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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-14198
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DIGITAL TRANSMISSION SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2037949
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3000 NORTHWOODS PARKWAY,
BUILDING 330,
NORCROSS, GA 30071
(Address of principal executive office) (Zip Code)
</TABLE>
(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
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock........................ Philadelphia and Boston Stock Exchanges
Warrants............................ Philadelphia and Boston Stock Exchanges
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock and Warrants
(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 preceding
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 [ ] No [X]
Total revenues for the registrant for the fiscal year ended June 30, 2000
were: $18,978,000.
At November 16, 2000, there were 10,240,069 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates (based upon the closing price quoted on the OTC Bulletin Board at
November 16, 2000 was approximately $20,480,138.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K 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 held on October
5, 2000 (the "2000 Proxy Statement").
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PART I
ITEM 1. BUSINESS
GENERAL
Digital Transmission Systems, Inc. ("DTS") and subsidiaries (collectively termed
the "Company") designs, manufactures, repairs, refurbishes, and markets a broad
range of products for the telecommunications ("telecom") industry. The Company's
primary customers are long-distance carriers, domestic and international
wireless service providers, including those offering cellular telephone services
and Personal Communication Services ("PCS"), and domestic and international
resellers/integrators who sell to and service end users with telecom equipment.
The Company's products of original design, 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, access
to the Internet and video and desktop conferencing. Important product
requirements in the market segments the Company serves 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. Through its recently acquired wholly-owned subsidiary, Telcor
Communications, Inc. ("Telcor"), the Company also acquires and markets
de-installed and refurbished telecom equipment originally designed and
manufactured by leading telecom equipment suppliers such as Nokia, Lucent, and
Ericsson. Major customers of DTS and Telcor also include Nextel, Alltel Wireless
and Alltel Supply, Telmar, and Verizon.
The Company markets its products through a direct sales force employing inside
and outside sales representatives 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. The Company also utilizes telecommunications equipment
resellers and agents in the United States and other countries to market to
private network customers.
BACKGROUND
Apart from a recent trend in consolidations and business combinations among
service providers, the telecommunications industry is undergoing rapid and
fundamental changes in the services being provided. Along with traditional voice
services, customers are now being offered multimedia applications, Internet
access, video and desktop conferencing, facsimile transmission, compressed voice
communications and data communications between computers. The new services
necessitate the increased use of high-speed digital or broadband transmissions.
The increased demand for broadband capacity has led to significant network
infrastructure growth and efforts to improve the efficiency of current
telecommunications systems. For all participants in the telecommunications
industry, including long distance carriers, telephone operating companies and
wireless service providers, the need for efficient transmission of broadband
signals, lower operating costs, seamless connectivity and the assurance of
quality service between networks is of vital importance. Continued growth in
traditional wireline and alternative services will increase the need for
products like those offered by the Company which are designed to address these
requirements.
The Company has focused on the equipment needs of the wireless service industry.
Future needs will require the more efficient use of the frequency bands used by
the wireless carriers in offering current or future services especially those
requiring high speed or broadband digital data rates. The Company's association
with Wi-LAN, Inc., a developer and licensor of high speed wireless technology in
Calgary, Canada, has permitted the Company to address such future equipment
needs with W-OFDM technology from Wi-LAN. The Company expects to design and
manufacture products in the future using W-OFDM technology. This patented
technology allows the more efficient utilization of the limited bandwidth that
wireless carriers are licensed to use. The Company believes the following trends
are contributing and will continue to contribute to the growth in demand for its
products and services:
GROWTH IN WIRELESS SERVICES. According to industry sources, the wireless market
is currently estimated to include over 60 million cellular users in the US.
Although many of these users initiated wireless service with analog cellular
networks, many of these older networks are being upgraded to offer digital
services in the frequency bands they have been authorized to utilize. The growth
and analog-to-digital migration of these legacy networks has created the need
for highly integrated, multi-functional, high-speed network access products to
speed deployment of new digital cellular
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services, ease the maintainability of networks, lower cell site costs and
simplify the day-to-day operation of the associated network.
DEPLOYMENT OF PCS (PERSONAL COMMUNICATIONS SERVICES). The Company believes that
significant infrastructure investments will be made over the next few years as
PCS licensees build new or upgrade their communications networks to third ("3G")
and fourth generations ("4G") of wireless services. The establishment of a PCS
network involves the construction of a significant infrastructure that must be
reliably connected to existing wireline and cellular services. Each of these
networks will require efficient equipment to control and monitor the flow of
digital information without significant dependency on the local telephone
company for links between cell sites or major switching centers.
GROWTH IN WIRELINE SERVICES. The Company believes the markets for traditional
wireline service will continue to grow. Internet access is expanding and the
Company believes the trend of increased level of mobile services and
telecommuting is likely to continue because of: declining costs of
telecommunications equipment and services, employer cost-cutting and desires to
improve employee productivity, availability and convenience of improved
technology and environmental concerns. The increasing number of public
telecommunications services has created the need for broadband digital
connection devices that give service providers the ability to economically
expand their networks to provide new service offerings without drastic changes
in technology and the associated infrastructure costs. The ability to quickly
connect existing customers to these new broadband services without changing
access technologies usually means lower costs to end users and simplification of
network construction for the service provider.
PROLIFERATION OF COMPETITIVE ACCESS PROVIDERS. Deregulation of the
telecommunications industry has resulted in an increase in competitive
alternatives for local access to network services. These Competitive Access
Providers ("CAPs"), such as cable TV companies, utilities and long distance
telephone service providers, have targeted major metropolitan markets in the
United States to offer local telephone and broadband network services and are
courting large corporate customers who have traditionally been serviced by the
local Regional Bell Operating Companies ("RBOCs"). These CAPs have unique
connection requirements for access to the public network that are creating
opportunities for wireless digital transport equipment providers. Bridging two
buildings separated by 100 yards or two locations 30 miles apart with wireless
transport equipment allows companies to avoid the expense of leased lines from
the local RBOC. The market for equipment that connects the various networks is
one that the Company believes will continue to grow.
GROWTH OF INTERNATIONAL MARKETS. Many countries throughout the world lag behind
the United States in telecommunications infrastructure development. As customers
in such countries begin to demand new or enhanced communications services,
service providers will seek the ability to upgrade telecommunication networks
quickly without sacrificing service quality. Service providers in developing
countries are faced with the need to promptly connect high-speed digital lines
to public networks, provide telecommunications to rural areas and provide
extensions for thin route cellular services.
GROWTH IN USAGE OF INTERNET PROTOCOL (IP) PACKET SYSTEMS. The proliferation of
packet based data systems using the IP format has led to the advent of IP based
telephone services. It is envisioned that future voice communications and data
transmission through carrier networks will be increasingly accomplished through
IP packet formatted systems. This trend will revolutionize the processing of
voice calls and will lead to new services that many carriers are eager to offer.
All of these trends have created and will continue to create the need for
cost-effective, quality broadband network control and network access products,
such as those offered by the Company, that permit carriers to economically build
and operate networks to address the service requirements of their customers.
THE DTS SOLUTION
DTS has developed an integrated, systems-based, high-speed network control and
access solution for wireless and wireline networks that consists of the family
of access devices - FlexT1(R), FlexE1(TM), microFlex(TM) and the IP Processor.
In fiscal 1998 the Company introduced microFlex, a DS-1 cross connect switch
which addresses the need for high speed line concentration in wireless carrier
networks and in wireline applications. In April 1999 the Company introduced the
IP Processor, a device that allows the connectivity to the internet from cell
sites in a wireless carrier network. The Company believes that its products can
be combined to offer whole product solutions that provide significant
differentiation from competitive offerings in the marketplace with respect to
size, price, feature density and reliability.
The FlexT1 and FlexEl network access products provide integrated access to
public network services for both domestic ("T1") and international ("El")
markets. The FlexT1 and FlexEl are provided in a compact physical package, are
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expandable and allow an end user to access many of the business services
available from the public network. These products also enable the sharing of
telecommunication facilities among the different services, such as voice, video,
the Internet and facsimile, thus reducing the number of access lines the user
must lease and potentially reducing overall telecommunications expenses. A
companion product to the FlexT1/E1 family is microFlex(TM), a cross connect
switch or "DACS" (Digital Access Cross Connect Switch). The microFlex offers
non-blocking DS0 cross connect capability for up to sixteen T1's or E1's in one
RU (1.75 in.) high package. This product has applications in hubbing or grooming
environments involving many broadband lines such as those found when
concentration of voice lines from several cell sites are necessary before
transport to the central switching center.
COMPANY STRATEGY
The Company's goal is to become a leading worldwide supplier of network control
and access products and services for both public and private high-speed
telecommunications networks. In order to realize these goals the Company plans
to:
CONCENTRATE ON THE DOMESTIC AND INTERNATIONAL EXPANDING CELLULAR AND PCS
MARKETS. The Company has a sales force and support staff to further penetrate
the growing domestic and international Cellular and PCS markets. The Company's
network access products have numerous wireless applications and offer what the
Company believes is a unique integrated solution to the wireless carriers' need
to monitor and control transmission facilities to hundreds of remote cell sites.
DEVELOP AND EXPAND ON FLEXIBLE AND MODULAR PLATFORMS. The Company continues to
expand upon its modular Flex and microFlex and IP Processor line of network
access products and plans to add various modules for feature enhancements,
facilitating continued utilization of Flex products as new applications are
developed.
SUPPLEMENT ITS PRODUCTS OF ORIGINAL DESIGN WITH REPAIR SERVICES AND REFURBISHED
PRODUCTS. The Company offers its customers a broad range of products and
services. In addition to its products of original design, the Company provides
the customer with the value of repair services of not only the Company's
products but products from other manufacturers. The repair and testing resources
of the Company enable it to buy de-installed telecom equipment from its
customers and rebuild and at times upgrade equipment from other manufacturers.
The Company was certified in December 1994 and continues to be an ISO 9001 new
equipment supplier, thus establishing its quality assurance credentials for the
international arena.
PRODUCTS AND TECHNOLOGY
The Company's proprietary products facilitate network access, bandwidth
management, network control and delivery of high-speed digital
telecommunications services. In addition, the Company offers de-installed and
refurbished telecom equipment from leading wireless and wireline equipment
manufacturers such as Nokia, Ericsson, Nortel and Lucent to those telephone
service providers who are cost-conscious in the expansion of their networks.
MICROFLEX PRODUCT
During fiscal 1998 the Company introduced microFlex which in conjunction with
FlexT1/E1 allows more efficient use of high speed lines which a wireless carrier
utilizes to connect voice and other traffic between cell sites and its switching
center. In particular, microFlex offers cross connect functionality between
segments of one high speed line (T1 or E1) with another in a total set of up to
sixteen high speed lines.
FLEXT1 AND FLEXE1 PRODUCT FAMILY
The FlexTl family of products 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.
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FLEXT1/E1 SYSTEM ARCHITECTURE
The FlexT1/E1 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/E1 enclosure. This architecture
allows users to pay only for the functions and features needed for a particular
application. Bandwidth managers connect directly to 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.
IP PROCESSOR PRODUCTS
The IP Processor product from DTS provides wireless carriers a means for
connecting cell sites in their network to the internet. This connectivity
enhances the ability of the carrier to remotely access various pieces of
equipment at the cell site for maintenance and network control purposes. This
password protected access would be available from any personal computer
connected to the internet. In addition, a craftsperson at the cell site would
have access to the internet resources for accessing equipment user manual
information.
PRODUCTS FROM OTHER MANUFACTURERS.
The Company possesses significant repair services in its Duluth and Dallas
facilities which can be called upon to warrant functionality of products,
modules and systems from other manufacturers which have been de-installed from
customer networks. Often, one customer exchanges one type of wireless cellular
equipment from one manufacturer to that of another manufacturer. This is common
in today's wireless environment where business consolidations or simple service
upgrades forces a wireless service provider to switch out equipment built by a
wireless equipment manufacturer from a whole network of many cell sites. The
Company's involvement in such an exchange can entail purchasing the de-installed
equipment, refurbishing it and selling it to another carrier or the Company can
take on an asset management role in the de-installation whereby the equipment
can be sold, on consignment, piece by piece to the general wireless equipment
marketplace.
The Company offers its complete set of products to wireless and wireline service
providers through a direct sales force. A secondary channel to
telecommunications service providers exists through selected reseller
arrangements. Reseller agreements were signed with Alltel Supply and Somera
Communications who distribute telecommunications equipment to telephone service
providers and private network users. Additionally, the Company has recently
expanded its list of customers to include major wireless service providers such
as Nextel, Verizon, DigiPH, Dobson Cellular, and Voicestream.
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. In the
network access marketplace, ADC Kentrox (a subsidiary of ADC Telecommunications
Inc.), Carrier Access Corporation, Paragon Networks, Inc., Adtran Inc. and
Newbridge Networks, Inc. are competitors. In the sales of refurbished telecom
equipment, Somera Communications and Second Source are competitors.
The Company expects increased competition from existing competitors as they
develop and service 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.
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MANUFACTURING
For its products of proprietary design, DTS currently outsources most
subassembly kitting, board assembly and testing to high quality suppliers which
are ISO 9002 certified. For products designed by other manufacturers and sold as
refurbished items with warranty, DTS does repair and testing of those products
using its facilities and personnel with rare exception.
For several of the products and subassemblies of original design, 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.
High quality is demanded by all DTS' customers. The Company continues to strive
for quality in the design and the manufacturing of products in order to attain a
competitive advantage. 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 numerous successful follow-up compliance surveillance audits
for products of original design. The DTS division that handles refurbished
products anticipates ISO 9001 certification in FY2001. 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 network access,
transport and control areas although new developments are underway which utilize
the broadband wireless technology, W-OFDM, from Wi-LAN, Inc.
The Company's resident core technologies resulting from the developments of the
Flex and microFlex products include:
- T1/E1 multiplexing of voice and high speed data signals
- T1/E1 alarm reporting and trunk conditioning
- Network performance monitoring and testing
- 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
- Real time processing of control and data signals
- Design of programmable logic device
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 modulation
algorithms, error correcting coding, automatic equalization methods utilizing
digital signal processing, VLSI devices, RF filtering for microwave
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products, point-to-point and multipoint networking protocols, X.25 interfaces,
voice compression, voice telephony interfaces and 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. Future Company products will also exploit the bandwidth efficiencies
offered with the use of the patented broadband wireless technology from Wi-LAN,
Inc.
INTELLECTUAL PROPERTY
The Company's proprietary technology is protected in large measure by trade
secret although it has several patents either granted or pending. Core
technologies described in the "Product Development" section are incorporated in
the Company's products through proprietary hardware and software modules that
embed original algorithmic and device circuitry.
The Company currently owns the trademarks of "FlexT1," "FlexE1," and
"microFlex." It has also filed federal trademark applications for FlexSentry,
FlexCell, FlexE1 internationally, and these applications were published for
opposition in the Trademark Office after examination. The applications for
FlexCell and FlexE1 were formally opposed by Fujitsu Network Transmission
Systems, Inc. Fujitsu has alleged that the trademark registrations should be
denied because of their prior rights filed on a trademark application for FlexR,
for certain access controllers. The Company and Fujitsu have reached an
agreement whereby the DTS trademarks can be used with few restrictions.
The Company relies primarily upon trade secret protection for its confidential
and proprietary product 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.
In January 2000 the Company entered into an investment partnership with Wi-LAN,
Inc. (see Item 6) whereby Wi-LAN, Inc. became and has remained a significant
shareholder in the Company's common stock (approximately 51%). In addition, the
Company and Wi-LAN are discussing joint broadband product developments which
utilize the Wi-LAN patented W-OFDM technology. It is anticipated that several
products will be jointly designed by both companies in fiscal 2001.
RESEARCH AND DEVELOPMENT COSTS
During fiscal years 2000 and 1999, the Company's expenditures in product
development were $759,000 and $1,400,000, respectively. The decrease in spending
from 2000 to 1999 is primarily due to the divestiture of SouthTech, Inc., the
Company's international subsidiary, and to a corporate downsizing executed in
the summer of 1998 and early fiscal 1999. During fiscal 2000, the Company
capitalized approximately $174,000 in software development costs primarily for
the continued development and enhancement of the Internet Protocol Processor
card set. During fiscal 1999, the Company capitalized approximately $136,000 in
software development costs primarily for the development of the Company's ELP
(Enhanced Lightning Protection) Card set.
During fiscal years 1999 and 1998, the Company's expenditures in product
development were $1.4 million and $2.4 million, respectively. The decrease in
spending from 1999 to 1998 is primarily due to the divesture of SouthTech,
Inc., the Company's international subsidiary, and to a corporate downsizing
executed in the summer of 1998. During fiscal 1999, the Company capitalized
approximately $136,000 primarily for the development of an Enhanced Lightning
Protection FlexT1 CSU (ELP) and the continuing development of the Internet
Protocol Processor card set. During fiscal 1998, the Company capitalized
approximately $583,000 primarily for the development of the Company's
international product line. It was determined that the future recoverability of
the capitalized costs of certain features developed for the aforementioned
product line was not assured and that the value of the asset was impaired. As a
result, approximately $414,000 of the asset was written off during the year
ended June 30, 1998 and appropriately charged to Cost of Sales in the
accompanying 1998 financial statement data.
