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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
---- ----
----------------
Commission File Number 1-14198
DIGITAL TRANSMISSION SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 58-2037949
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3000 NORTHWOODS PARKWAY, BUILDING 330, NORCROSS, GA 30071
(Address of principal executive office) (Zip Code)
(770) 798-1300
(Issuer's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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]
The number of shares outstanding of the registrant's common stock as of
September 30, 2000 was 10,240,070.
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DIGITAL TRANSMISSION SYSTEMS INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2000
and June 30, 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Items 1 & 2. Not applicable 15
Item 3. Qualitative and Quantitative Disclosures About
Market Risk 15
Items 4 & 5. Not applicable 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 11.0 Earnings Per Share 17
Exhibit 27.0 Financial Data Schedule (SEC use only) 18
</TABLE>
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DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 JUNE 30, 2000
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,033 1,646
Trade accounts receivable, net of allowances for
returns and doubtful accounts of $1,424 and $2,313
at September 30, 2000 and June 30, 2000, respectively 11,102 10,885
Accounts receivable from related parties 113 161
Inventories 13,652 13,117
Prepaid expenses and other current assets 293 507
Deferred income tax assets 2,225 2,225
-------- --------
Total current assets 28,418 28,541
Property and equipment, net of accumulated depreciation
and amortization 5,018 4,898
Intangible assets, net 14,630 15,717
Other assets 3,164 3,121
-------- --------
Total assets $ 51,230 52,277
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 10,665 7,684
Accounts payable and accrued liabilities 11,846 13,952
Acquisition payable 7,655 7,655
Accrued payroll and benefits 291 241
Notes payable to related parties 3,068 3,000
Current maturities of long term debt 78 146
Current maturities of obligations under capital leases 42 33
Warranty accrual 424 1,112
-------- --------
Total current liabilities 34,069 33,823
-------- --------
Long-term liabilities:
Long term debt, excluding current maturities -- 4
Notes payable to related party 721 721
Obligations under capital leases, excluding current maturities 48 44
Deferred income tax liability 2,225 2,225
-------- --------
Total long-term liabilities 37,063 36,817
-------- --------
Shareholders' equity:
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 3,000
Common stock, $0.01 par value, 50,000,000 shares authorized;
10,240,070 shares issued and outstanding at September 30, 2000
and June 30, 2000 102 102
Common stock subscribed 41 41
Additional paid-in capital 29,991 30,299
Notes receivable from stock sales -- (63)
Accumulated deficit (20,281) (19,233)
-------- --------
Total shareholders' equity 14,167 15,460
-------- --------
Total liabilities and shareholders' equity $ 51,230 52,277
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 12,948 $ 2,619
Cost of sales 8,459 1,704
-------- -------
Gross profit 4,489 915
-------- -------
Selling, general and administrative 3,839 382
Product development 201 236
Depreciation and amortization 1,068 162
-------- -------
Total operating expenses 5,108 780
-------- -------
Operating income (loss) (619) 135
Other expense (70) --
Interest expense, net (523) (118)
-------- -------
Income (loss) before income tax expense (1,212) 17
Income taxes -- --
-------- -------
Net income (loss) $ (1,212) $ 17
======== =======
Net income (loss) per share - basic and diluted:
Net income (loss) per share - basic $ (0.12) $ 0.004
======== =======
Net income (loss) per share - diluted $ (0.12) $ 0.004
======== =======
Weighted average common shares outstanding:
Basic 10,240 4,646
-------- -------
Diluted(1) 10,240 4,646
-------- -------
</TABLE>
(1) Potentially dilutive securities not included as their effect would be
anti-dilutive
See accompanying notes to condensed consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,212) $ 17
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,068 102
Amortization of software development costs 62 60
Changes in assets and liabilities:
Trade accounts receivable (157) 595
Inventories (535) (89)
Prepaid expenses and other current assets 413 46
Accounts payable and accrued liabilities (2,115) (123)
Warranty accrual (688) --
-------- --------
Net cash provided by (used in) operating activities (3,164) 608
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (425) (10)
Additions to capitalized software development costs (72) (5)
-------- --------
Net cash used in investing activities (497) (15)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long term debt 67 --
Net borrowings (payments) under notes payable to banks 2,981 (764)
-------- --------
Net cash provided by (used in) financing activities 3,048 (764)
-------- --------
Net decrease in cash and cash equivalents (613) (171)
Cash and cash equivalents at beginning of period 1,646 217
-------- --------
Cash and cash equivalents at end of period $ 1,033 $ 46
======== ========
Supplemental disclosure of cash paid for:
Interest $ 472 $ 42
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
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.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreements, and to obtain additional
financing or refinancing as may be required. The Company is actively pursuing
additional equity financing through discussions with potential investors.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
information included herein is unaudited; however, the information reflects all
adjustments (consisting solely of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the three months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2001. For further information, refer to the financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended June
30, 2000.
