SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995
-----------------------------------
Commission File Number 0-15405
-----------------------------------
Data Transmission Network Corporation
(Exact name of registrant as specified in its charter)
Delaware 47-0669375
----------------------- --------------------------
(State of Incorporation) (I.R.S. Employer ID Number)
9110 West Dodge Road, Suite 200, Omaha, Nebraska 68114
------------------------------------------------ --------
(Address of principal executive office) (Zip Code)
(402) 390-2328
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Number of shares of common stock outstanding as of August 14, 1995...3,308,075.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------
June 30, 1995 December 31, 1994
-------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Current Assets
<S> <C> <C>
Cash $ 413,874 $ 720,343
Accounts receivable, net of allowance for
doubtful accounts of $220,000 4,137,695 3,297,773
Prepaid expenses 256,361 189,332
Deferred commission expense 970,169 629,925
------------- ------------
Total Current Assets 5,778,099 4,837,373
Equipment Used By Subscribers, net of accumulated
depreciation of $51,860,914 and $43,710,079 61,918,222 61,449,931
Equipment and Leasehold Improvements, net of
accumulated depreciation of $5,887,835
and $4,729,831 5,195,494 4,666,742
Other Assets 614,620 505,310
------------- ------------
$ 73,506,435 $ 71,459,356
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,810,363 $ 4,493,796
Accrued expenses 1,312,115 1,117,206
Current portion of long-term debt 9,062,500 9,463,541
------------- ------------
Total Current Liabilities 15,184,978 15,074,543
Long-Term Debt 20,234,374 19,578,124
Subordinated Long-Term Notes, net of unamortized
discount of $555,620 and $595,310 14,444,380 14,404,690
Equipment Deposits 524,630 542,102
Unearned Revenue 10,518,320 9,152,919
Stockholders' Equity
Common stock, par value $.001, authorized
20,000,000 shares, issued 3,375,408 3,375 3,375
Paid-in capital 14,302,689 14,302,689
Retained earnings (deficit) (464,706) (217,501)
Treasury stock, at cost, 73,780 and 83,723 shares (1,241,605) (1,381,585)
------------- -------------
Total Stockholders' Equity 12,599,753 12,706,978
------------- ------------
$ 73,506,435 $ 71,459,356
-------------------------------------------------------------------------------------------------------------------
<FN>
See notes to interim statements.
</FN>
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
Unaudited June 30, 1995 June 30, 1994 June 30, 1995 June 30, 1994
-------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C> <C>
Subscriptions $10,747,820 $ 8,277,304 $20,706,284 $15,924,565
Additional services 947,370 947,100 1,863,410 1,726,092
Communication services 1,671,460 1,055,284 3,128,717 2,032,305
Advertising 584,150 572,505 1,196,142 1,064,906
Service initiation fees 788,650 543,812 1,462,107 1,196,909
----------- ------------ ------------ -----------
14,739,450 11,396,005 28,356,660 21,944,777
EXPENSES
Selling, general and administrative 7,977,742 6,687,649 15,540,280 12,547,344
Sales commissions 1,169,804 842,393 2,256,587 1,580,313
Depreciation 4,517,280 3,659,692 8,882,745 7,047,999
----------- ------------ ------------ -----------
13,664,826 11,189,734 26,679,612 21,175,656
----------- ------------ ------------ -----------
OPERATING INCOME 1,074,624 206,271 1,677,048 769,121
Interest expense 1,038,741 645,626 2,083,522 1,162,618
Other income, net 15,919 8,883 31,304 19,510
----------- ------------ ------------ -----------
INCOME (LOSS) BEFORE
INCOME TAXES 51,802 (430,472) (375,170) (373,987)
Income tax (benefit) provision 19,000 (151,000) (135,000) (131,000)
----------- ------------ ------------ ------------
NET INCOME (LOSS) $ 32,802 $ (279,472) $ (240,170) $ (242,987)
-------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.09) $ (0.07) $ (0.08)
-------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares
Outstanding 3,451,426 3,243,804 3,295,119 3,234,141
<FN>
See notes to interim financial statements
</FN>
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------
Six Months Ended
Unaudited June 30, 1995 June 30, 1994
-------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net loss $ (240,170) $ (242,987)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 8,882,745 7,047,999
