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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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
proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of May 8,
2000 was 7,206,128.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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DIGITAL TRANSMISSION SYSTEMS INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 2000
and June 30, 1999 (Unaudited) 3
Consolidated Statements of Operations for the Three
Months ended March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Operations for the Nine
Months ended March 31, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2000 and 1999 (Unaudited) 6
Notes to Interim Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Items 1 - 5 Not applicable 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit 11.0 Earnings per share 20
Exhibit 27.0 Financial Data Schedule (SEC use only) 21
</TABLE>
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DIGITAL TRANSMISSION SYSTEMS, INC.
Balance Sheets
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31, JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,564 217
Trade accounts receivable, net of allowances for
returns and doubtful accounts of $1,967 and
$1,238 at March 31, 2000 and June 30, 1999, respectively 8,883 1,133
Accounts receivable from related parties -- 43
Inventories 12,332 903
Prepaid expenses and other current assets -- 25
---------- ----------
Total current assets 24,779 2,321
Property and equipment, net of accumulated depreciation
and amortization 4,754 410
Note receivable from a related party 127 127
Intangible assets 19,268 423
Other assets 3,378 526
---------- ----------
Total assets $ 52,306 3,807
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit $ 9,223 1,365
Accounts payable and accrued liabilities 14,965 1,749
Accounts payable to related parties -- 69
Accrued payroll and benefits 185 167
Notes payable 386 561
Acquisition payable 20,560 --
Warranty accrual 201 197
---------- ----------
Total current liabilities 45,520 4,108
---------- ----------
Long-term liabilities:
Convertible debentures 1,790 2,000
Other liabilities 58 --
Deferred gain on sale of subsidiary 127 127
---------- ----------
Total long-term liabilities 1,975 2,127
---------- ----------
Shareholders' equity (deficit):
Preferred stock - 3,000,000 shares authorized, $.01 par value
Series A - 1,314,333 shares issued and outstanding 1,314 1,314
Series B - 454,737 shares issued and outstanding 3,000 --
Common stock - $.01 par value; 15,000,000 shares
authorized; 6,903,500 and 4,646,221 shares issued and outstanding
at March 31, 2000 and June 30, 1999, respectively 69 47
Additional paid-in capital 15,972 11,651
Notes receivable from stock sales (63) (63)
Accumulated deficit (15,481) (15,377)
---------- ----------
Total shareholders' equity (deficit) 4,811 (2,428)
Commitments and contingencies
---------- ----------
Total liabilities and shareholders' equity (deficit) $ 52,306 3,807
========== ==========
</TABLE>
See accompanying notes to financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
2000 1999
Unaudited Unaudited
---------- ----------
<S> <C> <C>
Net sales $ 3,145 $ 1,922
Cost of sales 1,957 972
---------- ----------
Gross profit 1,188 950
---------- ----------
Selling, general and administrative 842 658
Product development 112 281
---------- ----------
Total operating expenses 954 939
---------- ----------
Operating income 234 11
Interest expense, net (81) (164)
Gain on sale of subsidiary -- 1,100
---------- ----------
Income before income tax expense 153 947
Income tax benefit (expense) -- --
---------- ----------
Income before extraordinary items 153 947
Extraordinary gain on settlement of trade -- 165
payables
---------- ----------
Net income $ 153 $ 1,112
========== ==========
Net income per share before extraordinary items - basic $ 0.03 $ 0.22
Extraordinary gain on settlement of trade payables
-- 0.04
---------- ----------
Net income per share - basic $ 0.03 $ 0.26
========== ==========
Net income per share before extraordinary items - diluted $ 0.01 $ 0.09
Extraordinary gain on settlement of trade payables
-- 0.02
---------- ----------
Net income per share - diluted $ 0.01 $ 0.11
========== ==========
Weighted average common shares outstanding:
Basic 5,187 4,250
---------- ----------
Diluted 11,800 10,597
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31
--------------------------
2000 1999
Unaudited Unaudited
---------- ----------
<S> <C> <C>
Net sales $ 6,887 $ 4,846
Cost of sales 4,289 3,045
---------- ----------
Gross profit 2,598 1,801