There have been no changes to the accounting policies of the Company during the
periods presented. For a description of these policies, see Note 1 of the Notes
to Financial Statements in the Company's Annual Report on Form 10-K.
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2. INCOME (LOSS) PER COMMON 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 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 1,735,000 of additional common shares related to the potential
conversion of warrants and shares attributable to convertible Series B preferred
stock were excluded from the computation of diluted net loss per share in the
quarter ended September 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 3,377,000 and 6,115,000 for the three
month periods ended September 30, 2000 and 1999, respectively.
3. LEGAL MATTERS
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.
4. INVENTORIES
The Company's products, consisting of proprietary software and hardware modules,
facilitate the control, monitoring, and efficient transmission of high-speed
digital information through public or private telecommunications networks. The
Company purchases both new and used hardware for applications in
telecommunications and computer networking. Used hardware is refurbished and
tested prior to shipment. 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.
5. 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.
6. SEGMENT REPORTING
The Company's operations are classified into two reportable business segments
for the three months ended September 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 the three months
ended September 30, 2000 to the respective information in the consolidated
statements is as follows:
<TABLE>
<CAPTION>
DTS TELCOR TOTAL
--- ------ -----
<S> <C> <C> <C>
Sales $ 2,419 10,529 12,948
Operating income (loss) (746) 127 (619)
Net loss (935) (277) (1,212)
Total assets 30,703 20,527 51,230
Depreciation and amortization 764 304 1,068
Capital expenditures 49 376 425
</TABLE>
7. 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 the three months
ended September 30, 2000 and 1999 with the consolidated financial information
of Telcor for the three months ended September 30, 2000 and 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 -- THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (000'S OMITTED)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Revenues $12,948 $17,655
Income loss before extraordinary items (1,212) (94)
Net loss (1,212) (94)
Net loss per share:
Basic (.12) (.02)
Diluted (.12) (.02)
</TABLE>
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
The following table sets forth certain financial data derived from the Company's
condensed consolidated statement of operations for the three months ended
September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------ -----------------------
$ % OF SALES $ % OF SALES
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 12,948 100 2,619 100
Gross profit 4,489 35 915 35
Selling, general and administrative 3,839 30 382 15
Depreciation and amortization 1,068 8 162 6
Product development 201 2 236 9
Net income (loss) (1,212) 10 17 1
</TABLE>
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NET SALES. Net sales increased 394% to $12,948,000 for the three months ended
September 30, 2000 from $2,619,000 for the three months ended September 30,
1999. The sales mix, and the corresponding percentage of total sales of the
Company's products, is set forth in the chart below:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------
2000 1999 2000 1999
--------------------------------------------------
<S> <C> <C> <C> <C>
Flex T1/E1 and MicroFlex $ 2,419 $2,619 18 99
Equipment sales 10,492 -- 81 --
Other products 37 -- 1 1
--------------------------------------------------
Totals $ 12,948 $2,619 100 100
==================================================
</TABLE>
For the three months ended September 30, 2000, revenues from the Company's
FlexT1/E1 and microFlex product line decreased 8% from $2,619,000 for the three
months ended September 30, 1999 to $2,419,000 for the three months ended
September 30, 2000. The decrease is primarily due to the fact that, at a
customer's request, the Company chose to accelerate certain product deliveries
during the quarter ended September 30, 1999. In the three month period ended
September 30, 2000, the Company was not requested to accelerate any product
deliveries and is adhering to scheduled delivery dates. Revenues from the
FlexT1/E1 and microFlex product line represented approximately 18% and 99% of
the Company's consolidated revenues for the three months ended September 30,
2000 and 1999, respectively. Revenues from the Company's sale of new, used and
re-furbished telecommunications equipment were $10,492,000 for the three month
period ended September 30, 2000 as compared to $0 for the same period in the
prior year. The increase is attributable to the Company's acquisition of Telcor
Communications, Inc. ("Telcor") on March 31, 2000. The Company began
consolidating the results of operations of Telcor on April 1, 2000 and, as such,
no comparable revenue was recorded during the three month period ended September
30, 1999.