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. A 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.
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YEAR 2000 (Y2K) IMPACT ON COMPANY'S INFORMATION TECHNOLOGY
Since the implementation of the Company's Y2K compliant systems and processes in
late 1999 and early 2000, the Company has not experienced any material or
adverse effects nor any business interruptions resulting from Y2K compliance
issues. The Company did not incur any costs related to Y2K compliance.
EMPLOYEES
As of June 30, 2000, the Company had approximately 117 full-time employees, of
whom 14 are technical personnel engaged in developing the Company's products, 34
are marketing and sales personnel, approximately 40 are quality assurance and
operations personnel and 29 are involved in administration and finance. 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 Company completed a public
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. On February 18, 1997, trading of the Units was split
into separate trading of the underlying Common Stock and Warrants. The Company
stock was delisted from the NASDAQ small cap exchange on October 15, 1998 and is
currently being traded as an OTC Bulletin Board issue.
Additionally, on March 31, 2000, the Company acquired Telcor Communications,
Inc., a leading reseller of new and used hardware for applications in
telecommunications and computer networking whose headquarters was located in
Duluth, Georgia and with branch offices in Maryland, Colorado, Texas and
Illinois.
ITEM 2. PROPERTIES
Norcross, GA location
The Company's Norcross, GA operations are located in an approximately 18,000
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 with a three year extension signed in May 1998. The lease was
re-negotiated in late 1998 concerning the amount of leased space dropping from
24,000 square feet to 18,000 square feet. The base annual triple-net rate for
this space is $7.02 per square foot, including amortization of build-out costs
of approximately $150,000, and escalates by 4% per year. Base annual rent under
this lease approximates $164,000. Additionally, approximately 6,000
square feet is sub-leased to the Company's affiliate - LinkaNet Labs under a
services agreement. LinkaNet Labs was formerly known as Chapala Communications,
Inc. ("Chapala"). Chapala acquired the Company's international subsidiary,
SouthTech, Inc., on February 5, 1999.
Duluth, GA location
The Company's Duluth, GA operations are located in an approximately 160,000
square foot facility in a modern business park in Duluth (in the greater
Atlanta, Georgia area). The Company leases the Duluth facility under a five year
lease with an irrevocable trust for the children of the former shareholders of
Telcor Communications, Inc. Base annual rent under this lease approximates
$909,000 per year.
It is anticipated that the Company will consolidate its Norcross and Duluth
facilities sometime during fiscal 2001. The Company also has smaller offices or
facilities in Colorado, Texas, Maryland and Illinois. The Company believes its
facilities are suitable and adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity. The Company
is not a party to any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Digital Transmission Systems, Inc. Annual Meeting as held on October 5,
2000, the following proposals were submitted to a vote of security holders:
(1) Approval of the proposed amendment to the Company's 1996 Stock
Incentive Plan to increase the number of shares of Common Stock
reserved for issuance by 1,160,000 shares;
(2) Ratification of the selection of KPMG LLP as independent public
accountants for the Company's current fiscal year;
(3) Approval of the proposed amendment to the Company's Restated and
Amended Certificate of Incorporation to increase authorized common
shares, par value of $0.01, available for issuance from 15,000,000 to
50,000,000;
(4) Approval of the proposed amendment to the Company's Restated and
Amended Certificate of Incorporation to increase authorized Company
preferred shares, par value of $0.01, available for issuance from
3,000,000 to 10,000,000.
All proposals received a majority vote of shareholders of record as of August 4,
2000 and were formally approved on October 5, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
On October 14, 1998, the Company was de-listed from NASDAQ due to noncompliance
with a net worth requirement of $2,000,000 for continued listing. The Company's
common stock, with symbol DTSX, continues to trade on the OTC Bulletin Board.
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 were not detachable or separately
transferable, and could only have been traded as part of a Unit until February
18, 1997 (the "Separation Date"), when each Unit was separated into one share of
Common Stock and one Warrant. The Common Stock and Warrants had been listed on
the NASDAQ SmallCap Market, the Company's principal market, under the symbols
DTSX and DTSXW, respectively, and were listed on the Philadelphia Stock Exchange
and the Boston Stock Exchange under the symbols DTS and DTS.W, respectively. The
Units previously traded on the NASDAQ Market and the Philadelphia and Boston
exchanges.
On February 18, 1997 the Common Stock and Warrants underlying the Units began
trading separately and the Units ceased to trade. Both the Common Stock and
Warrants traded on the NASDAQ Market and the Philadelphia and Boston exchanges.
On October 14, 1998, the Company's securities ceased to be listed on NASDAQ and
continue to trade on the OTC Bulletin Board. The price per share of the
Company's Common Stock in the table below represents the range of low and high
closing sale prices as reported by the NASDAQ Stock Market or the OTC Bulletin
Board for the quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended High Price Low Price
----------------------------------------- ---------- ---------
<S> <C> <C>
September 30, 1998 $ 3.1250 $ 0.7500
December 31, 1998 $ 0.8750 $ 0.1000
March 31, 1999 $ 0.8125 $ 0.2000
June 30, 1999 $ 0.8125 $ 0.2187
September 30, 1999 $ 0.4688 $ 0.2188
December 31, 1999 $ 2.1250 $ 0.2500
March 31, 2000 $ 12.4375 $ 2.2500
June 30, 2000 $ 7.3750 $ 2.7500
</TABLE>
The price per share of the Company's Warrants in the table below represents the
range of low and high closing sale prices as reported by the NASDAQ Stock Market
or the OTC Bulletin Board for the quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended High Price Low Price
----------------------------------------- ---------- ---------
<S> <C> <C>
September 30, 1998 $ 0.375 $ 0.0312
December 31, 1998 $ 0.0312 $ 0.0001
March 31, 1999 $ 0.125 $ 0.0001
June 30, 1999 $ 0.001 $ 0.0001
September 30, 1999 $ 0.0001 $ 0.0001
December 31, 1999 $ 0.001 $ 0.001
March 31, 2000 $ 3.312 $ 0.090
June 30, 2000 $ 1.250 $ 0.500
</TABLE>
The closing sale price of the Company's Common Stock as reported by the OTC
Bulletin Board on June 30, 2000 was $5.00. The closing sale price of the
Company's Warrants as reported by the OTC Bulletin Board on June 30, 2000 was
$0.7969.
The total number of shareholders of record of the Company's common shares as of
September 28, 2000 was approximately 92. Because a substantial portion of shares
are held by brokers and other institutions on behalf of shareholders, the
Company is unable to estimate the total number of shareholders beyond those
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.
9
<PAGE> 11
ITEM 6 and 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND SELECTED FINANCIAL DATA.
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
By accepting a timely investment of $1.5 million by Wi-LAN, Inc. in January
2000, the Company improved its cash position and was able to improve relations
with its key suppliers and customers. The Wi-LAN, Inc. investment led to
Wi-LAN's 51% ownership of outstanding DTS common stock. Further, the association
with Wi-LAN, Inc. provided the Company access to patented W-OFDM technology from
Wi-LAN which the Company plans on utilizing to develop wireless products.
Subsequently, in March 2000, the Company completed the acquisition of Telcor
Communications, Inc., a company focused on telecom equipment sales to wireless
carriers and located just five miles from DTS in Duluth, GA. Telcor's revenues
in calendar 1999 totaled $60 million with approximately $1 million in net
profit. The acquisition of Telcor by DTS created a substantially larger company
with sales diversified in both customer base and products. Although Telcor
featured a balance sheet with more than $6 million in net tangible assets, the
purchase method of accounting led to more than $16 million in intangible assets
being recorded by DTS.
DTS' flagship product, FlexT1/E1, recorded a significant increase in sales year
over year. Since Telcor was acquired on March 31, 2000, sales from the
subsidiary contributed only to fourth fiscal quarter revenue. During the fourth
quarter, Telcor contributed approximately $9 million in sales, but recorded
nearly $2 million in operational losses. The operational losses stemmed from
significant costs incurred in connection with (1) the implementation of a new
Enterprise Resource Planning ("ERP") software system at Telcor which has modules
supporting order entry, planning, inventory management, operations, and general
ledger functions and (2) additional consolidation expenses recognized after the
acquisition of Telcor by DTS. The growth in new product sales and Telcor's
fourth quarter revenue contribution led to the Company's posting of nearly $19
million in net sales for fiscal 2000.
The FlexT1/E1 products contributed the bulk of the Company's new product
revenues for fiscal 2000. Telcor's revenue contribution in the fourth quarter,
consisting mostly of sales of refurbished telecom products and repair services,
nearly equaled the revenue realized by the Company in the first three quarters
of fiscal 2000. Approximately 65% of products and services from Telcor are sold
to major USA based wireless service providers, the same market segment that DTS
has targeted since 1995 with its sales of FlexT1/E1 products. In reviewing the
attributes of DTS and its Telcor subsidiary, DTS has product design and
development resources which, when accompanied by access to Wi-LAN's patented
W-OFDM technology, has the potential for design of innovative wireless products
for the wireless carrier market segment that both companies target for sales. In
addition, Telcor has complementary repair services that can play a strategic
role in customer warranty for new or refurbished product sales. The Company has
already announced plans for physical consolidation of offices at DTS and its
subsidiary for the purpose of realizing expense savings and increasing
departmental cooperation.
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 over the next few years.
COMPARISON OF YEARS ENDED JUNE 30, 2000 AND JUNE 30, 1999
The following table sets forth certain financial data derived from the Company's
Statements of Operations (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------- -----------------
% of % of
$ Sales $ Sales
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 18,978 100 $ 7,538 100
Gross profit 6,092 32 2,774 37
Product development 759 4 1,353 18
Selling, general and administrative 6,723 35 2,161 29
Net loss (3,815) (20) (424) (6)
</TABLE>
10
<PAGE> 12
NET SALES. Net sales increased by 152%, to $18,978,000 for the year ended June
30, 2000, from $7,538,000 for the year ended June 30, 1999. 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,
----------------------- -----------------
2000 1999 2000 1999
------- ------ ---- ----
<S> <C> <C> <C> <C>
FlexT1 / E1 $ 9,556 $5,623 50 75
Equipment sales 8,529 -- 45 --
SKYPLEX -- 1,402 -- 18
MicroFlex 283 459 1 6
Other products 610 54 3 1
------- ------ --- ---
Totals $18,978 $7,538 100 100
======= ====== === ===
</TABLE>
During the year ended June 30, 2000, two customers accounted for greater than
10% each of the Company's consolidated sales. Nextel represented 32% of total
sales and Alltel (a reseller/integrator of telecommunications products)
accounted for approximately 21% of the Company's sales. Revenues from the
Company's FlexT1/E1 product line increased over 69% from $5,623,000 in the year
ended June 30, 1999 to $9,556,000 in the year ended June 30, 2000. The increase
was primarily due to increased access to working capital as a result of the
Wi-LAN investment on January 7, 2000. Such an investment enabled DTS to more
effectively manage inventory levels and supplier relationships which in turn
resulted in DTS's ability to more adequately serve its customers. Revenues from
SKYPLEX (both international and domestic customers) decreased by 100% from
$1,402,000 in the year ended June 30, 1999 to $0 in the year ended June 30,
2000. The decrease is due to the sale of the Company's international subsidiary
(and the corresponding SKYPLEX product line) during FY1999. The microFlex
product, introduced in fiscal 1998, realized $283,000 in sales for fiscal 2000
compared to $459,000 in sales in fiscal 1999, a decrease of 38%. The decrease is
attributable to the sale of the Company's international subsidiary during fiscal
1999. Prior to the sale of the international subsidiary, the Company sold its
microFlex product to certain international customers. Such international sales
were eliminated after the sale of the subsidiary as the Company focused its
operations on only servicing domestic customers.
Equipment sales (sales of new and refurbished telecommunications equipment)
increased 100% to $8,529,000 for the year ended June 30, 2000. The increase is
due to the acquisition of Telcor Communications, Inc. on March 31, 2000. The
equipment sales noted for FY2000 represent sales realized by Telcor for the
period April 1, 2000 through June 30, 2000. As the acquisition occurred during
FY2000, no such equipment sales were realized during FY1999.
GROSS PROFIT. Gross profit for the year ended June 30, 2000 increased 120% to
$6,092,000 from $2,774,000 for the year ended June 30, 1999. As a percentage of
sales, gross profit decreased from 37% for the year ended June 30, 1999 to 32%
for the year ended June 30, 2000. The decrease reflects the inclusion of a
significant portion of lower margin sales of new and refurbished equipment as
realized by the Company's subsidiary, Telcor, during the year ended June 30,
2000. Margins on new and refurbished equipment sales at Telcor have historically
ranged from 25% to 35% depending upon the product mix and the customer. Gross
margin realized on the Company's sales of FlexT1/E1 products remained consistent
at 37% for both years ended June 30, 2000 and 1999. For the years ended June 30,
2000 and 1999, sales of the Company's FlexT1 and microFlex products represented
approximately 51% and 81%, respectively, of total sales recorded for each
respective fiscal year. Additionally, for the years ended June 30, 2000 and
1999, sales of new, used and refurbished telecommunications equipment
represented approximately 45% and 0%, respectively, of total sales recorded for
each respective fiscal year.
PRODUCT DEVELOPMENT. Product development expenses decreased from $1,353,000 for
the year ended June 30, 1999 to $759,000 for the year ended June 30, 2000.
Approximately $174,000 of software development costs related to new products
were capitalized during the fiscal 2000 year, as compared to $136,000 during the
year ended June 30, 1999. The decrease in product development costs is due to
the sale of the Company's international subsidiary during FY1999. Prior to the
sale, the Company was developing international products (SKYPLEX) in addition to
its domestic product offerings. As the international subsidiary was sold during
FY1999, no such international product development expense was incurred during
the period ended June 30, 2000 thereby accounting for a majority of the
decrease. As a percentage of sales, total product development costs decreased
from 18% for the year ended June 30, 1999 to 4% for the year ended June 30,
2000. The decrease, as a percentage of sales, is attributable to lower product
development spending and significantly higher revenues recorded during the year
ended June 30, 2000 versus the year ended June 30, 1999.
11
<PAGE> 13
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses of the Company increased 211%, from $2,161,000 for the year ended June
30, 1999 to $6,723,000 for the year ended June 30, 2000. The overall increase in
selling, general and administrative expenses is primarily due to the acquisition
of Telcor on March 31, 2000 and the subsequent inclusion of Telcor's operating
results for the period April 1, 2000 through June 30, 2000. Of the total
selling, general and administrative expenses of $6,723,000 incurred during
fiscal 2000, approximately $3,739,000 were incurred by DTS and approximately
$2,984,000 of such expenses were incurred by Telcor since the acquisition on
March 31, 2000.
DTS selling expenses decreased by 32% from $2,026,000 for the year ended June
30, 1999 to $1,380,000 for the year ended June 30, 2000. The decrease resulted
from a significant one-time write down of approximately $750,000 relating to
international accounts receivable that were retained by DTS after the sale of
its international subsidiary during FY1999. No such write down was required
during FY2000. Selling expenses as a percentage of DTS product sales decreased
from 36% for the year ended June 30, 1999 to 14% for the year ended June 30,
2000. The sharp decrease is primarily due to the significant increase in
FlexT1/E1 revenues noted during the year ended June 30, 2000.
General and administrative expenses for the Company increased from $988,000 for
the year ended June 30, 1999 to $5,343,000 for the year ended June 30, 2000.
Contributing to the increase were approximately $2,018,000 of additional general
and administrative expenses due to the inclusion of three months of operations
of Telcor. Also contributing to the increase were non-recurring charges of
approximately $1,200,000 relating to an executive severance settlement and
consolidation expenses borne by the Company after the acquisition of Telcor on
March 31, 2000.
NET INCOME/(LOSS). The net loss for the year increased from $424,000 for the
year ended June 30, 1999 to a loss of $3,815,000 for the year ended June 30,
2000. Significant components of the current year loss include non-cash charges
of $3,514,000 which represents amortization of intangible assets charged as a
result of the acquisition of Telcor on March 31, 2000 of $914,000, depreciation
charges of $567,000, interest expense of $833,000 and other non-recurring,
non-cash charges mentioned above of $1,200,000. For the year ended June 30,
1999, significant components of the net loss included depreciation and
amortization charges of $853,000 and interest expense of $651,000 for a total
of $1,504,000. The overall increase in depreciation, amortization and interest
expense for the year ended June 30, 2000 as compared to June 30, 1999 is a
result of the acquisition of Telcor on March 31, 2000. Specifically, additional
amortization charges of intangible assets resulting from the acquisition of
Telcor of $914,000 were incurred during the year ended June 30, 2000.