---------- ----------
Selling, general and administrative 1,892 2,241
Product development 519 1,203
---------- ----------
Total operating expenses 2,411 3,444
---------- ----------
Operating income (loss) 187 (1,643)
Interest expense, net (291) (498)
Gain on sale of subsidiary -- 1,100
---------- ----------
Loss before income tax expense (104) (1,041)
Income tax benefit (expense) -- --
---------- ----------
Loss before extraordinary items (104) (1,041)
Extraordinary gain on settlement of trade payables -- 165
---------- ----------
Net loss $ (104) $ (876)
========== ==========
Net loss per share before extraordinary items - basic and diluted $ (0.02) $ (0.25)
Extraordinary gain on settlement of trade payables -- 0.04
---------- ----------
Net loss per share - basic and diluted $ (0.02) $ (0.21)
========== ==========
Weighted average common shares outstanding:
Basic 5,187 4,250
---------- ----------
Diluted (1) 5,187 4,250
---------- ----------
</TABLE>
(1) Potentially dilutive securities not included as their effect would be
anti-dilutive
See accompanying notes to consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31
--------------------------
2000 1999
Unaudited Unaudited
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (104) $ (876)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 357 703
Extraordinary gain on settlement of trade payables -- (165)
Gain on sale of subsidiary -- (1,100)
Amortization of deferred compensation expense -- 48
Changes in assets and liabilities:
Trade and other accounts receivable (1,096) 740
Inventories 81 846
Prepaid expenses and other assets (96) (103)
Accounts payable and other accrued expenses 1,491 (5)
Warranty accrual 4 (13)
---------- ----------
Net cash provided by operating activities 637 75
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (26) (62)
Additions to capitalized product development costs (175) (98)
Acquisition of business, net of cash acquired (2,426) --
Decrease (increase) in other non-current assets and liabilities -- 94
---------- ----------
Net cash used in investing activities (2,627) (66)
---------- ----------
Cash flows from financing activities:
Net borrowings under line of credit agreement 703 50
Proceeds from issuance of Preferred Stock - Series B 3,000 --
Proceeds from issuance of convertible debentures 1,500 --
Proceeds from exercise of stock options 134 --
---------- ----------
Net cash provided by financing activities 5,337 50
---------- ----------
Net increase in cash and cash equivalents 3,347 59
Cash and cash equivalents at beginning of period 217 91
---------- ----------
Cash and cash equivalents at end of period $ 3,564 $ 150
========== ==========
Supplemental disclosure of cash paid for interest
Cash paid for interest $ 98 $ 119
---------- ----------
</TABLE>
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<TABLE>
<S> <C> <C>
Supplemental disclosure of non-cash operating and financing activities:
Issuance of note receivable in conjunction with a subsidiary liability -- $ 900
========== ==========
Conversion of $1,000 of convertible debentures plus accrued interest to Series
A convertible Preferred Stock -- $ 1,314
========== ==========
Conversion of $1,710 of convertible debentures to common stock $ 1,710 --
========== ==========
Issuance of warrants relating to conversion of debentures -- $ 182
========== ==========
Sale of subsidiary:
Assets disposed of: -- $ 981
Liabilities disposed of: -- $ (2,081)
---------- ----------
Gain on sale of subsidiary -- $ 1,100
========== ==========
Detail of acquisition:
Fair value of net assets acquired at March 31, 2000 6,693 --
Excess of consideration over fair value of net assets at March 31, 2000 18,867 --
Acquisition payable recorded (20,560) --
Common stock issued (2,500) --
---------- ----------
Cash paid for acquisition 2,500 --
Cash acquired in acquisition (74) --
---------- ----------
Net cash paid for acquisition $ 2,426 --
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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DIGITAL TRANSMISSION SYSTEMS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Digital Transmission Systems, Inc., a Delaware corporation ("DTS" or the
"Company"), designs, manufactures, and markets a broad range of products for
the telecommunications industry. The Company's primary customers are domestic
wireless service providers, including those offering cellular telephone
services and Personal Communications Services ("PCS") and domestic and
international resellers who sell to and service end users with telecom
equipment. Customers include Nextel Communications, Alltel, AirTouch Cellular,
and GTE Mobilnet.