Amortization of debt issue costs and discount 64,380 -
Deferred income taxes (134,000) (113,000)
Change in assets and liabilities:
Accounts receivable (839,922) (251,726)
Prepaid expenses (67,029) (196,010)
Deferred commission expense (340,244) (73,483)
Deferred debt issuance costs - (395,000)
Accounts payable 526,568 926,498
Accrued expenses 194,909 232,262
Equipment deposits (17,472) (19,213)
Unearned revenue 1,365,401 1,112,275
------------ -----------
Net Cash Provided By Operating Activities 9,395,166 8,027,615
Cash Flows From Investing Activities
Capital expenditures for equipment
used by subscribers (8,701,195) (15,956,806)
Capital expenditures for equipment
and leasehold improvements (1,388,594) (1,632,896)
------------ ------------
Net Cash Used By Investing Activities (10,089,789) (17,589,702)
Cash Flows From Financing Activities
Proceeds from long-term debt 5,000,000 10,500,000
Principal payments on long-term debt (4,744,791) (16,375,000)
Proceeds from subordinated long-term notes - 15,000,000
Proceeds from the exercise of stock
options and warrants 132,945 533,042
------------ -----------
Net Cash Provided By Financing Activities 388,154 9,658,042
------------ -----------
Net Increase (Decrease) in Cash (306,469) 95,955
Cash at Beginning of Period 720,343 648,391
------------ -----------
Cash at End of Period $ 413,874 $ 744,346
-------------------------------------------------------------------------------------------------------------------
<FN>
See notes to interim financial statements
</FN>
</TABLE>
- 4 -
<PAGE>
-------------------------------------------------------------------------------
DATA TRANSMISSION NETWORK CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The information furnished herein relating to interim periods
has not been examined by independent Certified Public
Accountants. The interim financial information in this report
reflects any adjustments which are, in the opinion of
management, necessary for a fair statement of results for the
interim periods presented in accordance with generally
accepted accounting principles. All such adjustments are of a
normal recurring nature. The accounting policies followed by
the company, and additional footnotes, are set forth in the
audited financial statements included in the company's 1994
Annual Report, which report was incorporated by reference in
Form 10-K for the fiscal period ended December 31, 1994.
2. LONG-TERM DEBT AND LOAN AGREEMENTS:
The company has a senior loan agreement with a group of seven
regional banks (the "senior loan agreement"). The senior loan
agreement, which expires June 30, 1996 unless extended,
provides for a total commitment of up to $34,500,000 in new
borrowings. As of June 30, 1995, $5,000,000 of the total
commitment had been borrowed, with the remaining $29,500,000
available to the company subject to certain restrictions as
discussed below.
Additional borrowings under the senior loan agreement are
available to the company, so long as at the time of the
advance, no default exists under the senior loan agreement or
under the subordinated notes agreement (see Note 3), and total
debt outstanding (including term notes outstanding but
excluding long-term subordinated debt) does not exceed
thirty-six times monthly operating cash flow (as defined). As
of June 30, 1995, based on its current operating cash flow,
the company would be able to borrow all of the $29,500,000
remaining commitment available.
Substantially all of the company's assets are pledged as
collateral under the senior loan agreement. In addition to the
restrictions mentioned above with respect to advances, total
debt outstanding (excluding long-term subordinated debt) is
limited to forty-eight times monthly operating cash flow or
three and one-half times stockholders' equity (defined to
include long-term subordinated debt), whichever is less.
Additionally, total debt outstanding (including subordinated
debt) is limited to sixty times monthly operating cash flow.
The company is also required to maintain total stockholders'
equity of at least $11,000,000, a ratio of quarterly operating
cash flow to interest expense (as defined) of at least 2.25 to
1, and is restricted to paying no cash dividends in excess of
25% of the prior years net operating income after taxes.