GROSS PROFIT. Cost of sales consists of component costs, compensation costs and
the overhead costs related to the production and shipping of the Company's
products, along with the support and warranty expense associated with such
products. Gross profit increased 391% from $915,000 for the three month period
ended September 30, 1999 to $4,489,000 for the three month period ended
September 30, 2000 due to the accompanying significant increase in sales noted
for the same period. As a percentage of sales, gross profit remained consistent
at 35% of sales for the three month period ended September 30, 2000 as compared
to the same period ended September 30, 1999.
PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 15%, to $201,000 for the three months ended September 30, 2000 from
$236,000 for the three months ended September 30, 1999. The decrease in product
development expense for the three month period ended September 30, 2000 is
primarily due to reduced spending on new development projects and reduction in
overall research and development charges. The Company anticipates an increase in
research and development charges in future periods as new development projects
are commenced. Approximately $72,000 of development costs related to new
projects were capitalized for the three month period ended September 30, 2000 as
compared to $5,000 for the three month period ended September 30, 1999. As a
percentage of sales, product development costs were 2% for the three months
ended September 30, 2000 and 9% for the three months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling expense consists primarily of
compensation costs for sales and marketing personnel, travel, consulting, trade
show and advertising expenses. General and administrative expense consists
primarily of occupancy costs and compensation expenses for administrative and
finance personnel, as well as accounting, legal and consulting fees. Selling,
general and administrative expense increased by 905%, to $3,839,000 for the
three months ended September 30, 2000 from $382,000 for the three months ended
September 30, 1999. The increase is attributable to the Company's acquisition of
Telcor Communications, Inc. ("Telcor") on March 31, 2000. The Company began
consolidating the results of operations of Telcor on April 1, 2000 and, as such,
no comparable selling, general and administrative expense was recorded during
the three month period ended
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September 30, 1999. For the three month period ended September 30, 2000, Telcor
contributed $3,222,000 to total selling, general and administrative expenses.
Excluding the Telcor contribution, selling, general and administrative expenses
increased by $235,000 for the three month period ended September 30, 2000 as
compared to the same period ended September 30, 1999. The increase is
attributable to additional personnel compensation costs as a result of an
increase in headcount and an increase in professional and legal fees as compared
to the same period in the prior year. As of September 30, 2000 the Company had
approximately 129 full-time employees reflecting an increase in overall
headcount of 100, from 29 full-time employees as of September 30, 1999. Total
selling, general and administrative costs were 30% of total sales for the three
months ended September 30, 2000 as compared to 15% of sales for the three months
ended September 30, 1999.
NET INCOME/LOSS. For the three month period ended September 30, 2000 the Company
recorded a net loss of $1,212,000 as compared to net income of $17,000 reported
for the three month period ended September 30, 1999. The increase in the net
loss is primarily a result of amortization of intangible assets recorded as a
result of the Telcor acquisition on March 31, 2000, additional selling general
and administrative expenses, and increased interest costs. The Telcor and DTS
contributions to interest expense for the three months ended September 30, 2000
were $404,000 and $119,000, respectively. Excluding depreciation and
amortization charges, the Company realized an operating profit of $449,000 for
the three month period ended September 30, 2000.
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 accompanying
financial statements during the quarter ended September 30, 2000, the Company
incurred a net loss of $1,212,000. Although the Company has an accumulated gross
deficit of $17,571,000 as of September 30, 2000, the Company has made
substantial progress over the past several quarters with respect to its overall
financial position. As of September 30, 2000 total net equity of the Company
increased to $14,167,000 as compared to a net deficit of ($2,411,000) as of the
quarter ended September 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 the upcoming quarters in
fiscal 2001 and the Company is actively pursuing various financing alternatives.
As of September 30, 2000 the Company's cash position is $1,033,000.
Additionally, available borrowings under the Company's notes payable to banks at
September 30, 2000 is $852,000. 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
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<PAGE> 11
tradable.
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 September 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 September 30, 2000.