The Company's products, consisting of proprietary software and hardware
modules, facilitate the control, monitoring and efficient transmission of
high-speed digital information through public or private telecommunications
networks. The Company's network access products enable telecommunications
service providers to give their customers economical, high-quality access to
public and private networks and various telecommunications services. These
services include voice and high-speed data transmission, access to the internet
and video and desktop conferencing. Important product requirements in these
market segments include high feature density, modularity, quality performance
and compactness. The Company's products meet these requirements and are
suitable for both wireline and wireless service environments.
DTS markets its products through a direct sales force and several reseller
channels. Domestically, wireless service providers, including cellular,
Specialized Mobile Radio ("SMR") and PCS service companies, are targeted as
prospective customers directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States to market to public
and private network customers.
The 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-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
information included herein is unaudited; however, the information reflects all
adjustments (consisting solely of normal recurring adjustments) that are, in
the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the nine months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ended June 30,
2000. For further information, refer to the financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended June 30, 1999.
There have been no changes to the accounting policies of the Company during the
periods presented. For a description of these policies, see Note 1 of the Notes
to Financial Statements in the Company's Annual Report on Form 10-KSB.
2. INCOME (LOSS) PER COMMON SHARE
The Company has presented earnings (loss) per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share ("SFAS 128"), which requires
companies that have publicly held common stock or potential common stock to
present both basic and diluted earnings (loss) per share (EPS) on the face of
the income statement. Basic EPS is calculated as income (loss) available to
common shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted EPS is calculated as income (loss)
available to common shareholders divided by the weighted-average number of
common shares outstanding during the period plus any dilutive potential common
shares, such as convertible debt or stock options. To the extent the Company
had losses, potentially dilutive shares have not been included as their effect
is anti-dilutive.
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3. LEGAL MATTERS
The Company is not party to any material legal proceedings. From time to time,
the Company is involved in various routine legal proceedings incidental to the
conduct of its business.
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.
5. SIGNIFICANT TRANSACTIONS
WI-LAN, INC.
On December 29, 1999 the Company entered into an agreement with Wi-LAN, Inc., a
Calgary, Alberta company in Canada to sell $1.5 million in convertible
debentures which would provide the Company with much needed additional working
capital. The new debentures, convertible at any time by the holder, would have
similar terms to those that had been placed with Finova Mezzanine Capital with
a few exceptions. Namely, the debentures would have a four-year term with 10%
coupon rate and principal and cumulative interest due at the end of the term.
In addition, the Company would have no buy-back provision and the conversion
rate would be $1 per share, 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 first tranche of the debenture payment of $400,000. The remaining
$1,100,000 debenture payments were received in full by the Company prior to
March 31, 2000. Through the closing on January 7, 2000, Wi-LAN, Inc. has the
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 DTSX common stock
at the time that the option is exercised.
Apart from the above transaction with the Company, Wi-LAN purchased 1,738,159
shares of DTSX stock from Microtel, another DTS shareholder, and the
outstanding $2 million debenture with outstanding warrants from Finova
Mezzanine Capital. By converting $1.3 million of the Finova debenture, Wi-LAN
received 1,300,000 shares of DTSX stock and gained over 50% of the outstanding
common stock of DTS. Through the transaction with Finova, Wi-LAN received the
outstanding warrants for 734,000 shares of DTSX common stock at a exercise
price of $1 per share and a warrant for 500,000 shares of LinkaNet Labs, a DTS
affiliate.
On March 31, 2000, Wi-LAN purchased $3,000,000 of the Company's Preferred Stock
with such stock convertible into common shares at $7.125 per share, the market
closing price of the Company's common stock on March 30, 2000. Additionally,
Wi-LAN converted part of a debenture from DTS purchased on January 7, 2000 into
400,000 and 300,000 common shares on March 31, 2000 and April 16, 2000,
respectively.
On January 18, 2000 DTS entered into a technology licensing agreement with
Wi-LAN, Inc., whereby DTS would have the right to receive documentation and
services about a technology named Wideband Orthogonal Frequency Division
Multiplexing ("W-OFDM"). W-OFDM technology has been widely proclaimed as the
preferred method of transmitting very high-speed digital information through
wireless links at speeds above 1 Mbps. Recently the IEEE 802.11a Committee
accepted W-OFDM as a standard for wireless transmission from 5 Mbps to 50 Mbps.