COMPARISON OF YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
The following table sets forth certain financial data derived from the Company's
Statements of Operations (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------ -----------------
% of % of
$ Sales $ Sales
-------- ----- --------- -----
<S> <C> <C> <C> <C>
Net sales $ 7,538 100 $ 15,579 100
Gross profit 2,774 37 1,858 12
Product development 1,353 18 2,367 15
Selling, general and administrative 2,161 29 5,799 37
Net loss (424) (6) (8,380) (54)
</TABLE>
NET SALES. Net sales decreased by 52%, to $7,538,000 for the year ended June 30,
1999, from $15,579,000 for the year ended June 30, 1998. 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,
----------------------- -------------------
1999 1998 1999 1998
------ ------- ------ ------
<S> <C> <C> <C> <C>
FlexT1 / E1 $5,623 $ 9,960 75 64
SKYPLEX 1,402 5,224 18 34
MicroFlex 459 214 6 1
Other products 54 181 1 1
------ ------- --- ---
Totals $7,538 $15,579 100 100
====== ======= === ===
</TABLE>
During the year ended June 30, 1999, two customers accounted for greater than
10% each of the Company's sales. Nextel represented 30% of total sales and
Alltel (a reseller/integrator of telecommunications products) also accounted for
approximately 30% of the Company's sales. Revenues from the Company's FlexT1/E1
product line decreased over 44% from $9,960,000 in the year ended June 30, 1998
to $5,623,000 in the year ended June 30, 1999. Revenues from SKYPLEX (both
international and domestic customers) decreased by 73% from $5,224,000 in the
year ended June 30,
12
<PAGE> 14
1998 to $1,402,000 in the year ended June 30, 1999, the decrease partly due to
sales registered only through February 5, 1999, the date of the sale of
SouthTech, Inc. The microFlex product, introduced in fiscal 1998, realized
$459,000 in sales for fiscal 1999 compared to $214,000 in sales in fiscal 1998,
an increase of 114%. Total international sales decreased by approximately 74%
from $5,333,000 in the year ended June 30, 1998 to $1,402,000 in the year ended
June 30, 1999.
GROSS PROFIT. Gross profit for the year ended June 30, 1999 increased 49% to
$2,774,000 from $1,858,000 for the year ended June 30, 1998. As a percentage of
sales, gross profit increased from 12% for the year ended June 30, 1998 to 37%
for the year ended June 30, 1999. The increase is primarily due to the increase
in the higher margin product mix (FlexT1 and microFlex) for the year ended June
30, 1999 as compared to June 30, 1998. For the year ended June 30, 1999 and
1998, sales of the Company's FlexT1 and microFlex products represented
approximately 81% and 65%, respectively, of total sales recorded for each
respective fiscal year.
PRODUCT DEVELOPMENT. Product development expenses decreased from $2,367,000 for
the year ended June 30, 1998 to $1,353,000 for the year ended June 30, 1999.
Approximately $136,000 of software development costs related to new products
were capitalized during the fiscal 1999 year, as compared to $583,000 during the
year ended June 30, 1998. During the fourth quarter of the year ended June 30,
1998, management determined that, given the anticipated direction of the
Company's product line, certain product features that had been developed for the
SKYPLEX international product line and capitalized as software development costs
would not be implemented in the foreseeable future. Consequently, it was
determined that the future recoverability of the cost of those features was not
assured and that the value of the asset was impaired. Accordingly, the Company
wrote off $414,000 of these capitalized costs during the year ended June 30,
1998. As a percentage of sales, total product development costs increased from
15% for the year ended June 30, 1998 to 18% for the year ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, including depreciation and amortization, decreased 57%, from
$7,018,000 for the year ended June 30, 1998 to $3,014,000 for the year ended
June 30, 1999. Selling expenses decreased by 58% from $4,854,000 for the year
ended June 30, 1998 to $2,026,000 for the year ended June 30, 1999. The decrease
resulted from the decrease in revenue of approximately 52% coupled with sales
personnel reductions and cost saving measures instituted during early fiscal
1999. Selling expenses as a percentage of net sales decreased from 31% for the
year ended June 30, 1998 to 27% for the year ended June 30, 1999. General and
administrative expenses decreased from $2,164,000 for the year ended June 30,
1998 to $988,000 for the year ended June 30,1999. As a percentage of net sales,
general and administrative expenses decreased slightly from 14% for the year
ended June 30, 1998 to 13% in the year ended June 30, 1999.
NET INCOME/(LOSS). The net loss decreased from $8,380,000 for the year ended
June 30, 1998 to a loss of $424,000 for the year ended June 30, 1999. This
decrease resulted primarily from significant expense reductions and an increased
sales mix percentage of the Company's higher margin FlexT1 product line as
compared to the prior year.
SALE OF DTS STOCK BY SIGNIFICANT SHAREHOLDER -- PEREGRINE VENTURES -- FISCAL
1999
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 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 of DTS. Two
MicroTel representatives were subsequently 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 on the OTC Bulletin Board 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
telecommunications and private network users.
ACQUISITION OF DTS STOCK BY WI-LAN, INC. -- FISCAL 2000
On December 29, 1999, the Company entered into an agreement with Wi-LAN Inc.
("Wi-LAN"), a leading provider of wireless data communications technology and
products, to sell Wi-LAN $1.5 million in convertible debentures (the "1999
debentures"). The debentures, convertible into the Company's common stock at any
time by the holder, have a four-year term with a 10% interest rate with
principal and interest due at maturity. The Company has no buy-back provision,
and the conversion rate is one share per $1 in debentures, which approximated
the fair value of the Company's
13
<PAGE> 15
common stock on the date the Company entered into the agreement. On January 7,
2000, a closing on the Wi-LAN debentures was held whereby the Company received
the proceeds from the first tranche of the debentures of $400,000. The remaining
$1,100,000 in proceeds from the issuance of debentures was received prior to
March 31, 2000. In connection with various transactions subsequent to the sale
of the $1.5 million in debentures and through June 30, 2000, Wi-LAN has
converted $1,278,900 of the 1999 debentures into 1,278,900 shares of the
Company's common stock. The outstanding amount of these 1999 debentures as of
June 30, 2000 is $221,100. In connection with the agreement, Wi-LAN also
received an option to purchase additional debentures of $1.5 million with
similar terms but at a conversion rate to be determined by the market price of
the Company's common stock at the time the option is exercised. The expiration
on the option to purchase additional debentures of $1.5 million is January 7,
2002.
Apart from the transactions described above, in January 2000, Wi-LAN purchased
1,738,159 shares of the Company's common stock from MicroTel, another DTS
shareholder, and the outstanding $2 million in debentures (the "1997
debentures") with outstanding warrants from Finova Mezzanine Capital, a DTS
lender. By converting $1,310,000 of the 1997 debentures, Wi-LAN received
1,310,000 shares of the Company's common stock and gained over 50% of the
outstanding common stock of the Company. Through the transaction with Finova,
Wi-LAN also received outstanding warrants for 702,615 shares of common stock at
an exercise price of $1 per share which expire in March 2004. All 702,615
warrants remain outstanding and exercisable as of June 30, 2000.
Additionally, Wi-LAN converted another $190,000 of the 1997 debentures into
190,000 shares of the Company's common stock through June 30, 2000. The
outstanding amount of the 1997 debentures as of June 30, 2000 is $500,000.
On March 31, 2000, Wi-LAN purchased 454,737 shares of the Company's Series B
preferred stock for $3 million in cash. The Company's Series B Preferred Stock
is convertible into common shares at $7.125 per share, the market closing price
of the Company's common stock on March 30, 2000.
In June 2000, Digital Transmission Systems, Inc. announced that Wi-LAN Inc.
entered into a purchase and assignment agreement with the two former
shareholders of Telcor to acquire the right to receive approximately 31% of the
merger consideration still due to the former Telcor shareholders. According to
the agreement, Wi-LAN acquired $6,100,000 of the original $20 million
acquisition payable for $500,000 in cash and $5,600,000 by issuing the former
Telcor shareholders a right to receive $5,600,000 of Wi-LAN common shares based
on the market value of Wi-LAN shares on July 17, 2000, subject to a specified
maximum number of shares. Wi-LAN may redeem all or part of the right for cash.
In addition, Wi-LAN has granted the former Telcor shareholders an option
exercisable by August 31, 2000, to sell between $2,000,000 and $4,000,000 of
additional merger consideration to Wi-LAN for the issuance of a right to receive
Wi-LAN shares of equivalent value, based on the market value of Wi-LAN shares at
October 30, 2000, subject to a specified maximum number of shares.
ACQUISITION OF TELCOR COMMUNICATIONS, INC.
TRANSACTION SUMMARY
On March 31, 2000 the Company consummated the merger of Telcor Communications,
Inc. ("Telcor"), a leading reseller of new and used wireless and wireline
telecom equipment based in Duluth, Georgia, into a wholly-owned subsidiary of
the Company. The merger consideration payable to the shareholders of Telcor is
$25 million in a combination of the Company's common stock and cash. The amount
of $5 million of the consideration was paid at closing with $2.5 million in cash
and $2.5 million in common stock valued at $7.375 per share (the closing price
of DTS common stock a few days before and after the announcement date). A total
of 338,983 shares of DTS common stock were paid in connection with the closing
on March 31, 2000. The remaining consideration of $20 million is due and payable
on or before October 30, 2000 with a commitment from the Company to use best
efforts to tender to the former shareholders of Telcor at least $10 million in
cash before June 30, 2000. In connection with the acquisition, additional
payments may be made and accounted for as part of the purchase price. If all
performance objectives are met by May 31, 2000, an additional $6 million may be
paid in connection with the acquisition. The additional payments, if earned,
will be treated as additional purchase price for the acquisition. Based upon the
Company's review of the May 31, 2000 performance objectives mentioned above, it
is unlikely that any material additional consideration will be due the former
shareholders of Telcor.
The statement of financial position ("balance sheet") of the acquired Telcor
business as of June 30, 2000 has been included in the accompanying financial
statements. Additionally, Telcor's results of operations ("income statement")
for the three month period ended June 30, 2000 has also been included in the
accompanying financial statements.
14
<PAGE> 16
The acquisition was accounted for by the purchase method of accounting, and
accordingly, the purchase price has been preliminarily allocated to assets
acquired and liabilities assumed based on their fair value at the date of
acquisition.
ACTIVITY SUBSEQUENT TO ACQUISITION
In June 2000, the Company announced that Wi-LAN Inc. entered into a purchase and
assignment agreement with the two former shareholders of Telcor to acquire the
right to receive approximately 31% of the merger consideration still due to the
former Telcor shareholders. According to the agreement, Wi-LAN acquired
$6,100,000 of the original $20 million acquisition payable for $500,000 in cash
and $5,600,000 by issuing the former Telcor shareholders a right to receive
$5,600,000 of Wi-LAN common shares based on the market value of Wi-LAN shares on
July 17, 2000, subject to a specified maximum number of shares. Wi-LAN may
redeem all or part of the right for cash. As of June 30, 2000 and after
consideration of the above payments, the Company has recorded a liability to the
former stockholders of Telcor of $5,435,000 and a liability to Wi-LAN, Inc. of
$2,220,400.
In addition, Wi-LAN has granted the former Telcor shareholders an option
exercisable by August 31, 2000, to sell between $2,000,000 and $4,000,000 of
additional merger consideration to Wi-LAN for the issuance of a right to receive
Wi-LAN shares of equivalent value, based on the market value of Wi-LAN shares at
October 30, 2000, subject to a specified maximum number of shares. On August 31,
2000, the former shareholders of Telcor exercised the aforementioned option and
sold $4,000,000 of merger consideration to Wi-LAN in exchange for Wi-LAN shares
as discussed above.
The following is a summary of the merger consideration paid and/or payable as of
June 30, 2000:
<TABLE>
<CAPTION>
AMOUNT DESCRIPTION DATE PAID
------ ----------- ---------
<S> <C> <C>
$25,000,000 Merger Consideration due under Merger Agreement
$(2,500,000) Cash Paid the Telcor Stockholders at Merger Closing March 31, 2000
$(2,500,000) Shares of Company Common Stock paid the Telcor Stockholders March 31, 2000
$ (500,000) Cash Paid the Telcor Stockholders June 16, 2000
$(7,965,000) Shares of Company Common Stock paid the Telcor Stockholders June 29, 2000
$(3,879,600) Shares of Company Common Stock paid Wi-LAN, Inc. June 29, 2000
------------
$ 7,655,400 Remaining Merger Consideration due under Merger Agreement
</TABLE>
UNAUDITED PROFORMA DATA
The following unaudited pro forma combined financial data of Digital
Transmission Systems, Inc. ("DTS") and Telcor Communications, Inc. ("Telcor")
combine the consolidated financial information of DTS for year ended June 30,
1999 with the consolidated financial information of Telcor for the year ended
June 30, 1999. We have prepared the unaudited pro forma information using the
purchase method of accounting as if the acquisition took place at the beginning
of the period presented. The pro forma information does not give effect to any
restructuring costs or to any potential cost savings or other operating
efficiencies that could result from the merger.
The unaudited pro forma combined financial information is not intended to
represent what the combined company's financial position or results of
operations would have been had the merger occurred at the beginning of the
earliest period presented or to project the combined financial position or
results of operations for any future date or period.
PROFORMA DATA -- YEARS ENDED JUNE 30, 2000 AND 1999 (000'S OMITTED)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Revenues $65,295 $62,856
Loss before extraordinary items (3,336) (2,704)
Net loss (3,336) (2,345)
Net loss per share:
Basic (.59) (.50)
Diluted (.59) (.50)
</TABLE>
15
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. The accompanying 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. As shown in the financial
statements during the years ended June 30, 2000 and 1999, the Company incurred
losses of $3,815,000 and $424,000, respectively. Although the Company has an
accumulated gross deficit of $19,233,000 as of June 30, 2000, the Company has
made substantial progress over the past fiscal year with respect to its overall
financial position. As of June 30, 2000 total net equity of the Company
increased to $15,460,000 as compared to a net deficit of ($2,428,000) as of the
year ended June 30, 1999. Additionally, the Company received monetary support
from a significant investor during fiscal year 2000. Such support enabled the
Company to more effectively manage its cash commitments and indebtedness.
Additional equity may be required during fiscal year 2001 and the Company is
actively pursuing various financing alternatives. Given the significant
improvement in the Company's overall financial position during fiscal 2000, the
Company believes that the probability of obtaining additional equity during
fiscal 2001, although dependent on a number of uncontrollable external factors,
has increased as compared to previous periods.
As of June 30, 2000 the Company's cash position is $1,646,000. Additionally,
available borrowings under the Company's lines of credit at June 30, 2000 is
$4,344,000. Such availability will be utilized in the near term to address the
Company's existing accounts payable, notes payable and inventory purchase
commitments. The Company believes its current cash position and availability
under its credit facilities is adequate to address immediate cash requirements
as dictated by the Company's existing commitments.
Potential additional sources of cash for use in future periods may include, but
are not limited to, private or public placements of the Company's securities and
securing additional financing with certain financial institutions. In the event
the Company is able to raise additional capital, the Company intends on using
such proceeds to accelerate product development initiatives, add additional
personnel as may be required and to pay down existing and any additional
indebtedness. Given the significant improvement in the Company's overall
financial position during fiscal 2000, the Company believes that the probability
of obtaining additional equity during fiscal 2001, although dependent on a
number of uncontrollable external factors, has increased as compared to previous
periods.
EQUITY. On October 14, 1998, NASDAQ delisted the Company because the Company did
not meet the 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 employed several
programs in an effort to help the Company preserve cash which, in the first and
second fiscal quarters of 1999, was 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 could not be pledged, sold or
traded until November 30, 1999 at which time, under Rule 144, the restricted
legend was removed from the certificates and the certificates are now 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 completed formal negotiations with three critical suppliers
and established 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 $402,000 of amounts
payable have been settled for a reduced amount under these conditions. The
Company has recorded an extraordinary gain of $359,000 to reflect the settlement
transactions closed during the third quarter of fiscal 1999 which is included in
the accompanying financial statements.
On December 29, 1999, the Company entered into an agreement with Wi-LAN Inc.
("Wi-LAN"), a leading provider of wireless data communications technology and
products, to sell Wi-LAN $1.5 million in convertible debentures (the "1999
debentures"). The debentures, convertible into the Company's common stock at any
time by the holder, have a four-year term with a 10% interest rate with
principal and interest due at maturity. The Company has no buy-back provision,
and the conversion rate is one share per $1 in debentures, which approximated
the fair value of the Company's common stock on the date the Company entered
into the agreement. On January 7, 2000, a closing on the Wi-LAN debentures was
held whereby the Company received the proceeds from the first tranche of the
debentures of $400,000. The remaining $1,100,000 in proceeds from the issuance
of debentures was received prior to March 31, 2000. In connection with various
transactions subsequent to the sale of the $1.5 million in debentures and
through June 30, 2000,
16
<PAGE> 18
Wi-LAN has converted $1,278,900 of the 1999 debentures into 1,278,900 shares of
the Company's common stock. The outstanding amount of these 1999 debentures as
of June 30, 2000 is $221,100. In connection with the agreement, Wi-LAN also
received an option to purchase additional debentures of $1.5 million with
similar terms but at a conversion rate to be determined by the market price of
the Company's common stock at the time the option is exercised. The expiration
on the option to purchase additional debentures of $1.5 million is January 7,
2002.
