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 occupancy costs and compensation expenses for administrative and
finance personnel, as well as accounting, legal and consulting fees. Selling,
general and administrative expense decreased by 35%, to $544,000 for the three
months ended September 30, 1999 from $835,000 for the three months ended
September 30, 1998. Total selling, general and administrative costs were 21% of
total sales for the three months ended September 30, 1999 as compared to 55% of
sales for the three months ended September 30, 1998 . The overall decrease in
selling, general and administrative expenses is primarily due to the Company's
reduction in personnel compensation and other administrative costs due to
several cost reduction plans instituted by management during the fourth quarter
of fiscal 1998 and the first, second and third quarters of fiscal 1999.
Additionally, the Company experienced an overall reduction in selling, general,
and administrative expenses following the sale of the Company's international
subsidiary on February 5, 1999. As of September 30, 1999 the Company had
approximately 28 full-time employees
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reflecting a decrease in overall headcount of 9, from 37 full-time employees as
of September 30, 1998. Selling expense decreased by 50%, to $176,000 for the
three months ended September 30, 1999 from $349,000 for the three months ended
September 30, 1998. This decrease is attributable to lower sales personnel
compensation costs and sales commission costs incurred after the sale of the
Company's international subsidiary on February 5, 1999. Marketing expenditures
decreased by 64% from $161,000 to $58,000 due to reduced advertising efforts
and a reduction in tradeshow participation during the three month period ended
September 30, 1999. General and administrative expenses decreased by 5%, to
$310,000 for the three months ended September 30, 1999 from $325,000 for the
three months ended September 30, 1998.
NET INCOME/LOSS. Net income for the three month period ended September 30, 1999
of $17,000 reflects an overall increase of $1,094,000 as compared to the net
loss of $1,077,000 reported for the three month period ended September 30,
1998. The increase reflects the substantially lower operating costs of the
Company. The reduction in overall operating costs is due to (1) the institution
of cost reduction plans during early fiscal 1999, (2) the overall decrease in
headcount as of September 30, 1999 as compared to September 30, 1998, and (3)
the sale of the Company's international subsidiary on February 5, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred significant losses in recent periods and has previously been in
violation of its debt covenants. However, through the sale of its international
subsidiary, SouthTech, Inc., on February 5, 1999, and the amendment of its bank
line with Silicon Valley Bank and its debenture agreement with Sirrom Capital,
the Company is currently in compliance with all loan covenants and its net
capital deficit has been reduced to $2,411,000 as of September 30, 1999.
Although these accomplishments and the profitability of the fiscal quarter
ended September 30, 1999 have improved the Company's financial condition from
September 30, 1998, the Company's access to additional working capital and
current cash condition still raise doubt about the Company's ability to
continue as a going concern for a reasonable period of time.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of its financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to
attain profitability. The Company is pursuing additional equity financing
through discussions with potential investors and is pursuing potential merger
or acquisition candidates.
On October 14, 1998, NASDAQ delisted the Company because the Company did not
meet its listing requirement of minimum net assets. The Company's securities
are currently traded on the OTC Bulletin Board. The delisting action has
hampered the Company's efforts to raise capital through a private placement of
its stock with qualified investors. However, the Company has employed several
programs in an effort to help the Company preserve cash which, in the first and
second fiscal quarters of 1999, was being used to fund severance costs of
terminated employees, to fund payroll and essential expenses and the purchase
of supplies from critical vendors. First, a group of employees and affiliates
volunteered to forego or delay salary, commission and other compensation
payments through a restricted stock for cash program offered by Board
resolution on August 10, 1998. Under that program a total of approximately
395,612 common shares were approved by the Board to compensate those employees
and affiliates in return for cancellation of salary or other compensation
payments totaling $52,320 and a delay of payment of another $62,206. These
shares cannot be pledged, sold or traded until November 30, 1999 at which time,
under Rule 144, they will have the restricted legend removed from their
certificates and are freely tradable. Secondly, another program to preserve
cash has been to work out extended payment terms with certain key material
suppliers for overdue amounts payable. The Company has been able to complete
formal negotiations with three critical suppliers and establish extended
payment terms (over a 12 month period) for overdue amounts payable. Third,
non-critical suppliers have been offered settlements in the form of uniform
terms and reduced but immediate cash payments for cancellation of long standing
past due amounts. A total of $208,000 of amounts payable have been settled for
a reduced amount under these conditions.