Wi-LAN owns key patents on W-OFDM and has developed components and modules that
allow a licensee to develop systems and products that incorporate the patented
technology. The license granted DTS by Wi-LAN allows DTS to develop and sell
products on an exclusive basis for the Local Multipoint Distribution Services
("LMDS") worldwide market in the frequency range 10GHz to 100GHz. The license
will allow DTS to enter a market relevant to that being served currently with
its line of products - Flex, microFlex and the IP Processor. The compensation
to be paid Wi-LAN, Inc. for the aforementioned license, which is expected to be
settled in the Company's common stock, has yet to be determined.
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
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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.
The statement of financial position ("balance sheet") of the acquired Telcor
business as of March 31, 2000 has been included in the accompanying financial
statements. The Company will begin consolidating Telcor's operating results
beginning April 1, 2000.
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. The excess of purchase price over the net assets acquired has been
recorded as goodwill.
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 and at or for the six month period ended December 31, 1999, with the
consolidated financial information of Telcor for the year ended June 30, 1999
and for the nine and three month period ended March 31, 2000. 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 does not 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 - YEAR ENDED JUNE 30, 1999 (000'S OMITTED)
<TABLE>
<S> <C>
Revenues $ 62,856
Income before extraordinary items (2,704)
Net income (2,345)
Net income per share:
Basic (.50)
Diluted (.50)
</TABLE>
PROFORMA DATA - NINE MONTHS ENDED MARCH 31, 2000 (000'S OMITTED)
<TABLE>
<S> <C>
Revenues $ 53,204
Income before extraordinary items (343)
Net income (343)
Net income per share:
Basic (.07)
Diluted (.07)
</TABLE>
PROFORMA DATA - THREE MONTHS ENDED MARCH 31, 2000 (000'S OMITTED)
<TABLE>
<S> <C>
Revenues $ 14,651
Income before extraordinary items 216
Net income 216
Net income per share:
Basic .04
Diluted .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., a Delaware corporation ("DTS" or the
"Company"), designs, manufactures, and markets a broad range of products for
the telecommunications industry. The Company's primary customers are domestic
wireless service providers, including those offering cellular telephone
services and Personal Communications Services ("PCS") and domestic and
international resellers who sell to and service end users with telecom
equipment. Customers include Nextel Communications, Alltel, AirTouch Cellular,
and GTE Mobilnet.
The Company's products, consisting of proprietary software and hardware
modules, facilitate the control, monitoring and efficient transmission of
high-speed digital information through public or private telecommunications
networks. The Company's network access products enable telecommunications
service providers to give their customers economical, high-quality access to
public and private networks and various telecommunications services. These
services include voice and high-speed data transmission, the Internet and video
and desktop conferencing. Important product requirements in these market
segments include high feature density, modularity, quality performance and
compactness. The Company's products meet these requirements and are suitable
for both wireline and wireless service environments.
DTS markets its products through a direct sales force and several reseller
channels. Domestically, wireless service providers, including cellular,
Specialized Mobile Radio ("SMR") and PCS service companies, are targeted as
prospective customers directly by the Company's sales force. DTS utilizes
telecommunications equipment resellers in the United States to market to public
and private network customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
The following table sets forth certain financial data derived from the
Company's statement of operations for the three months ended March 31, 2000 and
March 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
$ % OF SALES $ % OF SALES
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net Sales 3,145 100 1,922 100
Gross Profit 1,188 38 950 49
Product development 112 4 281 15
Selling, general and administrative 842 27 658 34
Net income 153 5 1,112 58
</TABLE>
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NET SALES. Net sales increased by 64%, to $3,145,000 for the three months ended
March 31, 2000 from $1,922,000 for the three months ended March 31, 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
MARCH 31, MARCH 31,
---------- ---------
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Flex T1/E1 $ 2,938 $ 1,472 93 77
SKYPLEX -- 383 -- 20
Other products 207 67 7 3
-----------------------------------------------
Totals $ 3,145 $ 1,922 100 100
===============================================
</TABLE>
For the three months ended March 31, 2000, revenues from the Company's
FlexT1/E1 product line increased 100% from $1,472,000 for the three months
ended March 31, 1999 to $2,938,000 for the three months ended March 31, 2000.
Revenues from sales of the Company's SKYPLEX product decreased 100% to $0 for
the three months ended March 31, 2000 from $383,000 for the three months ended
March 31, 1999 reflecting a shift in the Company's sales focus from
international to domestic after the sale of the Company's international
subsidiary on February 5, 1999.