Apart from the transactions described above, in January 2000, Wi-LAN purchased
1,738,159 shares of the Company's common stock from MicroTel, another DTS
shareholder, and the outstanding $2 million in debentures (the "1997
debentures") with outstanding warrants from Finova Mezzanine Capital, a DTS
lender. By converting $1,310,000 of the 1997 debentures, Wi-LAN received
1,310,000 shares of the Company's common stock and gained over 50% of the
outstanding common stock of the Company. Through the transaction with Finova,
Wi-LAN also received outstanding warrants for 702,615 shares of common stock at
an exercise price of $1 per share which expire in March 2004. All 702,615
warrants remain outstanding and exercisable as of June 30, 2000.
Additionally, Wi-LAN converted another $190,000 of the 1997 debentures into
190,000 shares of the Company's common stock through June 30, 2000. The
outstanding amount of the 1997 debentures as of June 30, 2000 is $500,000.
On March 31, 2000, Wi-LAN purchased 454,737 shares of the Company's Series B
preferred stock for $3 million in cash. The Company's Series B Preferred Stock
is convertible into common shares at $7.125 per share, the market closing price
of the Company's common stock on March 30, 2000.
In June 2000, Digital Transmission Systems, Inc. announced that Wi-LAN Inc.
entered into a purchase and assignment agreement with the two former
shareholders of Telcor to acquire the right to receive approximately 31% of the
merger consideration still due to the former Telcor shareholders. According to
the agreement, Wi-LAN acquired $6,100,000 of the original $20 million
acquisition payable for $500,000 in cash and $5,600,000 by issuing the former
Telcor shareholders a right to receive $5,600,000 of Wi-LAN common shares based
on the market value of Wi-LAN shares on July 17, 2000, subject to a specified
maximum number of shares. Wi-LAN may redeem all or part of the right for cash.
In addition, Wi-LAN has granted the former Telcor shareholders an option
exercisable by August 31, 2000, to sell between $2,000,000 and $4,000,000 of
additional merger consideration to Wi-LAN for the issuance of a right to receive
Wi-LAN shares of equivalent value, based on the market value of Wi-LAN shares at
October 30, 2000, subject to a specified maximum number of shares.
On January 25, 2000, the Board of Directors of the Company approved a plan
whereby certain compensation obligations of the Company to employees and Board
members could be satisfied through the issuance of restricted common stock at
the option of the holder. Approximately 30,000 shares of the Company's common
stock were issued to satisfy such obligations. The shares will be issued at
$3.56 per share (a 25% discount from the market closing price on January 25,
2000) and are restricted as to trade, pledge, or sale until January 25, 2001.
The Company has recorded $143,000 in compensation expense to reflect the
satisfaction of these obligations which represented the fair market value of the
shares issued.
LINE OF CREDIT ARRANGEMENTS. On April 10, 1997, DTS established a bank line of
credit agreement with Silicon Valley Bank which makes available $2,500,000 in
borrowings with availability based on DTS'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% of eligible receivables plus 30% of eligible
inventory, as defined, through the maturity date of April 10, 2000. The loan is
secured by DTS's assets and bears interest at the rate of prime plus 2.25%. A
net worth covenant was amended on March 16, 1998, requiring DTS to maintain a
net worth of $1,000,000. In September 1998, DTS agreed to a UCC filing whereby
all assets of DTS became 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. DTS 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, DTS signed an amendment to the loan agreement with Silicon
Valley Bank which modified previous loan covenants and revised the maximum
borrowing amount to $1,500,000. The revised covenants are primarily based upon
minimum monthly and quarterly revenue levels. As consideration for the amended
agreement, DTS 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 the new agreement was
reached.
On February 24, 2000, DTS signed an additional amendment to the loan agreement
with Silicon Valley Bank which modified previous terms. Under the modified
terms, the revised loan agreement bears a maturity date of April 10, 2001.
Additionally, the revised and amended agreement increased the maximum borrowing
to $2,500,000 and bears interest at prime plus 2 1/4 (11.75% at June 30, 2000).
Additionally, covenants under the agreement were further revised to require
certain minimum quarterly revenue and monthly income requirements. DTS was in
compliance with
17
<PAGE> 19
all covenants imposed by the agreement as of June 30, 2000. Amounts outstanding
under the DTS line of credit facility were $1,172,000 and $1,365,000 at June 30,
2000 and 1999, respectively.
Additionally, the Company's wholly-owned subsidiary, Telcor Communications, Inc.
("Telcor") has a revolving credit facility with a commercial bank (PNC Bank) at
LIBOR plus 2.5% or prime, whichever is lower, the interest on which is payable
monthly. Under the agreement, Telcor is allowed to borrow up to 85% of eligible
accounts receivable and 50% of eligible inventory with an established limit of
$17,000,000 as of June 30, 2000 (the amount available under the credit facility
was increased on January 7, 2000 from $15,000,000 to $17,000,000). At June 30,
2000, amounts outstanding under the Telcor line of credit facility are
$6,512,000, and the interest rate was 10.0%. The line is collateralized by
Telcor's trade accounts receivable, inventories, and all other assets. The
Telcor revolving line of credit will expire on May 11, 2002.
Under the agreement, Telcor is required to comply with certain covenants which
include, but are not limited to, maintaining minimum requirements for debt to
equity, net worth, cash flows, and capital expenditures. At June 30, 2000,
Telcor was in compliance with all covenants imposed by the line of credit
agreement.
CASH. As of June 30, 2000, the Company had approximately $1,646,000 in cash and
cash equivalents. For the year ended June 30, 2000, $1,897,000 was used in
operating activities as compared to cash provided by operations of $305,000 for
the year ended June 30, 1999. The net loss for the period ended June 30, 2000 of
$3,815,000 includes non-cash charges relating to depreciation, amortization and
accounts receivable and inventory reserves of $3,449,000. Exclusive of the
fiscal 2000 non-cash charges, cash was used in operations primarily through an
increase in accounts receivable of $3,728,000 and an increase in accounts
payable of $1,089,000 offset by a decrease in inventory of $1,589,000.
As of June 30, 2000, the Company has an obligation of $7,655,000 in connection
with the acquisition of Telcor on March 31, 2000. According to the terms of the
merger agreement, the Company agreed to use its best efforts to raise the
necessary cash to pay down the acquisition payable by October 30, 2000. In the
event the Company is unsuccessful in raising the necessary cash required to
address the acquisition payable, the Company will issue shares of its common
stock (based on the market price of the Company's common stock for a ten day
trading window as dictated by the merger agreement) on or before October 30,
2000.
The Company purchased $413,000 and $85,000 of property, plant and equipment
during the year ended June 30, 2000 and 1999, respectively. In addition, the
Company capitalized certain software development costs paid to outside
contractors. During the year ended June 30, 2000, the Company capitalized
$174,000 of such costs as compared to capitalized costs of $136,000 for the year
ended June 30, 1999.
CREATION AND SALE OF SOUTHTECH, INC.
At its April 1998 meeting the DTS Board of Directors approved the creation of a
wholly owned subsidiary -- SouthTech, Inc. ("SouthTech") whose business purpose
is the administration and growth of the Company's international business. The
subsidiary was legally created as a Georgia corporation in July 1998. The
SKYPLEX and DIV product lines and associated intellectual property together with
the payables and receivables pertaining to the sales realized from those product
lines form the assets and liabilities transferred. Since its creation,
investment capital had been sought for the subsidiary in order to fund its
operating losses which have been substantial in the past. Cash resources of the
Company had been used for the purposes of developing the SKYPLEX product line, a
set of microwave radio products utilizing spread spectrum technology, and
developing sales distribution channels in Latin America, Asia Pacific and the
Mid-East global sectors.
The Company entertained an offer from a private group of investors to buy
SouthTech, Inc. in the latter part of 1998, but the offer was later withdrawn on
November 10, 1998. In late November 1998, Chapala Communications, Inc.
("Chapala"), a Georgia based company, offered to purchase the stock of
SouthTech. The sale involved the transfer of certain assets and liabilities of
SouthTech, Inc. to Chapala. The transaction resulted in approximately $981,000
of assets and $2,442,000 of liabilities being transferred to Chapala which
resulted in a net gain of $1,461,000 which has been recorded in the accompanying
fiscal 1999 financial statements. In accordance with SFAS 125 - Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
the Company derecognized the liabilities that were transferred to SouthTech upon
obtaining formal, legally binding releases of such liabilities from the
respective creditors.
As additional consideration for the sale, the Company received 19.5% of Chapala
voting stock ownership in the form of 1,000,000 shares of $0.001 par value
Series A voting Preferred Stock. Each share of Series A Preferred Stock shall be
convertible into the number of fully paid and nonassessable shares of Common
Stock obtained by dividing (a) the aggregate Series A Preferred Stock
Liquidation Preference of the shares to be converted , by (b) the conversion
price. The initial conversion price is $0.484 per share subject to adjustment,
as defined. Any conversion of Preferred Stock into Common Stock in accordance
with the above conversion formula is limited with respect to total ownership
after conversion. Such a limitation is 19.5% of outstanding common stock after
conversion. Conversion of the Series A Preferred Stock to common stock is at the
option of the holder and is not redeemable by Chapala.
18
<PAGE> 20
SouthTech was later merged into Chapala and the resulting entity was named
LinkaNet Labs, Inc. ("LinkaNet"). The Company has valued its investment in
Chapala using the equity method. The Company has assigned zero value to its
interest in LinkaNet within the accompanying financial statements and has no
obligations to fund LinkaNet's future operations or present liabilities. Since
inception, LinkaNet has incurred significant losses from operations. In the
event that the operations of LinkaNet ultimately attain profitability, the
Company will appropriately adjust its interest in LinkaNet. It is not
anticipated that such an adjustment will have a material impact on the Company's
results of operations in future periods.
In connection with the sale of SouthTech, the Company received a note from
SouthTech, Inc. in the amount of $127,000 at June 30, 1999. The note represents
a portion of the vendor liability that was not assumed by Chapala. The Company
has also deferred $127,000 of the gain associated with the sale as of June 30,
1999. As a result of additional negotiations with Chapala during fiscal 2000,
the Company deemed the remaining $127,000 note receivable from Chapala as
uncollectible and appropriately reversed the note balance against the remaining
deferred revenue balance. Accordingly, as of June 30, 2000, there are no amounts
outstanding with respect to the sale of the international subsidiary.
The SouthTech purchase and sale transaction was closed on February 5, 1999.
MANAGEMENT AND EMPLOYMENT AGREEMENTS
By agreement of the Board of Directors of the Company, Wi-LAN, Inc. has a
service agreement with the Company's Chief Executive Officer ("CEO") which
provides for the CEO to provide services to Wi-LAN. Wi-LAN has accrued or paid
the Company's CEO $65,439 during the period ended June 30, 2000, which has not
been reflected in the Company's consolidated financial statements. The Company
is also reimbursed by Wi-LAN for payments made by the company to certain Wi-LAN
United States-based sales personnel who provide services to Wi-LAN. The Company
has recorded a receivable from Wi-LAN for these amounts of $161,000 at June 30,
2000 in the accompanying 2000 consolidated balance sheet. Additionally, the
Company has accrued or paid $251,000 in interest expense to Wi-LAN related to
convertible debentures held by Wi-LAN during the period ended June 30, 2000.
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 build-out of the telecommunications infrastructure during
certain months of the year. 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. At June 30, 2000, the
Company's order backlog totaled $3,665,000.
YEAR 2000 (Y2K) IMPACT ON COMPANY'S INFORMATION TECHNOLOGY
Since the implementation of the Company's Y2K compliant systems and processes in
late 1999 and early 2000, the Company has not experienced any material or
adverse effects nor any business interruptions resulting from Y2K compliance
issues. The Company did not incur any costs related to Y2K compliance.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," which deferred implementation of SFAS 133 until fiscal
quarters of fiscal years beginning after June 15, 2000.
SFAS 133 requires all derivatives to be carried on the balance sheet at fair
value. Changes in the fair value of derivatives must be recognized in the
Company's Consolidated Statement of Operations when they occur; however there is
an
19
<PAGE> 21
exception for derivatives that qualify as hedges as defined by SFAS 133. If a
derivative qualifies as a hedge, a company can elect to use "hedge accounting"
to eliminate or reduce the income statement volatility that would arise from
reporting changes in a derivative's fair value.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133."
SFAS No.138 adds to the guidance related to accounting for derivative
instruments and hedging activities. This statement should be adopted
concurrently with SFAS 133. The adoption of both SFAS 133 and 138 is not
expected to materially impact the Company's financial results.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 summarizes existing guidance on revenue recognition. The implementation date
of SAB 101 is no later than the fourth quarter of fiscal years beginning after
December 15, 1999. The Company anticipates that implementation of SAB 101 will
not have a material impact on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation -- an Interpretation of
Accounting Principles Board Opinion No. 25." FIN 44 provides guidance for
certain issues that arose in applying APB 25. The provisions are effective July
1, 2000, and, generally, shall be applied prospectively. Adoption of FIN 44 is
not expected to materially affect the Company's financial results.
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.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see pages F-1 through F-31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is included in the Company's Proxy Statement for
the Annual Meeting of Shareholders filed with the Commission in September 2000
under the captions "Election of Directors" and "Executive Officers" and is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is included in the Company's Proxy Statement for
the Annual Meeting of Shareholders filed with the Commission in September 2000
under the captions "Election of Directors" and "Executive Officers" and is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is included in the Company's Proxy Statement for
the Annual Meeting of Shareholders filed with the Commission in September 2000
under the captions "Election of Directors" and "Executive Officers" and is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is included in the Company's Proxy Statement for
the Annual Meeting of Shareholders filed with the Commission in September 2000
under the captions "Election of Directors" and "Executive Officers" and is
incorporated by reference herein.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27.0 Financial Data Schedule (SEC use only)
(b) Supplemental schedules
Schedule I - Condensed financial information
Schedule II - Valuation and qualifying accounts
(c) Reports on Form 8-K.
Form 8-K dated February 5, 1999, filed with the Securities and Exchange
Commission on February 22, 1999, as amended by Form 8-K/A filed with the
Securities and Exchange Commission on February 23, 1999.
22
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Digital Transmission Systems, Inc.
Under date of October 13, 200, we reported on the consolidated balance sheets of
Digital Transmission Systems, Inc. and subsidiaries as of June 30, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the years in the three-year period
ended June 30, 2000, as contained in the annual report on Form 10-K for the year
2000. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Our report dated October 13, 2000, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations, which raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements and financial statement schedules do not
include any adjustments that might result from the outcome of that uncertainty.
Atlanta, Georgia
October 13, 2000
23
<PAGE> 25
DIGITAL TRANSMISSION SYSTEMS, INC. - EXCLUDING SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY -
(000'S OMITTED)
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
<S> <C>
BALANCE SHEET
Cash $ 996
Accounts Receivable, net 1,446
Inventory 1,172
Deferred Tax Asset 2,225
Other current assets 248
--------
Total Current Assets 6,087
--------
Property, Plant and Equipment 326
Intangible Assets 15,717
Investment in subsidiary 7,687
Other Assets 272
--------
Total Assets $ 30,089
========
Line of Credit 1,172
Accounts payable and Accruals 2,656
Acquisition payable 7,655
Warranty Accrual 200
--------
Total Current Liabilities 11,683
--------
Convertible debt - LT 721
Deferred Tax Liability 2,225
--------
Total Liabilities 14,629
--------
Stockholder's Equity 15,460
--------
Total Liabilities and Equity $ 30,089
========
<CAPTION>
FOR THE
YEAR ENDED
JUNE 30, 2000
-------------
<S> <C>
INCOME STATEMENT
Net Sales $ 10,085
Cost of Sales 6,333
--------
Gross Margin
3,752
--------
Operating Expenses 3,739
Depreciation and amortization 914
Product Development 759
--------
Operating Profit (Loss) $ (1,660)
--------
Interest Expense (463)
Other Income (Expense) (111)
--------
Net loss before Income Taxes and Equity in
Undistributed Income of Subsidiaries (2,234)
--------
Income Taxes --
Net loss before Equity in Undistributed
Income of Subsidiaries (2,234)
--------
Equity in Undistributed Income of Subsidiaries (1,622)
--------
Net Income (Loss) (3,856)
========
</TABLE>
24
<PAGE> 26
DIGITAL TRANSMISSION SYSTEMS, INC. - EXCLUDING SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY -
(000'S OMITTED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
JUNE 30, 2000
------------- -
<S> <C>
CASH FLOW STATEMENT (000'S OMITTED)
Cash flows from operating activities:
Net loss $ (3,856)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization 444
Equity in undistributed income of subsidiaries 1,622
(Increase) decrease in:
Trade accounts receivable (152)
Inventories (269)
Prepaid expenses and other current assets (338)
Increase (decrease) in:
Accounts payable and accrued liabilities 2,329
Accrued payroll and benefits 46
Warranty accrual 4
--------
Net cash (used in) provided by operating activities (170)
Cash flows from investing activities:
Purchases of property, plant and equipment (87)
Acquisition of company, net of cash acquired (2,426)
Additions to software development costs (175)
--------
Net cash used in investing activities (2,688)
Cash flows from financing activities:
Net borrowings (payments) under notes payable to banks (193)
Proceeds from issuance of Series B preferred stock to related party 3,000
Repayments of notes payable (430)
Proceeds from sale of convertible debentures 1,500
Repayment of acquisition payable (500)
Proceeds from exercise of stock options and common stock 260
--------
Net cash provided by financing activities 3,637
Net increase (decrease) in cash and cash equivalents 779
--------
Cash and cash equivalents at beginning of year 217
Cash and cash equivalents at end of year $ 996
========
Supplemental disclosure of cash paid for interest $ 115
========
Supplemental disclosures of noncash operating and financing activities:
Conversion of convertible debentures plus accrued interest to common stock $ 2,951
========
Issuance of warrants in connection with financing $ 286
========
Acquisition of business in exchange for acquisition payable $ 20,000
========
Issuance of common stock in connection with acquisition $ 2,500
========
Issuance of common stock to retire acquisition payable $ 11,845
========
Issuance of common stock in lieu of compensation $ 143
========
</TABLE>
25
<PAGE> 27
DIGITAL TRANSMISSION SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - (000'S OMITTED)
<TABLE>
<CAPTION>
Balance at Charged to Costs Balance at
Beginning of Period and Expenses Other (1),(2) Deductions (3) End of Period
------------------- ---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts and Returns:
Year ended June 30, 1998 226 524 -- (17) 733
Year ended June 30, 1999 733 528 -- -- 1,261
Year ended June 30, 2000 1,261 488 606 (999) 1,356
Inventory Reserve:
Year ended June 30, 1998 366 961 -- -- 1,327
Year ended June 30, 1999 1,327 50 -- (445) 932
Year ended June 30, 2000 932 645 4,794 (99) 6,272
Warranty Reserve:
Year ended June 30, 1998 203 655 -- (240) 618
Year ended June 30, 1999 618 81 -- (502) 197
Year ended June 30, 2000 197 835 276 (196) 1,112
Deferred tax valuation allowance
Year ended June 30, 1998 3,509 -- 3,435 -- 6,944
Year ended June 30, 1999 6,944 -- 180 -- 7,124
Year ended June 30, 2000 7,124 -- (1,987) -- 5,137
</TABLE>
(1) Addition to accounts receivable, inventory and warranty reserve
balances as a result of acquisition of Telcor Communications, Inc. on
March 31, 2000.