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 was amended
on March 18, 1998 to increase the maximum eligible borrowing to the lesser of
$4,000,000 or 80% eligible
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receivables plus 30% of eligible inventory, as defined, through the maturity
date of April 10, 2000. The loan is secured by the Company's assets and bears
interest at the rate of prime plus 2.25%. A net worth covenant was amended on
March 16, 1998, requiring the Company to have a net worth of $1,000,000. In
September 1998, the Company agreed to a UCC filing whereby all assets of the
Company become collateral under the Agreement. 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 agreement term is two years with an
automatic renewal each year unless written notice of termination is given by
one of the parties. The Company issued 60,000 two year warrants to Silicon
Valley Bank at a strike price of $5.25 each as consideration for the amended
agreement. On February 25, 1999 the Company signed an amendment to the loan
agreement with Silicon Valley Bank which modified previous loan covenants. The
revised covenants are primarily based upon minimum monthly and quarterly
revenue levels. As consideration for the amended agreement, the Company issued
250,000 two year warrants for common stock of the Company at $0.119 per share
which represents the market price of the Company's common stock at the close of
business on December 2, 1998 when a new agreement was reached. The financial
and accounting value of the warrants issued is immaterial to the Company's
financial statements and has not been recorded as of September 30, 1999. Under
the revised agreement the maximum borrowing has been reduced to $1,500,000 and
bears interest at prime plus 2 1/4 (10% at September 30, 1999). The Company was
in compliance with all covenants in the revised bank agreement as of September
30, 1999.
During fiscal 1998, the Company issued $4 million of 11.5% subordinated
debentures to Sirrom Capital of Nashville, Tennessee. During March 1999, The
FINOVA Group consummated its previously announced acquisition of Sirrom Capital
Corporation. Sirrom Capital will begin operating as FINOVA Mezzanine Capital, a
specialty finance company, headquartered in Nashville, Tennessee. The
aforementioned debentures were issued on September 25, 1997 with a contractual
due date of September 25, 2002. The Debenture Purchase Agreement contained
numerous rights, privileges, and conditions in favor of the lender, only
certain of which are described herein. The debentures were originally
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 conversion price would change to $8.00 per share if the Company's common
stock was trading for less than that amount on September 25, 1998. The
debentures were 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 (a) there is a change in control,
as defined in the Debenture Agreement, (b) the Company's common stock is
delisted from NASDAQ, or (c) the Company's common stock ceases to be publicly
traded at the sum of the principal amount of the debentures tendered for
redemption, plus any accrued and/or unpaid interest outstanding related to the
debentures, plus 15% interest on outstanding principal and interest amounts
due, plus any expense or costs owed to the lender as set forth in the Debenture
Agreement. Due to continued noncompliance with debt covenants and the NASDAQ
listing criteria, the Company was delisted as of October 14, 1998. However,
accompanying the sale of the Company's international subsidiary, SouthTech,
Inc., Sirrom Capital agreed to restructure the $4,000,000 debenture with the
Company by transferring $1,000,000 to SouthTech, Inc. as it was sold to Chapala
Communications. In addition, Sirrom Capital agreed to convert $1,000,000 along
with accrued but unpaid interest of $314,333 into Series A convertible
preferred stock which bears no dividends and is convertible into common stock
at $1.00 per share. The remaining $2,000,000 debenture, convertible now at
$1.00 per share and bearing interest at 10% per annum, requires an interest
payment of $200,000 on February 5, 2000.
After February 5, 2000, interest under the debenture is to be paid (i) on each
June 1, September 1, December 1, and February 1 until and including February 1,
2002 (ii) on the first day of each month commencing March 1, 2002 and (iii) on
the final maturity date of February 5, 2004. Monthly interest payments shall be
accompanied by payments of principal on the first day of each month (i)
beginning on February 1, 2002, in the amount of $55,555 each, and (ii)
beginning on February 1, 2003 in the amount of $111,111 each, and (iii) all
remaining principal shall become due on February 5, 2004. As consideration for
the restructuring of the convertible debenture by Sirrom Capital, the Company
granted 702,615 warrants to Sirrom Capital with a strike price of $1.00 per
share. The warrants were valued at $182,000 and has been allocated to Other
Assets within the accompanying balance sheet. The warrant value will be
amortized over the life of the amended debenture agreement which approximates 5
years.
On December 31, 1998 an option to purchase 1,738,159 common shares of DTS stock
was granted to MicroTel International ("MicroTel") by Peregrine Ventures, a
California based limited partnership and shareholder of DTS, in consideration
for a certain amount of MicroTel common stock. On the same date, the two DTS
Board members representing Peregrine Ventures interests, tendered their
resignations effective immediately. The option, due to
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expire on January 31, 1999, was exercised by MicroTel and thus MicroTel became
DTS' largest single shareholder, holding approximately 40% of the then
outstanding stock. Two MicroTel representatives were elected to the DTS Board
of Directors at the DTS Shareholders Meeting held on April 13, 1999. MicroTel
is a Delaware corporation whose stock is publicly traded in the NASDAQ exchange
under the ticker symbol MCTL. In addition to various subsidiaries whose
principal business is to manufacture and market power supplies, keypads, video
displays, circuit boards and other electronic assemblies to a variety of
aerospace and communications clients MicroTel also owns two CXR subsidiaries -
CXR Telcom and CXR S.A. - which manufacture and market telecommunications
products to telco and private network users.