GROSS PROFIT. Cost of sales consists of component costs, compensation costs and
the overhead costs related to the production and shipping of the Company's
products, along with the support and warranty expense associated with such
products. Gross profit increased 25% from $950,000 for the three month period
ended March 31, 1999 to $1,188,000 for the three month period ended March 31,
2000. As a percentage of sales, gross profit decreased from 49% for the three
month period ended March 31, 1999 to 38% for the three month period ended March
31, 2000. The decrease in margins is attributable to additional inventory
obsolescence costs charged to Cost of Sales during the three month period ended
March 31, 2000 to adequately reserve against obsolescence of the Company's
inventory on hand as of March 31, 2000 and a lower margin product mix.
PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 60%, to $112,000 for the three months ended March 31, 2000 from
$281,000 for the three months ended March 31, 1999. The decrease in product
development expense for the three month period ended March 31, 2000 is
primarily due to reduced spending on new development projects due to limited
availability of excess working capital to spend on such projects. Approximately
$28,000 of development costs related to new projects were capitalized for the
three month period ended March 31, 2000 as compared to $4,000 for the three
month period ended March 31, 1999. As a percentage of sales, product
development costs were 4% for the three months ended March 31, 2000 and 15% for
the three months ended March 31, 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 28%, to $842,000 for the three
months ended March 31, 2000 from $658,000 for the three months ended March 31,
1999. Total selling, general and administrative costs were 27% of total sales
for the three months ended March 31, 2000 as compared to 34% of sales for the
three months ended March 31, 1999. As of March 31, 2000 the Company had
approximately 28 full-time employees reflecting a decrease in overall headcount
of 1, from 29 full-time employees as of March 31, 1999. Selling expense
increased by 15%, to $316,000 for the three months ended March 31, 2000 from
$274,000 for the three months ended March 31, 1999 primarily due to the
increase in revenues during the three month period ended March 31, 2000 as
compared to March 31, 1999. Marketing expenditures decreased by 14% from
$88,000 for the three month period ended March 31, 1999 to $76,000 for the
three month period ended March 31, 2000.
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General and administrative expenses increased by 52%, to $450,000 for the three
months ended March 31, 2000 from $296,000 for the three months ended March 31,
1999. As a percentage of sales, general and administrative expenses remained
consistent at 14% and 15% for the three month periods ended March 31, 2000 and
1999, respectively.
NET INCOME/LOSS. Net income decreased from $1,112,000 for the three month
period ended March 31, 1999 to $154,000 for the three month period ended March
31, 2000. Net income for the three month period ended March 31, 1999 reflects a
recorded gain of $1,100,000 resulting from the sale of the Company's
international subsidiary and an extraordinary gain resulting from troubled debt
restructurings of certain payables. Excluding such one-time charges, net income
increased 208% from $(153,000) for the three month period ended March 31, 1999
to $154,000 for the three month period ended March 31, 2000. The increase is
attributable to the increase in revenue for the three month period ended March
31, 2000.
NINE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
The following table sets forth certain financial data derived from the
Company's statement of operations for the nine months ended March 31, 2000 and
March 31, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
$ % OF SALES $ % OF SALES
-----------------------------------------------
<S> <C> <C> <C> <C>
Net Sales 6,887 100 4,846 100
Gross Profit 2,598 38 1,801 37
Product development 519 8 1,203 25
Selling, general and administrative 1,892 27 2,241 46
Net loss (104) (2) (876) (18)
</TABLE>
NET SALES. Net sales increased 42%, to $6,887,000 for the nine months ended
March 31, 2000 from $4,846,000 for the nine months ended March 31, 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
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------- ---------
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Flex T1/E1 $ 6,509 $ 3,284 95 68
SKYPLEX 39 1,399 -- 29
Other products 339 163 5 3
-----------------------------------------------
Totals $ 6,887 $ 4,846 100 100
===============================================
</TABLE>
For the nine months ended March 31, 2000, revenues from the Company's FlexT1/E1
product line increased 98% from $3,284,000 for the nine months ended March 31,
1999 to $6,509,000 for the nine months ended March 31, 2000. Revenues from
sales of the Company's SKYPLEX product decreased 97% to $39,000 for the nine
months ended March 31, 2000 from $1,399,000 for the nine months ended March 31,
1999 reflecting an overall decrease in
Page 13
<PAGE> 14
international sales of the SKYPLEX product line as a result of the sale of the
Company's international subsidiary on February 5, 1999.