(2) Deferred tax valuation allowance reduced in conjunction with
acquisition of Telcor Communications, Inc. and its attendant net
deferred tax credits.
(3) Inventory and accounts receivable deductions of reserve consist of
write-offs of previously reserved amounts. Deductions of warranty
reserve based on satisfaction of respective warranty liability.
26
<PAGE> 28
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.
November 17, 2000 /s/ Andres C Salazar
----------------- ---------------------------------------
by: Andres C. Salazar,
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, November 17, 2000
------------------------------ Director (Principal Executive Officer)
Andres C. Salazar
/s/ Clive N. W. Marsh Vice President - Finance and Administration November 17, 2000
------------------------------ (Principal Accounting Officer)
Clive N. W. Marsh
/s/ Ed Kantor Director November 17, 2000
------------------------------
Ed Kantor
</TABLE>
27
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <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.
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C> <C>
*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) - Form of Digital Transmission Systems, Inc. Employee Stock Purchase Plan
**10.23 - Form of Amendment to the Company's 401 (K) Savings Plan
***10.24 - Form of Debenture Agreement between Sirrom Capital d/b/a Tandem Capital
and the Company
****10.25 - Second Amendment to Debenture Purchase Agreement between Sirrom Capital
and the Company
****10.26 - Second Amendment to Subordinated Debenture Agreement between Sirrom
Capital and the Company
****10.27 - Stock Purchase Warrant Agreement between Sirrom Capital and the Company
****10.28 - Shareholders' Agreement with respect to shares of Chapala Communications, Inc.
and the Company
****10.29 - Pledge and Security Agreement between MicroTel International, Inc. and Sirrom
Capital
****10.30 - Promissory Note between SouthTech, Inc. and the Company
****10.31 - Security Agreement between SouthTech, Inc. and the Company
****10.32 - Stock Purchase Agreement between Chapala Communications, Inc. and the Company
****10.33 - Employment Agreement between Woodrow B. Cannon and the Company
****10.34 - Employment Agreement between Andres C. Salazar and the Company
*23.1 - Consent of Price Waterhouse LLP
*23.2 - Consent of Sutherland, Asbill & Brennan (included in the opinion filed as
Exhibit No. 5.1 to the Registration Statement.)
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).
29
<PAGE> 31
** Incorporated by reference to the corresponding exhibit of the
Registrant's Form 10-KSB filed 9/30/96.
*** Incorporated by reference to the corresponding exhibit of the
Registrant's Form 10-KSB filed 10/14/97.
**** Incorporated by reference to the corresponding exhibit of the
Registrant's Form 10-QSB filed May 15, 1999.
(1) Constitutes a management contract or compensatory plan or arrangement
required to be filed.
30
<PAGE> 32
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999, and 1998 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended June 30, 2000, 1999, and 1998 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999, and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Digital Transmission Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Transmission Systems, Inc. and subsidiaries as of June 30, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
June 30, 2000. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Transmission
Systems, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1(b) to the
financial statements, the Company has suffered recurring losses from operations,
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1(b).
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Atlanta, Georgia
October 13, 2000
F-2
<PAGE> 34
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,646 217
Trade accounts receivable, net of allowances for
returns and doubtful accounts of $2,313 and $1,274
at June 30, 2000 and 1999, respectively 10,885 1,133
Accounts receivable from related party 161 --
Inventories 13,117 903
Prepaid expenses and other current assets 507 68
Deferred income tax assets 2,225 --
-------- --------
Total current assets 28,541 2,321
Property and equipment, net 4,898 410
Intangible assets, net 15,717 423
Other assets 3,121 653
-------- --------
Total assets $ 52,277 3,807
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks $ 7,684 1,365
Accounts payable 9,494 1,617
Accrued liabilities 4,458 201
Acquisition payable 7,655 --
Accrued payroll and benefits 241 167
Notes payable to related parties 3,000 --
Current maturities of long-term debt 146 561
Current maturities of obligations under capital leases 33 --
Warranty accrual 1,112 197
-------- --------
Total current liabilities 33,823 4,108
Long-term debt, excluding current maturities 4 2,000
Notes payable to related party 721 --
Obligations under capital leases, excluding current maturities 44 --
Deferred income tax liabilities 2,225 --
Deferred gain on sale of subsidiary -- 127
-------- --------
Total liabilities 36,817 6,235
-------- --------
Shareholders' equity (deficit):
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
Series A, convertible, liquidation preference of
$1.00 per share; 1,314,333 shares issued and outstanding 1,314 1,314
Series B, convertible, liquidation preference of
$7.125 per share; 454,737 shares issued and outstanding 3,000 --
Common stock - $0.01 par value; 50,000,000 shares authorized;
10,240,070 and 4,646,221 shares issued and outstanding at June 30,
2000 and 1999, respectively 102 47
Common stock subscribed 41 --
Additional paid-in capital 30,299 11,651
Notes receivable from stock sales (63) (63)
Accumulated deficit (19,233) (15,377)
-------- --------
Total shareholders' equity (deficit) 15,460 (2,428)
-------- --------
Commitments and contingencies
Total liabilities and shareholders' equity (deficit) $ 52,277 3,807
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 35
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2000, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 18,978 7,538 15,579
Cost of sales, including $414 in write-offs of
software development costs in 1998 12,886 4,764 13,721
-------- -------- --------
Gross profit 6,092 2,774 1,858
-------- -------- --------
Selling, general, and administrative expenses 6,723 2,161 5,799
Product development costs 759 1,353 2,367
Depreciation and amortization 1,481 853 1,219
-------- -------- --------
Total operating expenses 8,963 4,367 9,385
-------- -------- --------
Operating loss (2,871) (1,593) (7,527)
Interest expense, net of interest income (665) (651) (576)
Interest expense to related parties (168) -- --
Gain on sale of subsidiary -- 1,461 --
Other income (expense), net (111) -- 8
-------- -------- --------
Total other income (expense), net (944) 810 (568)
-------- -------- --------
Loss before income tax expense and extraordinary item (3,815) (783) (8,095)
Income tax expense -- -- (285)
-------- -------- --------
Loss before extraordinary item (3,815) (783) (8,380)
Extraordinary item--gain on settlement of trade payables -- 359 --
-------- -------- --------
Net loss (3,815) (424) (8,380)
Series B, preferred stock dividends (41) -- --
-------- -------- --------
Net loss attributable to common shareholders $ (3,856) (424) (8,380)
======== ======== ========
Net loss per share - basic and diluted:
Before extraordinary item $ (0.68) (0.18) (2.01)
Extraordinary item--gain on settlement of trade payables -- 0.08 --
-------- -------- --------
Loss per share - basic and diluted $ (0.68) (0.10) (2.01)
======== ======== ========
Weighted-average common shares outstanding 5,670 4,318 4,160
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 36
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
Years ended June 30, 2000, 1999, and 1998
(in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK, PREFERRED STOCK,
Series A Series B Common stock
------------------ ----------------- ------------------
Number Number Number Common
of shares of shares of shares stock
issued Amount issued Amount issued Amount subscribed
--------- ------- --------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 -- $ -- -- $ -- 4,121 $ 41 --
Exercise of stock options -- -- -- -- 70 1 --
Stock compensation expense -- -- -- -- -- -- --
Issuance of warrants in connection
with financing -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------- ------- ---- ------- ------- ------- ----
Balance at June 30, 1998 -- -- -- -- 4,191 42 --
Exchange of convertible debentures
for Series A preferred stock 1,314 1,314 -- -- -- -- --
Exercise of stock options -- -- -- -- 59 1 --
Issuance of stock in lieu of compensation -- -- -- -- 396 4 --
Stock compensation expense -- -- -- -- -- -- --
Issuance of warrants in connection
with financing -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------- ------- ---- ------- ------- ------- ----
Balance at June 30, 1999 1,314 1,314 -- -- 4,646 47 --
Conversion of convertible debentures
to common stock -- -- -- -- 2,779 28 --
Deferred financing costs on conversion
of debentures -- -- -- -- -- -- --
Issuance of stock in lieu of interest
on convertible debentures -- -- -- -- 48 -- --
Issuance of stock in cancellation of options
in connection with severance agreement -- -- -- -- 167 2 --
Exercise of stock options -- -- -- -- 224 2 --
Issuance of stock in connection
with acquisition -- -- -- -- 339 3 --
Issuance of stock to retire
acquisition payable -- -- -- -- 2,007 20 --
Issuance of stock in lieu of compensation -- -- -- -- 30 -- --
Issuance of warrants in connection
with financing -- -- -- -- -- -- --
Issuance of Series B preferred stock -- -- 455 3,000 -- -- --
Dividend on Series B preferred stock to
be paid in common stock -- -- -- -- -- -- 41
Net loss -- -- -- -- -- -- --
------- ------- ---- ------- ------- ------- ----
Balance at June 30, 2000 1,314 $ 1,314 455 $ 3,000 10,240 $ 102 41
======= ======= ==== ======= ======= ======= ====
<CAPTION>
Notes Total
Additional Unearned receivable shareholders'
paid-in stock from stock Accumulated equity
capital compensation sales deficit (deficit)
---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 11,232 (124) (33) (6,573) 4,543
Exercise of stock options 64 -- (30) -- 35
Stock compensation expense -- 68 -- -- 68
Issuance of warrants in connection
with financing 166 -- -- -- 166
Net loss -- -- -- (8,380) (8,380)
-------- ---- ---- -------- --------
Balance at June 30, 1998 11,462 (56) (63) (14,953) (3,568)
Exchange of convertible debentures
for Series A preferred stock -- -- -- -- 1,314
Exercise of stock options 1 -- -- -- 2
Issuance of stock in lieu of compensation -- -- -- -- 4
Stock compensation expense -- 56 -- -- 56
Issuance of warrants in connection
with financing 188 -- -- -- 188
Net loss -- -- -- (424) (424)
-------- ---- ---- -------- --------
Balance at June 30, 1999 11,651 -- (63) (15,377) (2,428)
Conversion of convertible debentures
to common stock 2,751 -- -- -- 2,779
Deferred financing costs on conversion
of debentures (79) -- -- -- (79)
Issuance of stock in lieu of interest
on convertible debentures 251 -- -- -- 251
Issuance of stock in cancellation of options
in connection with severance agreement 833 -- -- -- 835
Exercise of stock options 141 -- -- -- 143
Issuance of stock in connection
with acquisition 2,497 -- -- -- 2,500
Issuance of stock to retire
acquisition payable 11,825 -- -- -- 11,845
Issuance of stock in lieu of compensation 143 143
Issuance of warrants in connection
with financing 286 -- -- -- 286
Issuance of Series B preferred stock -- -- -- -- 3,000
Dividend on Series B preferred stock to
be paid in common stock -- -- -- (41) --
Net loss -- -- -- (3,815) (3,815)
-------- ---- ---- -------- --------
Balance at June 30, 2000 30,299 -- (63) (19,233) 15,460
======== ==== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 37
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,815) (424) (8,380)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,481 853 1,219
Gain on sale of subsidiary -- (1,461) --
Provision for losses on accounts receivable 488 528 524
Provision for inventory obsolescence 645 50 961
Provision for warranty reserve 835 81 655
Extraordinary gain on settlement of trade payables -- (359) --
Write-off of software development costs -- -- 414
Stock compensation expense -- 56 68
Deferred income tax expense -- -- 285
(Increase) decrease in:
Trade accounts receivable (3,728) 371 1,416
Inventories 1,589 1,342 (990)
Prepaid expenses and other assets (496) (62) 60
Increase (decrease) in:
Accounts payable and accrued liabilities 1,089 (492) 1,565
Accrued payroll and benefits 46 (81) (343)
Warranty accrual 80 (97) (240)
--------- -------- --------
Net cash (used in) provided by operating activities (1,786) 305 (2,786)
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment 56 -- --
Payments for business acquired, net of cash acquired (2,426) -- --
Purchases of property and equipment (413) (85) (658)
Additions to software development costs (174) (136) (583)
--------- -------- --------
Net cash used in investing activities (2,957) (221) (1,241)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party 3,000 -- --
Repayments of long-term debt (424) -- --
Repayment of acquisition payable (500) -- --
Net borrowings (payments) under notes payable to banks (547) 36 (629)
Proceeds from sale of convertible debentures to a related party 1,500 -- 4,000
Proceeds from exercise of stock options 143 2 35
Proceeds from issuances of common stock -- 4 --
Proceeds from issuance of Series B preferred stock to a related party 3,000 -- --
--------- -------- --------
Net cash provided by financing activities 6,172 42 3,406
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,429 126 (621)
Cash and cash equivalents at beginning of year 217 91 712
--------- -------- --------
Cash and cash equivalents at end of year $ 1,646 217 91
========= ======== ========
Supplemental disclosure of cash paid for interest $ 163 158 517
========= ======== ========
Supplemental disclosures of noncash operating and financing activities:
Issuance of note receivable in conjunction with a subsidiary liability $ -- 127 --
========= ======== ========
Conversion of convertible debentures plus accrued interest to
Series A preferred stock $ -- 1,314 --
========= ======== ========
Conversion of convertible debentures plus accrued interest to common stock $ 2,951 -- --
========= ======== ========
Issuance of warrants in connection with financing $ 286 188 166
========= ======== ========
Acquisition of business in exchange for acquisition payable $ 20,000 -- --
========= ======== ========
Issuance of common stock in connection with acquisition $ 2,500 -- --
========= ======== ========
Issuance of common stock to retire acquisition payable $ 11,845 -- --
========= ======== ========
Issuance of common stock in lieu of compensation $ 143 4 --
========= ======== ========
Sale of subsidiary:
Assets disposed of $ -- 981 --
Liabilities disposed of -- (2,442) --
--------- -------- --------
$ -- (1,461) --
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 38
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Digital Transmission Systems, Inc. and subsidiaries (the
"Company" or "DTS") designs, manufactures, repairs,
refurbishes, and markets a broad range of products for the
telecommunications ("telecom") industry. The Company's primary
customers are long-distance carriers, domestic wireless
service providers, including those offering cellular telephone
services and Personal Communication Services ("PCS"), and
domestic and international resellers/integrators who sell to
and service end users with telecom equipment.
The Company's products of original design, 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,
access to the Internet and video and desktop conferencing.
Through its recently acquired wholly-owned subsidiary, Telcor
Communications, Inc. ("Telcor"), the Company also acquires and
markets de-installed and refurbished telecom equipment
originally designed and manufactured by leading telecom
equipment suppliers such as Nokia, Lucent, and Ericsson.
The accompanying consolidated financial statements include the
accounts of Digital Transmission Systems, Inc., Telcor, and
several inactive Telcor wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent liabilities at
the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported
periods to prepare these consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America. Actual results could differ from
those estimates.