Interest on the outstanding borrowings (prior to when the
borrowings might be converted to term loans, as discussed
below) is at a variable rate, depending on the ratio of the
company's total borrowings (excluding long-term subordinated
debt) to stockholders equity (including long-term subordinated
debt) (the "Ratio"). So long as the Ratio is below 2.0 to 1,
interest is at prime. When the Ratio is between 2.0 to 1 and
2.49 to 1, the interest rate is at prime plus 1/4%. When the
Ratio is between 2.50 to 1 and 2.99 to 1, the interest rate is
at prime plus 3/4%. When the Ratio is at or above 3.0 to 1,
the interest rate is at prime plus 1 1/4%. The prime rate is
adjusted monthly, with the interest rate adjustment (as
defined above) changed quarterly. As of August 1, 1995, the
variable rate borrowings outstanding are accruing interest at
the prime rate of 8.75%.
- 5 -
<PAGE>
The company has the option to convert the outstanding
borrowings to term loans at any time, payable in forty-eight
equal principal installments, plus interest. Interest on the
converted term loans is at the greater of, a variable rate of
.75% over the base rate (as determined in the preceding
paragraph) or, 2.50% above the average of the yields on
constant maturity treasury bonds with maturities of three and
five years. As of June 30, 1995, $5,000,000 of the total
borrowings outstanding had not been converted to term loans.
The remainder of the borrowings were term loans with interest
rates ranging from 6.75% to 9.25%.
The company pays a commitment fee of 1/4% on all unused
portion of the total commitment. Additionally, once the Ratio
(as described previously) reaches 2.50 to 1, the company will
be required to pay a closing fee of 1/2% on all new borrowings
made after that point in time.
3. SUBORDINATE LONG-TERM NOTES:
On June 30, 1994, the company sold to one investor $15,000,000
of its 11.25% subordinated long-term notes in a private
placement transaction (the "subordinated debt"). The
subordinated debt is subordinate in right of payment to all
current and future senior debt. Interest on the subordinated
debt is to be paid quarterly, with principal due in five equal
annual installments beginning on June 30, 2000.
The company has the option to prepay the subordinated debt on
any date after June 30, 1997 at a premium beginning at 7.5% of
the principal prepaid, and decreasing by 1.5% per year until
June 30, 2002 when no premium is required. There are also
provisions for mandatory prepayment upon a change in ownership
control (as defined), at a premium beginning at 12.0% of the
principal prepaid during the period ended June 30, 1995 and
decreasing by 1.5% per year until June 30, 2002 when no
premium is required.
The subordinated debt agreement contains a cross-acceleration
clause, whereby the subordinated debt will become immediately
due and payable upon a payment default on the senior debt
outstanding. Other subordinated debt financial covenants and
restrictions are generally less restrictive than those of the
senior loan agreement.
The company also issued a warrant to the investor to purchase
25,000 shares of the company's $.001 par value common stock at
$22.17 per share on or before June 30, 2004. In connection
with the issuance of the warrant to purchase common stock, the
company recorded a $635,000 credit to additional paid in
capital and a related debt discount, which represents an
estimate of the fair value of the warrant issued.
Expenses of the subordinated debt offering have been
capitalized, and are being amortized, along with the debt
discount mentioned in the previous paragraph, over the life of
the subordinated debt using a level-yield method.
4. EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share were calculated based on the
weighted average number of shares outstanding. Outstanding
warrants and options are included in the calculation of net
income (loss) per share only when their impact is dilutive.
- 6 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues:
Total revenues for the second quarter and first six months of 1995
increased 29% over the same periods of 1994. The increase can be attributed
to strong growth in subscription, communications and service initiation fee
revenues. A contributing factor for the increase was the growth in total
subscribers to 86,700 up from 78,300 one year ago. On a per subscriber per
month basis, operating revenue, (subscription, communication, additional
services, and advertising revenues) increased to $54.29 and $53.10 for the
second quarter and first six months of 1995 compared to $46.74 and $45.32
for the same periods in 1994.
Subscriptions:
The 11% growth in total subscribers and the continued increase of
higher revenue services in the subscription mix contributed to the 30%
increase in subscription revenue for both the second quarter and first
six months of 1995 compared to 1994.
Communication Services:
The continued strong growth by the DTNergy service resulted in a 58%
and 54% revenue increase for the second quarter and first six months of
1995 compared to the same periods of 1994. DTNenergy transmits
refiner's prices and other communications messages to wholesalers.
Service Initiation Fees:
The increased growth of new subscription sales and an increase in the
standard fee charged to subscribers contributed to the revenue increase.