At September 30, 1999, the Company had approximately $46,000 in cash and cash
equivalents. For the three months ended September 30, 1999 and 1998, $608,000
and $435,000 was provided by operations, respectively. Cash was provided for
operations primarily through a decrease in accounts receivable of $595,000.
The Company purchased $10,000 and $22,000 of property, plant and equipment
during the three months ended September 30, 1999 and 1998, respectively. In
addition, the Company capitalized certain product development expenses paid to
outside contractors. During the three months ended September 30, 1999, the
Company capitalized $5,000 of such costs as compared to capitalized costs of
$25,000 for the three months ended September 30, 1998.
SEASONALITY
The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's major customers. 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 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.
YEAR 2000 (Y2K) IMPACT ON COMPANY'S INFORMATION TECHNOLOGY
The Company operates an Enterprise Resource Planning ("ERP") software system
which has modules supporting order entry, planning, inventory management,
operations, and general ledger functions. The vendor of this information system
has sent the Company a letter indicating the ERP system is Y2K compliant. The
hardware platform vendor, through its web presence, also indicates that the
system is Y2K compliant.
Most of the desktop computing systems used at the Company were manufactured
after 1995. They use operating system and document preparation software from
Microsoft Corporation. These systems are generally compliant with the Year 2000
requirements. The Company does operate older PC's in its manufacturing and
engineering organizations, but they are not used in time or date critical
operations.
The Company's products are designed to be Year 2000 compliant and have been
adequately tested as to conformance with Year 2000 date processing. All
products tested passed the conformance test and have been appropriately
certified as Year 2000 compliant by the Company. The Company did not incur and
does not expect to incur any material costs to address Year 2000 compliance
issues. The Company has a number of material relationships with third parties
and is aware of the risks involved and is currently analyzing the potential
impact on future operations. The Company is, however, aware of the risk that
third parties, including vendors and customers of the Company, will not
adequately address the Year 2000 problem and the resultant potential adverse
impact on the Company.
Notwithstanding the above, there can be no assurance that the Company's
internal systems or products will operate beyond 1999 or that major business
disruptions will not occur in mission critical systems and processes.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Subsequently, the effective date was deferred until June 15, 2000. We do not
anticipate any material impact on the financial statements as a result of the
adoption of SFAS No. 133.
12
<PAGE> 13
IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples
of forward-looking statements include, but are not limited to: (i) projections
of revenue, income or loss, earnings or loss per share, the payment or
nonpayment of dividends, capital structure and other financial items; (ii)
statements of plans and objectives of the company's management or Board of
Directors, including those relating to products or services; (iii) statements
of future economic performance; and (iv) statements of assumptions underlying
such statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (i) the strength of
the U.S. economy in general and relevant foreign economies; (ii) the Company's
performance under current and future contracts; (iii) inflation and interest
rate fluctuations; (iv) timely and successful implementation of processing
systems to provide new products, improved functionality and increased
efficiencies; (v) technological changes; (vi) acquisitions; (vii) the ability
to increase market share and control expenses; (viii) changes in laws or
regulations or other industry standards affecting the Company's business which
require significant product redevelopment efforts; (ix) the effect of changes
in accounting policies and practices as may be adopted by the Financial
Accounting Standards Board; (x) changes in the Company's organization,
compensation and benefit plans; (xi) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; (xii) failure to
successfully implement the Company's Year 2000 modification plans substantially
as scheduled and budgeted; and (xiii) the success of the Company at managing
the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which statements
are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect to occurrence of unanticipated events.
13
<PAGE> 14
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEMS 1 - 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
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, 1999.
14
<PAGE> 15
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 12, 1999 By: /s/ Andres C. Salazar
---------------------
Andres C. Salazar,
Chief Executive Officer
Date: November 12, 1999 By: /s/ Clive N. W. Marsh
----------------------
Clive N. W. Marsh, Controller
(Principal Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL TRANSMISSION SYSTEMS, INC. FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 46
<SECURITIES> 0
<RECEIVABLES> 1,374
<ALLOWANCES> 906
<INVENTORY> 992
<CURRENT-ASSETS> 1,562
<PP&E> 2,916
<DEPRECIATION> 2,592
<TOTAL-ASSETS> 2,939
<CURRENT-LIABILITIES> 3,223
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> (2,411)
<TOTAL-LIABILITY-AND-EQUITY> 2,939
<SALES> 2,619
<TOTAL-REVENUES> 2,619
<CGS> 1,704
<TOTAL-COSTS> 780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 17
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-BASIC> 0.004
<EPS-DILUTED> 0
</TABLE>