The markets for the Company's telecom products are
characterized by significant risk as a result of rapid changes
in technology, competitors with significant financial
resources, frequent new product and service introductions, and
mergers and acquisition activity in the telecom industry.
Furthermore, the Company's business is also subject to
additional significant risks such as availability of capital,
history of operating losses, concentrations with major
customers, inability to integrate acquired companies,
dependency on major suppliers, protection of intellectual
property rights, dependence on key personnel, and new laws or
regulations affecting the telecom industry. As a result,
negative developments in the Company's markets or in managing
these additional risks could have an adverse effect on the
Company's financial position, results of operations and
liquidity.
(B) GOING CONCERN MATTERS
The accompanying 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. As shown in the financial statements
during the years ended June 30, 2000 and 1999, the Company
incurred losses of $3,856,000 and $424,000, respectively, and
has an accumulated deficit of $19,233,000 as of June 30, 2000.
These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern for a
reasonable period of time.
F-7
<PAGE> 39
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Although the Company has a significant accumulated deficit as
of June 30, 2000, the Company has made substantial progress
over the past fiscal year with respect to its overall
financial position. As of June 30, 2000 total net equity of
the Company increased to $15,460,000 as compared to a net
deficit of ($2,428,000) as of the year ended June 30, 1999.
Additionally, as discussed in Note 3(a), the Company received
monetary support from a significant investor during fiscal
year 2000. Such support enabled the Company to more
effectively manage its cash commitments and indebtedness.
Additional equity may be required during fiscal year 2001 and
the Company is actively pursuing various financing
alternatives. Given the significant improvement in the
Company's overall financial position during fiscal 2000, the
Company believes that the probability of obtaining additional
equity during fiscal 2001, although dependent on a number of
uncontrollable external factors, has increased as compared to
previous periods.
The 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 actively pursuing additional equity financing
through discussions with potential investors.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit in demand or
money market accounts with commercial banks. All cash and cash
equivalents are carried at cost which approximates market. For
purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(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. The Company purchases de-installed
telecom equipment individually and in bulk lots. Cost is
allocated to individual items in bulk purchases based on
management's assessment of each item's value in relation to
the total cost of the purchase. The Company has established a
valuation allowance for inventories based on a review of the
composition, quantity, and expected future usage or sales of
inventories including expected sales prices.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization
on property and equipment are provided using the straight-line
method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Computer equipment 3 years
Test equipment 1-3 years
Software 3 years
Furniture and fixtures 6-10 years
Leasehold improvements 3-5 years
Vehicles 4-6 years
</TABLE>
Leasehold improvements are amortized using the straight-line
method over the estimated useful life of the improvements or
the lease term, whichever is shorter. Amortization of assets
held under capital lease arrangements is included in
depreciation and amortization.
F-8
<PAGE> 40
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(F) INTANGIBLE ASSETS
Intangible assets consist of capitalized software development
costs and other intangible assets acquired in connection with
the Company's acquisition of Telcor.
The Company capitalizes software development costs from the
time technological feasibility of the product is established
until the product is available for sale to customers.
Substantially all of the Company's software development costs
have been paid to third party contractors. Software
development costs are amortized using the greater of (1) the
straight-line method over the estimated useful life of the
product (not to exceed three years) or (2) the ratio of
current revenues to total current and anticipated revenues for
each product. The carrying value of software development costs
is reviewed for impairment by the Company by comparing the
carrying values to the future undiscounted net operating cash
flows expected to be derived from the underlying products. If
such a review indicates impairment, the Company uses fair
value in determining the amount that should be written-off.
The remaining intangible assets consist of values assigned to
customer lists, work force in place, non-compete arrangements,
and trade names in connection with the Telcor acquisition.
These intangible assets are being amortized using the
straight-line method over their estimated useful lives which
range from 2 to 10 years. The carrying values of other
intangible assets are reviewed for impairment by the Company
by comparing their carrying values to the future undiscounted
net operating cash flows expected to be derived from the
business acquired. If such a review indicates impairment, the
Company uses fair value in determining the amount that should
be written-off.
(G) PRODUCT DEVELOPMENT
Product development costs consist principally of compensation
and benefits paid to the Company's employees and are expensed
as incurred.
(H) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value
less costs to sell.
(I) FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash, cash
equivalents, and accounts receivable. The Company's cash
equivalents are held on deposit in demand or money market
accounts with commercial banks.
Accounts receivable arise from sales of products to
long-distance carriers, wireless service providers, and
resellers/integrators in the telecommunications industry,
domestically and internationally. Generally, the Company
requires no collateral on trade receivables, but believes that
credit risks are substantially mitigated by its credit
evaluation process. The Company maintains an allowance for
returns and doubtful accounts, but historically has not
experienced significant losses related to doubtful accounts.
The amount of losses on doubtful accounts could differ
materially from the allowance recorded in these consolidated
financial statements.
F-9
<PAGE> 41
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(J) REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time of
shipment. The Company estimates and records provisions for
sales returns and warranty obligations in the period the sale
is reported, based on historical experience and other relevant
factors.
Certain of the Company's contractual arrangements allow for
limited rights of return. Management of the Company has
provided an allowance for expected sales returns related to
these customers based on historical return rates and expected
future returns on sales to these customers. The amount of
sales returns could differ materially from the allowance
recorded in these consolidated financial statements.
(K) WARRANTY ACCRUAL
The Company warrants its products against defects in design,
materials, and workmanship for periods ranging from two to
five years. A provision for estimated future costs relating to
warranty obligations is recorded when the products are shipped
based on historical experience.
(L) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that
includes the enactment date.
(M) STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance
with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"),
which encourages entities to recognize as compensation expense
over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25 and provide
pro forma disclosures for employee stock-based awards as if
the fair-value based method of SFAS No. 123 had been applied.
As such, compensation expense would be recorded only if the
current market price of the underlying stock as of the date of
grant exceeded the exercise price. The Company has elected to
continue applying the provisions of APB Opinion No. 25 and
include the pro forma disclosures required under SFAS No. 123.
(N) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is calculated as
income (loss) available to common shareholders divided by the
weighted-average number of common shares outstanding during
each period. Diluted EPS
F-10
<PAGE> 42
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
is calculated as income (loss) available to common
shareholders divided by the weighted-average number of common
shares outstanding during each period plus the effect of any
potential dilutive common shares, such as those attributable
to convertible debt, convertible preferred stock, warrants, or
stock options.
A total of 1,830,000 of additional common shares related to
the potential conversion of warrants, options and shares
attributable to convertible Series B preferred stock were
excluded from the computation of diluted net loss per share in
the year ended June 30, 2000, because the exercise price of
these securities was greater than the average market price of
the Company's common stock. In addition, the Company excluded
all remaining convertible preferred stock, warrants,
outstanding stock options and convertible debentures from the
calculations of diluted net loss per share as all such
securities are anti-dilutive for all periods presented. The
total potential number of dilutive equivalent common shares
excluded was 3,140,000, 256,000 and 3,621,000 for the years
ended June 30, 2000, 1999 and 1998, respectively.
(O) COMPREHENSIVE INCOME (LOSS)
No statements of comprehensive income (loss) have been
included in the accompanying consolidated financial statements
since comprehensive loss and net loss presented in the
accompanying consolidated statements of operations would be
the same.
(P) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade
accounts receivable, accounts receivable from related parties,
notes payable to banks, accounts payable, accrued liabilities,
acquisition payable, and accrued payroll and benefits
approximate fair value because of the short maturity of these
instruments.
The carrying amount of the $3 million in notes payable to
related parties approximates fair value because of the short
maturity of these notes.
The fair value of notes payable to related parties and long
term debt is estimated by discounting the future cash flows of
cash instrument at rates currently offered to the Company for
similar debt instruments of comparable maturities by the
Company's bankers. The fair value of these notes payable
approximate carrying value.
(Q) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," which deferred implementation of SFAS 133
until fiscal quarters of fiscal years beginning after June 15,
2000.
SFAS 133 requires all derivatives to be carried on the balance
sheet at fair value. Changes in the fair value of derivatives
must be recognized in the Company's Consolidated Statement of
Operations when they occur; however there is an exception for
derivatives that qualify as hedges as defined by SFAS 133. If
a derivative qualifies as a hedge, a company can elect to use
"hedge accounting" to eliminate or reduce the income statement
volatility that would arise from reporting changes in a
derivative's fair value.
In June 2000, the FASB issued SFAS No. 138, "Accounting for
Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133." SFAS No. 138 adds to the guidance
related to accounting for derivative instruments and hedging
activities. This statement should be adopted concurrently with
SFAS 133. The adoption of both SFAS 133 and 138 is not
expected to materially impact the Company's financial results.
F-11
<PAGE> 43
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 summarizes
existing guidance on revenue recognition. The implementation
date of SAB 101 is no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The Company
anticipates that implementation of SAB 101 will not have a
material impact on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN
44), "Accounting for Certain Transactions involving Stock
Compensation -- an Interpretation of Accounting Principles
Board Opinion No. 25." FIN 44 provides guidance for certain
issues that arose in applying APB 25. The provisions are
effective July 1, 2000, and, generally, shall be applied
prospectively. Adoption of FIN 44 is not expected to
materially affect the Company's financial results.
(R) RECLASSIFICATIONS
Reclassifications were made to certain amounts in the 1999 and
1998 financial statements to conform with the presentation in
the 2000 consolidated financial statements.
(2) ACQUISITION OF TELCOR COMMUNICATIONS, INC.
On March 31, 2000, a wholly-owned subsidiary of the Company
consummated a merger with Telcor Communications, Inc. and
subsidiaries ("Telcor"), a leading reseller of new and
refurbished wireless and wireline telecom equipment based in
Duluth, Georgia. The merger consideration payable to the
shareholders of Telcor was $25 million in a combination of the
Company's common stock, cash, and an acquisition payable. The
amount of $5 million of consideration was paid at closing
consisting of $2.5 million in cash and $2.5 million in common
stock (338,983 shares with a value of $7.375 per share
representing the closing price of DTS common stock a few days
before and after the announcement date). The remaining
consideration of $20 million is due and payable in cash or the
Company's common stock (at fair value at the date of
issuance), at the Company's option, on or before October 30,
2000. The acquisition payable is unsecured and non-interest
bearing. Subsequent to the closing of the acquisition, the
former Telcor shareholders became DTS shareholders and loaned
the Company $3 million.
In accordance with the merger agreement, if all performance
objectives had been met by Telcor by May 31, 2000, an
additional $6 million in consideration would have been paid to
the former Telcor shareholders in connection with the
acquisition. Based on Telcor's operations through May 31,
2000, none of the performance objectives were met; therefore,
the Company did not incur any contingent consideration.
The Company began consolidating Telcor's operating results
beginning April 1, 2000.
F-12
<PAGE> 44
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on their fair values on March
31, 2000. A summary of the acquisition is as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 25,000
Legal, accounting, and other acquisition
costs 560
----------
Total purchase price 25,560
----------
Fair value of assets acquired 28,023
Fair value of liabilities assumed (18,710)
----------
Fair value of tangible net assets acquired 9,313
----------
Excess of total purchase price
over tangible net assets acquired $ 16,247
==========
</TABLE>
The excess of purchase price over the tangible net assets acquired of
$16,247 has been allocated to certain identifiable intangible assets as
follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE
----------------
<S> <C> <C>
Workforce in place $ 1,288 5 years
Trade name 5,194 5 years
Customer list 6,990 10 years
Non-compete covenants 2,775 2 years
-----------
$ 16,247
===========
</TABLE>
The following unaudited pro forma financial information of DTS and
Telcor reflect the pro forma results as if the acquisition had occurred
at the beginning of each period presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
2000 1999
---------- ---------
<S> <C> <C>
Revenues $ 65,295 62,856
Loss before extraordinary items (3,336) (2,704)
Net loss (3,336) (2,345)
Net loss per share:
Basic (0.59) (0.50)
Diluted (0.59) (0.50)
</TABLE>
The unaudited pro forma financial information does not purport to
represent what the Company's results of operations actually would have
been had the acquisition occurred on the dates specified, or to project
the Company's results of operation for any future period or date.
F-13
<PAGE> 45
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(3) RELATED PARTY TRANSACTIONS
(A) WI-LAN, INC.
On December 29, 1999, the Company entered into an agreement
with Wi-LAN Inc. ("Wi-LAN"), a leading provider of wireless
data communications technology and products, to sell Wi-LAN
$1.5 million in convertible debentures (the "1999
debentures"). The debentures, convertible into the Company's
common stock at any time by the holder, have a four-year term
with a 10% interest rate with principal and interest due at
maturity. The Company has no buy-back provision, and the
conversion rate is one share per $1 in debentures, which
approximated the fair value of the Company's common stock on
the date the Company entered into the agreement. On January 7,
2000, a closing on the Wi-LAN debentures was held whereby the
Company received the proceeds from the first tranche of the
debentures of $400,000. The remaining $1,100,000 in proceeds
from the issuance of debentures was received prior to March
31, 2000. In connection with various transactions subsequent
to the sale of the $1.5 million in debentures and through June
30, 2000, Wi-LAN has converted $1,278,900 of the 1999
debentures into 1,278,900 shares of the Company's common
stock. The outstanding amount of these 1999 debentures as of
June 30, 2000 is $221,100. In connection with the agreement,
Wi-LAN also received an option to purchase additional
debentures of $1.5 million with similar terms but at a
conversion rate to be determined by the market price of the
Company's common stock at the time the option is exercised.
The expiration on the option to purchase additional debentures
of $1.5 million is January 7, 2002.
Apart from the transactions described above, in January 2000,
Wi-LAN purchased 1,738,159 shares of the Company's common
stock from MicroTel, another DTS shareholder, and the
outstanding $2 million in debentures (the "1997 debentures")
with outstanding warrants from Finova Mezzanine Capital, a DTS
lender. By converting $1,310,000 of the 1997 debentures,
Wi-LAN received 1,310,000 shares of the Company's common stock
and gained over 50% of the outstanding common stock of the
Company. Through the transaction with Finova, Wi-LAN also
received outstanding warrants for 702,615 shares of common
stock at an exercise price of $1 per share which expire in
March 2004. All 702,615 warrants remain outstanding and
exercisable as of June 30, 2000.
Additionally, Wi-LAN converted another $190,000 of the 1997
debentures into 190,000 shares of the Company's common stock
through June 30, 2000. The outstanding amount of the 1997
debentures as of June 30, 2000 is $500,000.
On March 31, 2000, Wi-LAN purchased 454,737 shares of the
Company's Series B preferred stock for $3 million in cash. The
Company's Series B Preferred Stock is convertible into common
shares at $7.125 per share, the market closing price of the
Company's common stock on March 30, 2000.
In June 2000, Digital Transmission Systems, Inc. announced
that Wi-LAN Inc. entered into a purchase and assignment
agreement with the two former shareholders of Telcor to
acquire the right to receive approximately 31% of the merger
consideration still due to the former Telcor shareholders.
According to the agreement, Wi-LAN acquired $6,100,000 of the
original $20 million acquisition payable for $500,000 in cash
and $5,600,000 by issuing the former Telcor shareholders a
right to receive $5,600,000 of Wi-LAN common shares based on
the market value of Wi-LAN shares on July 17, 2000, subject to
a specified maximum number of shares. Wi-LAN may redeem all or
part of the right for cash. In addition, Wi-LAN has granted
the former Telcor shareholders an option exercisable by August
31, 2000, to sell between $2,000,000 and $4,000,000 of
additional merger consideration to Wi-LAN for the issuance of
a right to receive Wi-LAN shares of equivalent value, based on
the market value of Wi-LAN shares at October 30, 2000, subject
to a specified maximum number of shares.
In addition, Wi-LAN has granted the former Telcor shareholders
an option exercisable by August 31, 2000, to sell between
$2,000,000 and $4,000,000 of additional merger consideration
to Wi-LAN for the issuance of a right to receive Wi-LAN shares
of equivalent value, based on the market value of Wi-LAN
shares at October 30, 2000, subject to a specified maximum
number of shares. On August 31, 2000, the former shareholders
of Telcor exercised the aforementioned option and sold
$4,000,000 of merger consideration to Wi-LAN in exchange for
Wi-LAN shares as discussed above.
F-14
<PAGE> 46
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
Wi-LAN also has a services agreement with the Company's Chief
Executive Officer ("CEO") which provides for the CEO to
provide services to Wi-LAN. Wi-LAN has accrued or paid the
Company's CEO $65,439 during the period ended June 30, 2000,
which has not been reflected in the Company's consolidated
financial statements. The Company is also reimbursed by Wi-LAN
for payments made by the Company to certain Wi-LAN United
States-based sales personnel who provide services to Wi-LAN.
The Company has recorded a receivable from Wi-LAN for these
amounts of $161,000 at June 30, 2000 in the accompanying 2000
consolidated balance sheet. Additionally, the Company has
accrued or paid $251,000 in interest expense to Wi-LAN related
to convertible debentures held by Wi-LAN during the period
ended June 30, 2000.