Additionally, Wi-LAN converted another $190,000 of the 1997 debentures into
190,000 shares of the Company's common stock through September 30, 2000. The
outstanding amount of the 1997 debentures as of September 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 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
recorded $143,000 in compensation expense to reflect the satisfaction of these
obligations which represented the fair market value of the shares issued.
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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 September 30,
2000). Covenants under the agreement were further revised to require certain
minimum quarterly revenue and monthly income requirements. DTS was in compliance
with all covenants imposed by the agreement as of September 30, 2000. Amounts
outstanding under the DTS line of credit facility were $1,085,000 and $602,000
at September 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 September 30, 2000. At September 30, 2000, amounts outstanding
under the Telcor line of credit facility are $8,319,000, 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 September 30, 2000,
Telcor was in compliance with all covenants imposed by the line of credit
agreement.
CASH. As of September 30, 2000, the Company had approximately $1,033,000 in cash
and cash equivalents. For the three months ended September 30, 2000, $3,164,000
was used in operating activities as compared to cash provided by operations of
$608,000 for the three months ended September 30, 1999. The net loss for the
three months ended September 30, 2000 of $1,212,000 includes non-cash charges
relating to depreciation and amortization $1,130,000. Exclusive of non-cash
charges, cash was used in operations primarily through an increase in accounts
receivable of $157,000, an increase in inventories of $535,000 and a decrease in
accounts payable of $2,115,000.
As of September 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 November 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
November 30, 2000.
The Company purchased $425,000 and $10,000 of property and equipment during
the three months ended September 30, 2000 and 1999, respectively. In addition,
the Company capitalized certain software development costs paid to outside
contractors. During the three months ended September 30, 2000, the Company
capitalized $72,000 of such costs as compared to capitalized costs of $5,000
for the three months ended September 30, 1999.
SEASONALITY
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The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's major customers. Other fluctuations occur
due to increased buildout of the telecommunications infrastructure during the
summer months. The Company's business plan is to continue the diversification of
its product offerings, further develop its distribution channels and further
expand its customer base. The Company believes that the implementation of this
plan will decrease the seasonality of its sales. The Company operates with a
moderate level of backlog for each product line due to advance purchase
commitments and production lead times. The Company's backlog at September 30,
2000 is $2,598,000.
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 associated with Y2K compliance
issues.
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 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 believes 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
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenue, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of the company's management or Board of Directors,
including those relating to products or services; (iii) statements of future
economic performance; and (iv) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
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Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (I) the strength of the U.S. economy
in general and relevant foreign economies; (ii) the Company's performance under
current and future contracts; (iii) inflation and interest rate fluctuations;
(iv) timely and successful implementation of processing systems to provide new
products, improved functionality and increased efficiencies; (v) technological
changes; (vi) acquisitions; (vii) the ability to increase market share and
control expenses; (viii) changes in laws or regulations or other industry
standards affecting the Company's business which require significant product
redevelopment efforts; (ix) the effect of changes in accounting policies and
practices as may be adopted by the Financial Accounting Standards Board; (x)
changes in the Company's organization, compensation and benefit plans; (xi) the
costs and effects of litigation and of unexpected or adverse outcomes in such
litigation; (xii) failure to successfully implement the Company's Year 2000
modification plans substantially as scheduled and budgeted; and (xiii) the
success of the Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made to reflect the occurrence of unanticipated events.
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PART II. OTHER INFORMATION
ITEMS 1 - 2 ARE NOT APPLICABLE.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
on variable rate indebtedness. The Company's primary interest rate risk relates
to its variable rate bank credit facilities. At September 30, 2000, the
Company's total variable rate debt obligations was $10,665,000. A hypothetical
1% increase in the Company's variable interest rate for a duration of one year
would result in additional interest expense of approximately $107,000.
ITEMS 4 - 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<S> <C>
11.0 Earnings per share
27.0 Financial Data Schedule (for SEC use only)
</TABLE>
(B) REPORTS ON FORM 8-K
The registrant did not file any reports on Form 8-K during the three
months ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Digital Transmission
Systems, Inc.
Date: November 20, 2000 By: /s/ Andres C. Salazar
---------------------------------
Andres C. Salazar,
Chief Executive Officer
Date: November 20, 2000 By: /s/ Clive N. W. Marsh
---------------------------------
Clive N. W. Marsh, Controller
(Principal Accounting Officer)
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