GROSS PROFIT. Cost of sales consists of component costs, compensation costs and
the overhead costs related to the production and shipping of the Company's
products, along with the support and warranty expense associated with such
products. Gross profit increased 44% from $1,801,000 for the nine month period
ended March 31, 1999 to $2,598,000 for the nine month period ended March 31,
2000 primarily due to the accompanying increase in sales. As a percentage of
sales, gross profit remained consistent at 38% and 37% of sales for the nine
month periods ended March 31, 2000 and 1999, respectively.
PRODUCT DEVELOPMENT. Product development expense consists of personnel costs,
consulting, supplies and prototyping expenses. Product development expenses
decreased 57%, to $519,000 for the nine months ended March 31, 2000 from
$1,203,000 for the nine months ended March 31, 1999. The decrease in product
development expense for the nine month period ended March 31, 2000 is primarily
due to reduced spending on new development projects due to limited availability
of excess working capital to spend on such projects. Approximately $176,000 of
development costs related to new projects were capitalized for the nine month
period ended March 31, 2000 as compared to $98,000 for the nine month period
ended March 31, 1999. As a percentage of sales, product development costs were
8% for the nine months ended March 31, 2000 and 25% for the nine months ended
March 31, 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 decreased by 16%, to $1,892,000 for the nine
months ended March 31, 2000 from $2,241,000 for the nine months ended March 31,
1999. Total selling, general and administrative costs were 27% of total sales
for the nine months ended March 31, 2000 as compared to 46% of sales for the
nine months ended March 31, 1999. The overall decrease in selling, general and
administrative expenses is primarily due to the Company's reduction in
administrative costs due to several cost reduction plans instituted by
management during the fourth quarter of fiscal 1998 and the first and second
quarters of fiscal 1999. As of March 31, 2000 the Company had approximately 28
full-time employees. Selling expense decreased by 27%, to $662,000 for the nine
months ended March 31, 2000 from $909,000 for the nine months ended March 31,
1999. This decrease was due to lower sales personnel compensation costs.
Marketing expenditures decreased by 47% from $354,000 to $186,000 due to
reduced advertising efforts and a reduction in tradeshow participation during
the nine month period ended March 31, 2000 as compared to the same period ended
March 31, 1999. General and administrative expenses increased by 7%, to
$1,044,000 for the nine months ended March 31, 2000 from $978,000 for the nine
months ended March 31, 1999.
NET LOSS. The net loss decreased to $104,000 for the nine months ended March
31, 2000, from $876,000 for the nine months ended March 31, 1999. This decrease
was primarily the result of the decrease in selling, general and administrative
expenses as a result of an overall reduction in operating expenses and a
decrease in product development costs.
LIQUIDITY AND CAPITAL RESOURCES
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, to obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. The Company is pursuing additional equity financing through
discussions with potential investors.
On October 14, 1998, NASDAQ delisted the Company because the Company did not
meet its listing requirement of minimum net assets. The Company's securities
are currently traded on the OTC Bulletin Board. The delisting action has
hampered the Company's efforts to raise capital through a private placement of
its stock with qualified investors. However, the Company has employed several
programs in an effort to help the Company preserve cash which, in the first and
second fiscal quarters of 1999, was being used to fund severance costs of
terminated employees, to fund payroll and essential expenses and the purchase
of supplies from critical vendors. First, a group of employees and affiliates
volunteered to forego or delay salary, commission and other compensation
payments through a restricted stock for cash program offered by Board
resolution on August 10, 1998. Under that program a
Page 14
<PAGE> 15
total of approximately 395,612 common shares were approved by the Board to
compensate those employees and affiliates in return for cancellation of salary
or other compensation payments totaling $52,320 and a delay of payment of
another $62,206. These shares cannot be pledged, sold or traded until November
30, 1999 at which time, under Rule 144, they will have the restricted legend
removed from their certificates and are freely tradable. Secondly, another
program to preserve cash has been to work out extended payment terms with
certain key material suppliers for overdue amounts payable. The Company has
been able to complete formal negotiations with three critical suppliers and
establish extended payment terms (over a 12 month period) for overdue amounts
payable. Third, non-critical suppliers have been offered settlements in the
form of uniform terms and reduced but immediate cash payments for cancellation
of long standing past due amounts. A total of $208,000 of amounts payable have
been settled for a reduced amount under these conditions.