(B) EMPLOYEES AND BOARD OF DIRECTORS
On January 25, 2000, the Board of Directors of the Company
approved a plan whereby certain compensation obligations of
the Company to employees and Board members could be satisfied
through the issuance of restricted common stock at the option
of the holder. Approximately 30,000 shares of the Company's
common stock were issued to satisfy such obligations. The
shares were issued at $3.56 per share (a 25% discount from the
market closing price on January 25, 2000) and are restricted
as to trade, pledge, or sale until January 25, 2001. The
Company has recorded $143,000 in compensation expense to
reflect the satisfaction of these obligations which
represented the fair market value of the shares issued.
(4) INVENTORIES
Inventories consist of the following at June 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Raw materials $ 1,498 1,164
Work in process 182 227
Finished goods 17,709 444
----------- -----------
19,389 1,835
Less valuation allowances (6,272) (932)
----------- -----------
$ 13,117 903
=========== ===========
</TABLE>
F-15
<PAGE> 47
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Computer equipment $ 1,772 617
Test equipment 1,618 1,584
Software 2,010 349
Furniture and fixtures 1,150 140
Leasehold improvements 1,157 217
Vehicles 14 --
-------- --------
7,721 2,907
Less accumulated depreciation and
amortization (2,823) (2,497)
-------- --------
$ 4,898 410
======== ========
</TABLE>
Depreciation and amortization relating to property and equipment for
the years ended June 30, 2000, 1999, and 1998 was approximately
$354,000, $497,000, and $958,000, respectively.
(6) INTANGIBLE ASSETS
Intangible assets consist of the following as of June 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
2000 1999
---------- ------
<S> <C> <C>
Customer list $ 6,990 --
Work force in place 1,288 --
Noncompete covenants 2,775 --
Trade name 5,194 --
Software development costs 913 739
---------- ------
17,160 739
Less accumulated amortization (1,443) (316)
---------- ------
$ 15,717 423
========== ======
</TABLE>
The Company capitalized software development costs of $174,000,
$136,000, and $583,000 during the years ended June 30, 2000, 1999, and
1998, respectively. Amortization expense relating to intangible assets
for the years ended June 30, 2000, 1999 and 1998 was approximately
$1,127,000, $356,000, and $261,000, respectively.
F-16
<PAGE> 48
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(7) NOTES PAYABLE TO BANKS
(A) DTS CREDIT FACILITY
The Company maintains a revolving credit facility with a
commercial bank whereby it may borrow the lesser of $2,500,000
or 80% of eligible receivables, as defined.
Amounts outstanding under the facility were $1,172,000 and
$1,365,000 at June 30, 2000 and 1999, respectively. The amount
available for additional borrowings under this facility was
$843,000 as of June 30, 2000. Advances accrue interest at the
prime rate plus 2.25% (11.75% and 10.75% at June 30, 2000 and
1999, respectively) are payable monthly, and are secured by
accounts receivable, inventory, and certain other assets, as
defined. The credit facility expires on April 10, 2001. A
commitment fee of .125% of the unused portion of the line and
a $1,000 collateral fee are payable monthly.
In connection with a March 1998 amendment to the credit
facility, the Company issued warrants to the lender enabling
the lender to purchase 60,000 shares of the Company's common
stock at $5.50 per share. The warrants are exercisable at any
time and expire in March 2003. The Company recorded the fair
value of the warrants of $166,000, which was estimated using
the Black-Scholes option pricing model, as financing costs and
additional paid-in capital. All 60,000 warrants remain
outstanding and exercisable as of June 30, 2000.
In consideration of an amendment to the credit facility
executed in December 1998, the Company issued warrants to the
lender to purchase 250,000 shares of the Company's common
stock at $0.119 per share which expire in December 2003. The
fair market value of the warrants was insignificant.
Covenants under the facility include minimum quarterly revenue
and monthly income requirements and restrict the Company from
paying dividends. The Company was in compliance with all
covenants as of June 30, 2000.
(B) TELCOR CREDIT FACILITY
The Company's wholly-owned subsidiary, Telcor, maintains a
revolving credit facility with a commercial bank whereby it
may borrow the lesser of 85% of eligible accounts receivable
and 50% of eligible inventory (limited to $7 million in
borrowings), as defined, or $17 million. Advances under the
facility bear interest at LIBOR plus 2.5% or prime, whichever
Telcor selects at the date of the advance, payable monthly.
At June 30, 2000, amounts outstanding under the facility were
$6,512,000 and the interest rate was 10%. The amount available
for borrowing under this facility was $3,501,000 as of June
30, 2000. The facility is secured by Telcor's trade accounts
receivable, inventories, and all other assets and expires on
May 11, 2002.
Under the terms of the facility, Telcor is required to comply
with certain covenants which include, but are not limited to,
dividend restrictions, maintaining minimum requirements for
debt to equity, net worth, cash flows, and capital
expenditures. At June 30, 2000, Telcor had received a waiver
for those covenants for which it was not in compliance.
In connection with approvals needed for the merger with
Telcor, the Company issued warrants to the lender to purchase
60,000 shares of the Company's common stock at $7.375 per
share. The warrants are exercisable at any time and expire in
May 2003. The Company recorded the fair value of the warrants
of $286,000, which was estimated using the Black Scholes
option pricing model, as financing costs and additional
paid-in capital. All 60,000 warrants remain outstanding and
exercisable as of June 30, 2000.
F-17
<PAGE> 49
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(8) NOTES PAYABLE TO RELATED PARTIES AND LONG-TERM DEBT
Notes payable to related parties and long-term debt consists of the
following at June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Note payable to related party (former Telcor shareholder and DTS
shareholder), accrues interest at 6%, unsecured, principal and
interest payable at maturity on April 1, 2001 $ 2,500 --
Note payable to related party (former Telcor shareholder and DTS
shareholder), accrues interest at 6%, unsecured, principal and
interest payable at maturity on April 1, 2001 500 --
Convertible debentures, 1997 debentures, subordinated to notes payable
to banks, payable to a related party, principal
payable at maturity in February 2004. Interest payable
quarterly at 10%, due beginning February 2002
through February 2004 500 2,000
Convertible debenture, 1999 debentures, subordinated to notes payable to
banks, payable to a related party, principal payable at maturity with
interest payable quarterly at 10% due on February 5, 2004 221 --
Various notes payable; principal and interest due
monthly at rates ranging from 6.5% to 10%;
due through 2002 150 561
-------- --------
Total notes payable to related 3,871 2,561
parties and long-term debt
Less current maturities of notes payable to related
parties and long-term debt (3,146) (561)
-------- --------
Notes payable to related parties
and long term debt, excluding
current maturities $ 725 2,000
======== ========
</TABLE>
F-18
<PAGE> 50
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
As of June 30, 2000, the future maturities of long-term debt are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
2001 $ 3,146
2002 4
2003 --
2004 721
---------
$ 3,871
=========
</TABLE>
On September 25, 1997, the Company issued $4 million of 11.5%
subordinated convertible debentures due September 25, 2002 (the "1997
debentures"). The Debenture Purchase Agreement (the "Debenture
Agreement") contained numerous rights, privileges and conditions in favor
of the lenders. The 1997 debentures are convertible at any time by the
lenders into common stock of the Company at a conversion price of $10.25
per share, subject to adjustment in certain events. The 1997 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
debenture or (b) the 20-day average bid price for the Company's stock
exceeds $15.00 per share.
On February 5, 1999, the 1997 debentures were restructured as part of the
sale of the Company's subsidiary, SouthTech, Inc. As part of the
restructuring, $1,000,000 in principal of the debentures were assumed by
the acquiring company. In addition, $1,000,000 in principal was converted
along with accrued but unpaid interest of $314,333 into 1,314,333 shares
of Series A preferred stock which bear no dividends and are convertible
into common stock at a ratio of one for one at any time. The remaining
$2,000,000 in 1997 debentures were restructured in February 1999 to
convert into one share of common stock per $1 in debentures and bear
interest at 10% per annum. Interest was payable after February 5, 2000,
(i) on each June 1, September 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.
On January 7, 2000, Wi-LAN purchased the remaining $2,000,000 in 1997
debentures from Finova Mezzanine Capital, a DTS lender. Wi-LAN converted
$1,500,000 of the 1997 debentures into 1,500,000 shares of the Company's
common stock during the year ended June 30, 2000. The outstanding amount
of the 1997 debentures as of June 30, 2000 is $500,000.
On December 29, 1999, the Company entered into an agreement to sell $1.5
million in subordinated convertible debentures (the "1999 debentures")
due February 5, 2004 to Wi-LAN to raise additional working capital. The
new debentures have a four-year term with a 10% interest rate with
principal and interest due at maturity. Wi-LAN converted $1,278,900 of
the 1999 debentures into 1,278,900 shares of the Company's common stock
during the year ended June 30, 2000.
F-19
<PAGE> 51
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(9) INCOME TAXES
A reconciliation of the expected income tax expense (benefit) (at the
Federal statutory income tax rate of 34%) to the actual income tax
expense (benefit) reported in the consolidated statements of operations
is as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------- ---- ------
<S> <C> <C> <C>
Computed "expected" income tax benefit
at Federal statutory income tax rate
of 34% $(1,297) (144) (2,752)
State income taxes, net of Federal effect (153) (17) (321)
Increase in valuation allowance
allocated to income tax expense 1,552 180 3,435
Other, net (102) (19) (77)
------- ---- ------
Actual income tax expense $ -- -- 285
======= ==== ======
</TABLE>
The income tax effects of the temporary differences that give rise to
significant portions of the Company's deferred income tax assets and
liabilities at June 30, 2000 and 1999 are presented below (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- ------
<S> <C> <C>
Deferred income tax assets:
Current:
Allowances for returns and
doubtful accounts $ 423 85
Inventory valuation allowances 2,542 354
Accrued expenses not deducted for
income tax purposes 928 105
-------- ------
3,893 544
======== ======
Noncurrent:
Property and equipment, principally
due to differences in depreciation 100 165
Net operating loss carryforwards 7,557 5,974
Research and experimentation tax credit
carryforwards 441 441
-------- ------
8,098 6,580
-------- ------
Gross deferred income tax assets 11,991 7,124
Less valuation allowance (5,137) (7,124)
======== ======
Deferred income tax assets, net of
valuation allowance 6,854 --
-------- ------
</TABLE>
F-20
<PAGE> 52
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
<TABLE>
<S> <C> <C>
Deferred income tax liabilities:
Noncurrent:
Software development costs 32 --
Acquired intangible assets 6,822 --
------ -----
Gross deferred income tax
liabilities 6,854 --
------ -----
Net deferred income tax assets
(liabilities) $ -- --
====== =====
</TABLE>
The amounts are included in the accompanying consolidated balance sheets
at June 30, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Net current deferred income tax assets $2,225 --
====== ======
Net noncurrent deferred income tax
liabilities $2,225 --
====== ======
</TABLE>
The valuation allowance for deferred income tax assets as of
June 30, 2000 and 1999 was $5,137,000 and $7,124,000,
respectively. The net increase (decrease) in the total
valuation allowance for the years ended June 30, 2000, 1999,
and 1998 was approximately ($1,987,000), $180,000, and
$3,435,000, respectively. In assessing the realizability of
deferred income tax assets, management considers whether it is
more likely than not that some portion or all of the deferred
income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon
the generation of future taxable income during the periods in
which the temporary differences resulting in the deferred tax
assets become deductible. Management considers the scheduled
reversal of deferred income tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred income tax
assets, the Company will need to generate future taxable
income of approximately $21,200,000 prior to the expiration of
the net operating loss carryforwards beginning in 2007.
Taxable loss for the years ended June 30, 2000, 1999 and 1998
was approximately $(5,316,000), $(1,694,000) and $(5,956,000),
respectively. Based upon the level of historical taxable
income and projections for future taxable income over the
periods in which the deferred income tax assets are
deductible, management believes it is more likely than not the
Company will not realize the benefits of these deductible
differences. In conjunction with the acquisition of Telcor and
its attendant net deferred tax credits, the valuation
allowance was reduced by $3,539,000, effectively recognizing
an amount of deferred tax assets equal to the acquired
deferred tax liabilities. This reduction in the valuation
allowance was credited against goodwill and other intangible
assets.
At June 30, 2000, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$19,887,000 which are available to offset future federal
taxable income, if any, through 2020. In addition, the Company
has research and experimentation tax credit carryforwards of
approximately $441,000 which are available to reduce future
federal regular income taxes, if any, and have expiration
dates beginning in 2005.
On January 7, 2000, the Company experienced an ownership
change as defined in Internal Revenue Code Section 382. Net
operating loss carryforwards and research and experimentation
tax credit carryforwards of $15,467,000 and $441,000,
respectively, are subject to an annual limitation of $640,000.
F-21
<PAGE> 53
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(10) SHAREHOLDERS' EQUITY (DEFICIT)
(A) SERIES A PREFERRED STOCK
On February 5, 1999, the Company completed the restructuring
of the 1997 debentures. In connection with this restructuring,
the Company issued 1,314,333 shares of Series A preferred
stock ("Series A preferred stock") to the lender at $1.00 per
share in exchange for $1 million of the 1997 debentures and
accrued interest of $314,333. The holders of the Series A
preferred stock are not entitled to receive dividends. The
holders of the Series A preferred stock shall have the right
to convert any or all of such shares into the Company's common
stock as is determined by dividing $1.00 for each share of
Series A preferred stock by the conversion price of $1.00 per
share.
In the event of any voluntary or involuntary sale of all or a
substantial portion of the Company's capital stock, a
substantial portion of the assets, or any merger or
consolidation of the Company with another entity, or any
liquidation or dissolution of the Company, the holder of the
Series A preferred stock shall be entitled to receive, prior
to the receipt of any assets by holders of all other equity
securities of the Company, a cash amount equal to $1.00 for
each share of Series A preferred stock.
The holders of the Series A preferred stock are not entitled
to any voting rights as stockholders.
The Company may, at the option of the Board of Directors,
redeem all shares of the Series A preferred stock by paying,
in cash, an amount equal to the redemption price, which will
be equal to $1.00 for each share adjusted for any stock
dividends, combinations, or splits with respect to such
shares.
(B) SERIES B PREFERRED STOCK
In connection with the acquisition of Telcor on March 31,
2000, the Company issued 454,737 shares of Series B preferred
stock ("Series B preferred stock") to Wi-LAN at $7.125 per
share for net proceeds totaling $3,000,000.
The holders of the Series B preferred stock are entitled to a
5% dividend, payable annually in arrears in common stock at
the market price of the common stock on the due date of
dividend payment. The dividend payable as of June 30, 2000 of
approximately $41,000 has been reflected as common stock
subscribed in the accompanying consolidated balance sheet. The
holders of the Series B preferred stock may convert any or all
of such shares into a number of shares of common stock
determined by dividing $7.125 by the conversion price of
$7.125. The holders of the Series B preferred stock are not
entitled to any voting rights as stockholders of the Company
prior to conversion.
In the event of any voluntary or involuntary sale of all or a
substantial portion of the Company's capital stock, a
substantial portion of the Company's assets, any merger or
consolidation of the Company with another entity, or any
liquidation or dissolution of the Company, voluntary or
involuntary, then the holders of the Series B preferred stock
shall be entitled to receive, prior to the receipt of any
assets by holders of all other equity securities of the
Corporation (other than holders of the Company's Series A
preferred stock who shall receive a preferential distribution
of $1.00 per share ahead of the Series B preferred stock), a
cash amount equal to $7.125 for each share of Series B
preferred stock (adjusted for any stock dividends,
combinations or splits with respect to such shares).
The Company may, at the option of the Board of Directors,
redeem all shares of the Series B preferred stock by paying in
cash an amount equal to 110% of the redemption price which
will equal to $7.125 for each share adjusted for any stock
dividends, combinations, or splits with respect to such
shares. Written
F-22
<PAGE> 54
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
notice of this redemption must be provided at least 60 days
prior to redemption, but no more than 75 days prior to the
date on which the Company desires to redeem shares of Series B
preferred stock.
(C) WARRANTS
In connection with the Company's March 1996 initial public
offering, the Company issued warrants entitling the holders to
purchase 1,220,700 shares of the Company's common stock at an
exercise price of $9 per share which are exercisable at any
time until their expiration on March 4, 2001. All 1,220,700
warrants remain outstanding and exercisable as of June 30,
2000.
In connection with a March 1998 amendment to the Company's
revolving credit facility, the Company issued warrants to a
commercial bank enabling the bank to purchase 60,000 shares of
the Company's common stock at $5.50 per share. The warrants
are exercisable at any time and expire in March 2003. The
Company recorded the fair value of the warrants of $166,000,
which was estimated using the Black-Scholes option pricing
model, as financing costs and additional paid-in capital. All
60,000 warrants remain outstanding and exercisable as of June
30, 2000.
In connection with a December 1998 amendment to the Company's
revolving credit facility, the Company issued warrants to a
commercial bank enabling the bank to purchase 250,000 shares
of the Company's common stock at an exercise price of $0.119
per share. The warrants are exercisable at any time and expire
in December 2003. The fair market value of the warrants at the
date of issuance was insignificant. All 250,000 warrants
remain outstanding and exercisable as of June 30, 2000.