Service initiation fee revenue was up 45% for the second quarter of 1995
over the same quarter in 1994 and 22% for the first six months of 1995
compared to 1994.
Expenses:
Total expenses for the second quarter of 1995 increased 22% compared to the
second quarter of 1994. This increase was primarily due to increased costs
to obtain new subscribers and to service and support the increasing
subscriber base. The second quarter increase was down over the first
quarter increase of 30%, due mainly to slower growth in depreciation and in
net development costs.
Selling, General and Administrative:
Selling, general and administrative expenses grew 19% and 24% for the
second quarter and first six months of 1995 due primarily to the 11%
growth in the subscriber base and the continued investment in new
developmental services. On a per subscriber per month basis, these
costs were $31.05 and $30.68 for the second quarter and first six
months of 1995, compared to $28.80 and $27.41 one year ago. As a
percentage of revenues, selling, general and administrative expenses
were 54% and 55% for 1995 compared to 59% and 57% for the same periods
in 1994.
Sales Commissions:
Steady increases in gross subscription sales and strong revenue growth
in DTNergy attributed to the 39% and 43% increase in sales commissions
for the second quarter and first six months of 1995 over 1994. DTNergy
commissions are based on the level of net revenue generated and not new
sales as in other services.
Depreciation:
Depreciation expense for the second quarter of 1995 increased 23% over
1994 due to the rising subscriber base and with the change in the
percentage mix of the subscribers receiving their services via the more
expensive color graphics databox. This increase was at a slower growth
rate than the first quarter of 1995. As a percentage of revenue,
depreciation expense was down to 31% for the periods reported compared
to 32% one year ago.
Net Developmental Costs:
As defined, "net developmental costs" include, 1) the costs of market
research activities, 2) the expenses of hardware and software
engineering, and 3) the negative operating cash flow (after interest
expense but prior to corporate allocations) of new products. These
costs for the second quarter of 1995 were $860,000 compared to
$1,109,000 for the same period in 1994. Net developmental costs is one
measurement of the Company's investment in new services and technology.
- 7 -
<PAGE>
Operating Cash Flow:
Operating cash flow (operating income before depreciation expense) grew 45%
for the second quarter of 1995 over 1994. For the first six months, the
growth was at 35% for 1995 over 1994. The rise in operating cash flow can
be attributed to an increase in subscribers utilizing the higher margin
services and also to the efficiencies of the growing subscriber base.
Operating cash flow is a key component management uses to measure the
Company's success.
Interest Expense:
The interest expense increase for the second quarter and first six months
of 1995 over 1994 was primarily due to higher borrowing requirements needed
to fund purchases of equipment used by subscribers, a rise in the prime
rate that drives the Company's revolving variable rate debt and the
addition of the subordinated debt obtained late in the second quarter of
1994.
Income Tax (Benefit) Provision:
The Company's effective income tax rate was 36% for the second quarter and
first six months of 1995 compared to 35% for both periods one year ago.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Due to the nature of the Company's business, the majority of it's assets
are invested in equipment used by it's subscribers. As a result, the
Company does not have a significant amount of liquid assets.
The Company's primary commitment for capital expenditures is for equipment
used by it's subscribers. During the first six months of 1995, the Company
purchased $8,701,000 of this equipment compared to $15,957,000 in 1994. The
decrease in purchases was mainly the result of reducing inventory levels
that had been built up by the end of 1994. These purchases were financed
through cash flow from operations and borrowings under the revolving senior
loan agreement.
During the first six months of 1995, net cash provided by operating
activities increased 17% primarily due to the increase in operating cash
flow as previously discussed.
The Company expects to satisfy operating expenses and debt repayment
requirements with internally generated cash flows and the available credit
line under the current senior loan agreement. During the first six months
of 1995, the Company has borrowed $5,000,000 from the available credit
line.
Stockholders equity decreased slightly to $12,599,753 at June 30, 1995, due
to the net loss for the first six months, which was offset slightly by the
issuance of treasury stock upon the exercise of options outstanding to
purchase common stock.
- 8 -
<PAGE>
FORM 10-Q
DATA TRANSMISSION NETWORK CORPORATION
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) Date of Annual Meeting of Stockholders - April 26, 1995.