On January 25, 2000, the Board of Directors of the Company approved a plan
whereby certain debts of the Company to employees and Board members could be
satisfied through the issuance of restricted common stock at the option of the
debt holder(s). Approximately 30,083 shares of the Company's common stock were
issued to satisfy such obligations. The shares will be issued at $3.56/share
(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
issued such shares on May 5, 2000.
On April 10, 1997, the Company established a bank line of credit agreement with
Silicon Valley Bank which makes available $2,500,000 in borrowings with
availability based on the Company's accounts receivable. The loan was amended
on March 18, 1998 to increase the maximum eligible borrowing to the lesser of
$4,000,000 or 80% eligible receivables plus 30% of eligible inventory, as
defined, through the maturity date of April 10, 2000. The loan is secured by
the Company's assets and bears interest at the rate of prime plus 2.25%. A net
worth covenant was amended on March 16, 1998, requiring the Company to have a
net worth of $1,000,000. In September 1998, the Company agreed to a UCC filing
whereby all assets of the Company become collateral under the Agreement. The
loan requires a monthly monitoring fee of $1,000 and a commitment fee of 0.125%
due monthly on the unused portion of the facility. The agreement term is two
years with an automatic renewal each year unless written notice of termination
is given by one of the parties. The Company issued 60,000 two year warrants to
Silicon Valley Bank at a strike price of $5.25 each as consideration for the
amended agreement. On February 25, 1999 the Company signed an amendment to the
loan agreement with Silicon Valley Bank which modified previous loan covenants.
The revised covenants are primarily based upon minimum monthly and quarterly
revenue levels. As consideration for the amended agreement, the Company issued
250,000 two year warrants for common stock of the Company at $0.119 per share
which represents the market price of the Company's common stock at the close of
business on December 2, 1998 when a new agreement was reached.
On February 24, 2000, the Company signed an amendment to the loan agreement
with Silicon Valley Bank which modified previous terms. The revised and amended
agreement increased the maximum borrowing to $2,500,000 and bears interest at
prime plus 2 1/4 (11.25% at March 31, 2000). Additionally, covenants under the
agreement were revised to minimum quarterly revenue and monthly income
requirements. The Company was in compliance with all covenants imposed by the
agreement as of March 31, 2000.
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. Two
MicroTel representatives were elected to the DTS Board of Directors at the DTS
Shareholders Meeting held on April 13, 1999. MicroTel is a Delaware corporation
whose stock is publicly traded in the NASDAQ exchange under the ticker symbol
MCTL. In addition to various subsidiaries whose principal business is to
manufacture and market power supplies, keypads, video displays, circuit boards
and other electronic assemblies to a variety of aerospace and communications
clients MicroTel also owns two CXR subsidiaries - CXR Telcom and CXR S.A. -
which manufacture and market telecommunications products to telco and private
network users.
In connection with the acquisition of Telcor Communications on March 31, 2000,
the Company acquired a $17 million revolving bank line from PNC Bank. Amounts
outstanding under the line were approximately $7.2 million as of March 31,
2000.
Page 15
<PAGE> 16
As of March 31, 2000, the Company had a $2.05 million deposit under a purchase
commitment to acquire $6 million of inventory from a company in Hong Kong.
Under the terms of the contract, as amended, the Company is required to pay the
remaining $4 million on or before July 5, 2000.
At March 31, 2000, the Company had approximately $3,564,000 in cash and cash
equivalents. For the nine months ended March 31, 2000 and 1999, $637,000 and
$75,000 was provided by operations, respectively. Cash was provided for
operations for the nine months ended March 31, 2000 primarily through an
increase of accounts payable of $1,491,000.
The Company purchased $26,000 and $62,000 of property, plant and equipment
during the nine months ended March 31, 2000 and 1999, respectively. In
addition, the Company capitalized certain product development expenses paid to
outside contractors. During the nine months ended March 31, 2000, the Company
capitalized $175,000 of such costs as compared to capitalized costs of $98,000
for the nine months ended March 31, 1999.