In connection with a February 1999 restructuring to the
Company's 1997 debentures, the Company issued warrants to the
holders which enables them to purchase 702,615 shares of the
Company's common stock at $1.00 per share. The warrants are
exercisable at any time and expire in March 2004. The Company
recorded the fair value of the warrants of $188,000, which was
estimated using the Black Scholes option pricing model, as
financing costs and additional paid-in capital. All 702,615
warrants remain outstanding and exercisable as of June 30,
2000.
In connection with approvals needed for the merger with Telcor
in March 2000, the Company issued warrants to a commercial
bank to purchase 60,000 shares of the Company's common stock
at $7.375 per share. The warrants are exercisable at any time
and expire in May 2003. The Company recorded the fair value of
the warrants of $286,000, which was estimated using the
Black-Scholes option pricing model, as financing costs and
additional paid-in capital. All 60,000 warrants remain
outstanding and exercisable as of June 30, 2000.
F-23
<PAGE> 55
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(D) 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.
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. In October 1996, the Board of Directors voted to
increase the number of shares of common stock authorized under
the 1996 Plan from 200,000 shares to 440,000 shares.
Additionally, effective April 1999, shareholders of the
Company voted to increase the number of shares of common stock
authorized under the 1996 Plan from 440,000 shares to 840,000
shares. 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 1992 and 1996 Plans may be incentive
stock options or nonqualified 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 nonqualified 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 three to five
years. The expiration date of options granted under the 1992
and 1996 Plans are determined at the time of grant and may not
exceed ten years from the date of the grant.
As of June 30, 2000, there were no options available for grant
under the 1992 Plan, and there were 366,816 options available
for grant under the 1996 Plan.
On March 4, 1996, the Company issued options to the
underwriter of its initial public offering to purchase 107,000
units (consisting of one share of common stock and one warrant
to purchase one share of common stock at an exercise price of
$14.85). The options have an exercise price per unit of
$12.375 and expire March 4, 2001. The fair value of the
options was not significant when issued due to stated exercise
prices which greatly exceeded the market value of the common
stock at the grant date. As of June 30, 2000, all 107,000
units are outstanding and exercisable.
The Company also issues options to members of the Board of
Directors as compensation for board representation and
attendance. Options are issued at the fair market value at the
date of grant and vest at the conclusion of each fiscal year.
As of June 30, 2000, 8,000 of these options were outstanding
of which 8,000 were exercisable.
F-24
<PAGE> 56
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
On August 10, 1998, the Board of Directors approved a
reissuance of employee options whereby all optionholders under
the 1992 and 1996 Plans could forfeit their outstanding
options and receive instead new options at an exercise price
of $0.75, the fair market value of the Company's stock on the
approval date. The reissued options vest quarterly over three
years, but none can be exercised prior to February 10, 1999.
Options for 305,894 shares were cancelled and reissued under
the terms of this arrangement.
The per share weighted-average fair value of all stock options
granted during the years ended June 30, 2000, 1999 and 1998
was $3.25, $0.33 and $2.48, respectively, on the date of grant
using the Black Scholes option-pricing model with the
following weighted-average assumptions: 2000 -- expected
dividend yield 0%, expected volatility 100%, risk-free
interest rate of 5.38%, and an expected life of five years;
1999 -- expected dividend yield 0%, expected volatility 50%,
risk-free interest rate of 5.8%, and an expected life of five
years; 1998 -- expected dividend yield 0%, expected volatility
50%, risk-free interest rate of 5.8%, and an expected life of
four years.
The Company applies APB Opinion No. 25 in accounting for its
stock option plans and, accordingly, no compensation cost has
been recognized in the consolidated financial statements for
stock options issued with exercise prices at the grant date.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No.
123, the Company's net loss would have been adjusted to the
pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C> <C>
Net loss attributable to
common shareholders As reported $ (3,856) (424) (8,380)
Pro forma (5,338) (602) (8,850)
Net loss per share As reported $ (0.68) (0.10) (2.01)
Pro forma (0.94) (0.14) (2.13)
</TABLE>
Pro forma net loss reflects only options granted during the
years ended June 30, 1996 through 2000. Therefore, the full
impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma loss
amounts presented above because compensation cost is reflected
over the options' vesting periods ranging from one to five
years, and compensation cost for options granted prior to July
1, 1995 is not considered.
F-25
<PAGE> 57
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
The following summarizes stock option activity, excluding
underwriter options, for the years ended June 30, 2000, 1999
and 1998:
<TABLE>
<CAPTION>
EXERCISE PRICE PER SHARE
-----------------------------------------
NUMBER OF WEIGHTED
SHARES RANGE AVERAGE
----------- ----------------------- ---------
<S> <C> <C> <C>
Outstanding at June 30, 1997 722,221 $ .0085 - 12.8750
=======================
Granted 288,722 4.25 - 10.50
Exercised (70,317) .067 - 4.73
Canceled or expired (242,511) .067 - 12.25
-------- -----------------------
Outstanding at June 30, 1998 698,115 .0085 - 11.490
-------- =======================
Granted 708,085 .375 - .75 .5750
Exercised (59,149) .0085 - .213 .0305
Canceled or expired (650,155) .067 - 12.875 4.72
-------- ----------------------- -----
Outstanding at June 30, 1999 696,896 .375 - 4.73 0.585
-------- ======================= =====
Granted 90,098 3.03 - 5.56 3.97
Exercised (390,507) .47 - .75 .68
Canceled or expired (66,972) .375 - .75 .61
-------- ----------------------- -----
Outstanding at June 30, 2000 329,515 $ .47 - 5.56 1.12
======== ======================= =====
</TABLE>
The following table summarizes information about stock options
outstanding and exercisable as of June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- -------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE JUNE 30, CONTRACTUAL EXERCISE JUNE 30, EXERCISE
PRICES 2000 LIFE PRICE 2000 PRICE
---------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.47-0.75 239,417 8.60 0.68 180,367 0.71
3.03-5.56 90,098 9.95 3.97 10,296 3.42
---------- ------- ---- ---- ------- ----
$0.47-5.56 329,515 8.97 1.12 190,663 0.85
========== ======= ==== ==== ======= ====
</TABLE>
F-26
<PAGE> 58
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
At June 30, 2000, the weighted-average remaining contractual
life of outstanding options, excluding underwriter options,
was 8.97 years. At June 30, 2000, 1999 and 1998, the number of
options exercisable was 190,663, 310,565 and 281,267,
respectively, and the weighted-average exercise price of those
options was $.85, $.71 and $3.16, respectively.
During fiscal year 1998, the Company lowered the exercise
price of 272,015 options to $4.15, from exercise prices
previously ranging from $4.25 to $12.875. These revised
exercise prices were used to calculate the weighted-average
exercise price of outstanding options at June 30, 1998.
(E) NOTES RECEIVABLE FROM STOCK SALES
Notes receivable from stock sales resulted from the exercise
of stock options for full recourse promissory notes during the
year ended June 30, 1998.
(F) STOCK COMPENSATION EXPENSE
Unearned compensation expense of $269,000 was recorded as a
reduction of shareholders' equity for the fiscal year ended
June 30, 1996 for 62,089 options issued at an exercise price
less than fair market value. Compensation expense of
approximately $56,000, and $68,000 was recorded in the
consolidated statements of operations during the years ended
June 30, 1999 and 1998, respectively, for the options that
vested during these years.
(G) STOCK OPTION MODIFICATION
In June 2000, the Company modified the terms of the
outstanding stock options held by the Company's former
president in connection with a severance agreement. These
modifications included an acceleration of vesting of all
unvested options that would have vested through June 30, 2001.
Additionally, the Company remitted $110,999 to the former
President to be used to exercise all vested options. As a
result, the Company has reflected $835,000 in compensation
expense in the accompanying 2000 consolidated statement of
operations to reflect the fair value of the shares issued
under this arrangement.
(11) MAJOR CUSTOMERS, SUPPLIERS, AND INTERNATIONAL SALES
Sales to customers who individually accounted for more than 10% of the
Company's sales during the years ended June 30, 2000, 1999 and 1998,
were as follows (in thousands, except percentages):
<TABLE>
<CAPTION>
SALES, YEARS ENDED JUNE 30, ACCOUNTS RECEIVABLE AS OF
CUSTOMER 2000 1999 1998 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
-------- ---- ---- ---- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
A 31.9% 30.3% 37.0% $1,545 $449 $449
B 21.1% 29.6% 1.0% 782 667 --
C --% 3.1% 11.0% 32 67 660
</TABLE>
Purchases from any individual supplier or sales to international
customers did not exceed 10% during any of the years included in the
accompanying consolidated financial statements.
F-27
<PAGE> 59
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(12) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases office and warehouse facilities from an
irrevocable trust for the benefit of the children of the
former Telcor shareholders. The lease is for a five-year
period with a monthly rental of $76,000. Rental expense paid
to the trust for the year ended June 30, 2000 was
approximately $229,000.
The Company also leases a building, and certain other
furniture and equipment under noncancelable operating lease
agreements.
Rental expense under all lease agreements for the years ended
June 30, 2000, 1999, and 1998 was approximately $694,000,
$356,000, and $406,000.
The Company has also entered into capital lease arrangements
for equipment.
Future minimum lease payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one
year) and future minimum lease payments under capital lease
arrangements as of June 30, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING
YEAR ENDING JUNE 30, LEASES
-------------------- -------------- --------
<S> <C> <C>
2001 $ 40 1,414
2002 27 1,091
2003 17 927
2004 4 153
2005 1 --
-------- ------
Total future minimum lease payments 89 $3,586
======
Less amount representing interest (at rates of
15.7% through 26.6%) (12)
--------
Present value of future minimum
capital lease payments 77
Less current maturities of obligations under capital
leases (33)
--------
Obligations under capital leases,
excluding current maturities $ 44
========
</TABLE>
At June 30, 2000, the gross amount of property and equipment
under capital leases and related accumulated amortization was
$137,000 and $5,330, respectively.
F-28
<PAGE> 60
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(B) 401(K) PLAN
The Company sponsors both a Telcor Communications 401(k) Plan
("Telcor Plan") and a Digital Transmission Systems 401(k)
Savings Plan ("DTS Plan") for the benefit of eligible
employees and their beneficiaries. Under the Telcor Plan,
which covers all employees who meet certain age and length of
service requirements, the Company matches one half of
employees' elective contributions up to 4% of annual
compensation. The Company's expense relating to the Telcor
Plan for the three-months ended June 30, 2000, was
approximately $20,000.
Under the DTS Plan, employees may elect to contribute from 1%
to 20% of their gross compensation to the plan. The DTS Plan
was amended during the year ended June 30, 1997 to provide for
a Company match of 25% of employee contributions up to 6% of
their eligible compensation. The Company can also make an
additional annual discretionary contribution that is allocated
to employees based upon relative levels of compensation. The
Company recorded expense of approximately $52,000, $27,000 and
$32,000 for contributions to the DTS Plan for the years ended
June 30, 2000, 1999 and 1998, respectively. The Company did
not make any discretionary contributions to the DTS Plan
during the years ended June 30, 2000, 1999 and 1998.
(C) LEGAL MATTERS
The Company is also involved in various claims and legal
actions arising in the ordinary course of business. In the
opinion of management based in part upon the advice of
counsel, the ultimate disposition of these matters, will not
have a material adverse effect on the Company's financial
position, results of operations, or liquidity.
(D) INVENTORY PURCHASE COMMITMENT
During 1999, Telcor made a $2,050,000 deposit under an
inventory purchase commitment to acquire $6,000,000 of
inventory from a company in Hong Kong. This deposit is
included in other assets on the accompanying 2000 consolidated
balance sheet. Under terms of the contract, as amended, the
Company is required to pay the remaining $4,000,000 commitment
prior to receiving the inventory by December 2000.
(E) RESTRICTED NET ASSETS
Dividend payments by Telcor to Digital Transmission Systems,
Inc. are restricted under the terms of the Telcor credit
facility. As a result of this limitation, approximately $5
million of the consolidated net assets of Digital Transmission
Systems, Inc. is restricted from transfer by Telcor.
F-29
<PAGE> 61
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(13) BUSINESS SEGMENT INFORMATION
The Company's operations are classified into two reportable business
segments for the year ended June 30, 2000: Telcor Communications, Inc.
and DTS. Prior to the acquisition of Telcor on March 31, 2000, the
Company operated in one reportable segment: developer of proprietary
equipment for telecommunication companies. The Company's two reportable
segments are currently managed separately; however, the Company is in
the process of integrating these separate operations.
A reconciliation of the Company's segment information for fiscal year
2000 to the respective information in the consolidated statements is as
follows:
<TABLE>
<CAPTION>
DTS TELCOR TOTAL
-------- ------ ------
<S> <C> <C> <C>
Sales $ 9,935 9,043 18,978
Operating loss (1,660) (1,211) (2,871)
Net loss (2,234) (1,581) (3,815)
Total assets 22,402 29,875 52,277
Depreciation and amortization 1,299 182 1,481
Capital expenditures 87 326 413
</TABLE>
(14) CREATION AND SALE OF SOUTHTECH, INC.
At its April 1998 meeting the DTS Board of Directors approved the
creation of a wholly owned subsidiary - SouthTech, Inc. ("SouthTech")
whose business purpose is the administration and growth of the
Company's international business. The subsidiary was legally created as
a Georgia corporation in July 1998. The SKYPLEX and DIV product lines
and associated intellectual property together with the payables and
receivables pertaining to the sales realized from those product lines
form the assets and liabilities transferred. Since its creation,
investment capital had been sought for the subsidiary in order to fund
its operating losses which have been substantial in the past. Cash
resources of the Company had been used for the purposes of developing
the SKYPLEX product line, a set of microwave radio products utilizing
spread spectrum technology, and developing sales distribution channels
in Latin America, Asia Pacific and the Mid-East global sectors.
The Company entertained an offer from a private group of investors to
buy SouthTech, Inc. in the latter part of 1998, but the offer was later
withdrawn on November 10, 1998. In late November 1998, Chapala
Communications, Inc. ("Chapala"), a Georgia based company, offered to
purchase the stock of SouthTech. The sale involved the transfer of
certain assets and liabilities of SouthTech, Inc. to Chapala. The
transaction resulted in approximately $981,000 of assets and $2,442,000
of liabilities being transferred to Chapala which resulted in a net
gain of $1,461,000 which has been recorded in the accompanying fiscal
1999 financial statements. In accordance with SFAS 125 - Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - the Company derecognized the liabilities that were
transferred to SouthTech upon obtaining formal, legally binding
releases of such liabilities from the respective creditors.
As additional consideration for the sale, the Company received 19.5% of
Chapala voting stock ownership in the form of 1,000,000 shares of
$0.001 par value Series A voting Preferred Stock. Each share of Series
A Preferred Stock shall be convertible into the number of fully paid
and nonassessable shares of Common Stock obtained by dividing (a) the
aggregate Series A Preferred Stock Liquidation Preference of the shares
to be converted , by (b) the conversion price. The initial conversion
price is $0.484 per share subject to adjustment, as defined. Any
conversion of Preferred Stock into Common Stock in accordance with the
above conversion formula is limited with respect to total ownership
after conversion. Such a limitation is 19.5% of outstanding common
stock after conversion. Conversion of the Series A Preferred Stock to
common stock is at the option of the holder and is not redeemable by
Chapala.
F-30
<PAGE> 62
DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
SouthTech was later merged into Chapala and the resulting entity was
named LinkaNet Labs, Inc. ("LinkaNet"). The Company has valued its
investment in Chapala using the equity method. The Company has assigned
zero value to its interest in LinkaNet within the accompanying
financial statements and has no obligations to fund LinkaNet's future
operations or present liabilities. Since inception, LinkaNet has
incurred significant losses from operations. In the event that the
operations of LinkaNet ultimately attain profitability, the Company
will appropriately adjust its interest in LinkaNet. It is not
anticipated that such an adjustment will have a material impact on the
Company's results of operations in future periods.
In connection with the sale of SouthTech, the Company received a note
from SouthTech, Inc. in the amount of $127,000 at June 30, 1999. The
note represents a portion of the vendor liability that was not assumed
by Chapala. The Company has also deferred $127,000 of the gain
associated with the sale as of June 30, 1999. As a result of additional
negotiations with Chapala during fiscal 2000, the Company deemed the
remaining $127,000 note receivable from Chapala as uncollectible and
appropriately reversed the note balance against the remaining deferred
revenue balance. Accordingly, as of June 30, 2000, there are no amounts
outstanding with respect to the sale of the international subsidiary.
The SouthTech purchase and sale transaction was closed on February 5,
1999.
(15) SUBSEQUENT EVENT
At the Company's shareholder meeting held on October 5, 2000, the
shareholders approved amendments to the Company's articles of
incorporation to increase the number of authorized shares of common
stock from 15 million to 50 million and to increase the number of
authorized shares of preferred stock from 3 million to 10 million. In
addition, the number of shares available for issuance under the
Company's 1996 option plan was increased from 840,000 shares to
2,000,000 shares. These changes have been retroactively reflected in
the accompanying consolidated financial statements.
F-31