(b) Directors Elected - Roger R. Brodersen, Robert S. Herman,
David K. Karnes, J. Michael Parks, Jay E. Ricks, Greg T. Sloma
and Roger W. Wallace.
(c) Other Matters Voted Upon
- Proposal to amend the Company's Non-Employee
Directors Stock Option Plan, 2,700,301 votes
for, 54,887 votes against, 14,000 broker
non-votes and 19,196 votes abstained.
- Ratification of the appointment of Deloitte
and Touche LLP as independent auditors for
1995, 2,770,192 votes for, 8,635 votes
against and 9,557 votes abstained.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits - 11 - Statement re computation of per share earnings.
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
DATA TRANSMISSION NETWORK CORPORATION
By /s/ Roger R. Brodersen
----------------------
Roger R. Brodersen
Chairman, President and CEO
By /s/ Greg T. Sloma
-----------------
Greg T. Sloma
Executive Vice President and Chief Operating Officer
By /s/ Brian L. Larson
-------------------
Brian L. Larson
Chief Financial Officer, Secretary and Treasurer
Dated this 14th day of August, 1995.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
-------------------------------------------------------------------------------------------------------------------
COMPUTATION OF NET INCOME PER SHARE
-------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, 1995 June 30, 1994 June 30, 1995 June 30, 1994
-------------------------------------------------------------------------------------------------------------------
PRIMARY
Computation of income per common and common equivalent share:
<S> <C> <C> <C> <C>
Net income (loss) $ 32,802 $ (279,472) $ (240,170) $ (242,987)
============= ============= ============== =============
Average shares outstanding 3,297,797 3,243,804 3,295,119 3,234,141
Add shares applicable to stock
options & warrants (1) 151,843 - - -
Add shares applicable to stock options &
warrants prior to conversion, using
average market
price prior to conversion (1) 1,786 - - -
------------- ------------- -------------- -------------
Total shares 3,451,426 3,243,804 3,295,119 3,234,141
============= ============= ============== ===========
Per common share:
Net income (loss) (1) $ 0.01 $ (0.09) $ (0.07) $ (0.08)
============= ============= ============== =============
-------------------------------------------------------------------------------------------------------------------
<FN>
(1) Shares applicable to warrants and stock options are included in the
calculation only when their impact is dilutive.
</FN>
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11-page 2
-------------------------------------------------------------------------------------------------------------------
COMPUTATION OF NET INCOME PER SHARE
-------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, 1995 June 30, 1994 June 30, 1995 June 30, 1994
-------------------------------------------------------------------------------------------------------------------
FULLY DILUTED
Computation of income per common and common equivalent share:
<S> <C> <C> <C> <C>
Net income (loss) $ 32,802 $ (279,472) $ (240,170) $ (242,987)
============= ============= ============== =============
Average shares outstanding 3,297,797 3,243,804 3,295,119 3,234,141
Add shares applicable to stock
options & warrants (1) 154,323 - - -
Add shares applicable to stock options &
warrants prior to conversion, using
average market
price prior to conversion (1) 1,815 - - -
------------- ------------- -------------- -------------
Total shares 3,453,935 3,243,804 3,295,119 3,234,141
============= ============= ============== ===========
Per common share:
Net income (loss) (1) $ 0.01 $ (0.09) $ (0.07) $ (0.08)
============= ============= ============== =============
-------------------------------------------------------------------------------------------------------------------
<FN>
(1) Shares applicable to warrants and stock options are included in the
calculation only when their impact is dilutive.
</FN>
</TABLE>
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 413,874
<SECURITIES> 0
<RECEIVABLES> 4,357,695
<ALLOWANCES> 220,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,778,099
<PP&E> 124,862,465
<DEPRECIATION> 57,748,749
<TOTAL-ASSETS> 73,506,435
<CURRENT-LIABILITIES> 15,184,978
<BONDS> 34,678,754
<COMMON> 3,375
0
0
<OTHER-SE> 12,596,378
<TOTAL-LIABILITY-AND-EQUITY> 73,506,435
<SALES> 28,356,660
<TOTAL-REVENUES> 28,356,660
<CGS> 0
<TOTAL-COSTS> 26,679,612
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,083,522
<INCOME-PRETAX> (375,170)
<INCOME-TAX> (135,000)
<INCOME-CONTINUING> (240,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240,170)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