SEASONALITY
The Company's sales have been subject to quarterly fluctuations mainly due to
the purchasing cycle of the Company's major customers. Other fluctuations occur
due to increased buildout of the telecommunications infrastructure during the
summer months. The Company's business plan is to continue the diversification
of its product offerings, further develop its distribution channels and further
expand its customer base. The Company believes that the implementation of this
plan will decrease the seasonality of its sales. The Company operates with a
moderate level of backlog for each product line due to advance purchase
commitments and production lead times.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Subsequently, the effective date was deferred until June 15, 2000. We do not
anticipate any material impact on the financial statements as a result of the
adoption of SFAS No. 133.
IMPORTANT CONSIDERATIONS RELATED TO FORWARD-LOOKING STATEMENTS
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples
of forward-looking statements include, but are not limited to: (i) projections
of revenue, income or loss, earnings or loss per share, the payment or
nonpayment of dividends, capital structure and other financial items; (ii)
statements of plans and objectives of the company's management or Board of
Directors, including those relating to products or services; (iii) statements
of future economic performance; and (iv) statements of assumptions underlying
such statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (I) the strength of
the U.S. economy in general and relevant foreign economies; (ii) the Company's
performance under current and future contracts; (iii) inflation and interest
rate fluctuations; (iv) timely and successful implementation of processing
systems to provide new products, improved functionality and increased
efficiencies; (v) technological changes; (vi) acquisitions; (vii) the ability
to increase market share and control expenses; (viii) changes in laws or
regulations or other industry standards affecting the Company's business which
require significant product redevelopment efforts; (ix) the effect of changes
in accounting policies and practices as may be adopted by the Financial
Accounting Standards Board; (x) changes in the Company's organization,
compensation and benefit plans; (xi) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; (xii) failure to
successfully implement the Company's Year 2000 modification plans substantially
as scheduled and budgeted; and (xiii) the success of the Company at managing
the risks involved in the foregoing.
Page 16
<PAGE> 17
Such forward-looking statements speak only as of the date on which statements
are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect to occurrence of unanticipated events.
Page 17
<PAGE> 18
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEMS 1 - 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
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 nine
months ended March 31, 2000.
Page 18
<PAGE> 19
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: May 15, 2000 By: /s/ Andres C. Salazar
--------------------------------------------
Andres C. Salazar
Chief Executive Officer
Date: May 15, 2000 By: /s/ Clive N. W. Marsh
--------------------------------------------
Clive N. W. Marsh,
V.P. Finance and Administration
(Principal Accounting Officer)
Page 19
<PAGE> 1
DIGITAL TRANSMISSION SYSTEMS, INC.
EXHIBIT 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(000'S OMITTED)
---------------------
2000 1999
---- ----
<S> <C> <C>
BASIC
Net earnings available to common shareholders $ 153 1,112
======== ========
Shares:
Weighted average number of common shares outstanding 5,187 4,250
======== ========
Net earnings per common share $ 0.03 0.26
======== ========
DILUTED
Net earnings for diluted calculation $ 153 1,112
======== ========
Shares:
Weighted average number of common shares outstanding 5,187 4,250
Shares issuable from assumed exercise of options and warrants 3,054 3,033
Convertible debt 1,790 2,000
Convertible preferred stock 1,769 1,314
-------- --------
11,800 10,597
======== ========
Net earnings per common share $ 0.01 0.11
======== ========
</TABLE>
Page 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL TRANSMISSION SYSTEMS, INC. FOR THE NINE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,564
<SECURITIES> 0
<RECEIVABLES> 10,850
<ALLOWANCES> 1,967
<INVENTORY> 12,332
<CURRENT-ASSETS> 24,779
<PP&E> 8,698
<DEPRECIATION> 3,944
<TOTAL-ASSETS> 52,306
<CURRENT-LIABILITIES> 45,520
<BONDS> 0
0
4,314
<COMMON> 69
<OTHER-SE> 428
<TOTAL-LIABILITY-AND-EQUITY> 52,306
<SALES> 6,887
<TOTAL-REVENUES> 6,887
<CGS> 4,289
<TOTAL-COSTS> 2,411
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 498
<INTEREST-EXPENSE> 291
<INCOME-PRETAX> (104)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
