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 March 31, 1996
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 May 14, 1996...3,340,082.
1
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
March 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $210,182 $780,018
Accounts receivable, net of allowance for
doubtful accounts of $300,000 6,077,342 6,476,576
Prepaid expenses 744,878 474,135
Deferred commission expense 2,505,037 2,076,262
------------- -------------
Total Current Assets 9,537,439 9,806,991
Property and Equipment
Equipment Used By Subscribers 140,622,425 130,266,792
Equipment and Leasehold Improvements 15,867,535 13,952,173
------------- -------------
156,489,960 144,218,965
Less: Accumulated Depreciation 73,667,601 67,909,419
------------- -------------
Net Property and Equipment 82,822,359 76,309,546
Intangible Asset, net of accumulated
amortization of $414,160 and $258,850 4,555,840 4,711,150
Other Assets 2,037,518 1,844,363
------------- -------------
$98,953,156 $92,672,050
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $10,296,274 $9,385,812
Accrued expenses 2,120,870 1,856,659
Current portion of long-term debt 8,010,416 9,036,458
------------- -------------
Total Current Liabilities 20,427,560 20,278,929
Long-Term Debt 38,015,624 32,536,457
Subordinated Long-Term Notes, net of unamortized
discount of $496,085 and $515,930 14,503,915 14,484,070
Equipment Deposits 529,318 541,720
Unearned Revenue 12,716,530 11,953,909
Stockholders' Equity
Common stock, par value $.001, authorized
20,000,000 shares, issued 3,375,408 3,375 3,375
Paid-in capital 14,422,689 14,422,689
Retained earnings (deficit) (814,229) (497,687)
Treasury stock, at cost, 46,092 and 60,315 shares (851,626) (1,051,412)
------------- -------------
Total Stockholders' Equity 12,760,209 12,876,965
------------- -------------
$98,953,156 $92,672,050
============= =============
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
2
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Quarter Ended
Unaudited March 31, 1996 March 31, 1995
- --------------------------------------------------------------------------------
REVENUES
<S> <C> <C>
Subscriptions $14,084,778 $9,958,463
Additional services 1,140,724 916,040
Communication services 1,999,112 1,457,257
Advertising 668,967 611,992
Service initiation fees 1,219,436 673,458
------------ ------------
19,113,017 13,617,210
EXPENSES
Selling, general and administrative 10,702,963 7,562,538
Sales commissions 1,907,571 1,086,783
Depreciation and amortization 5,745,528 4,365,465
------------ ------------
18,356,062 13,014,786
------------ ------------
OPERATING INCOME 756,955 602,424
Interest expense 1,345,245 1,044,781
Other income, net 30,299 15,385
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (557,991) (426,972)
Income tax (benefit) provision (201,000) (154,000)
------------ ------------
NET INCOME (LOSS) $(356,991) $(272,972)
============ ============
EARNINGS (LOSS) PER SHARE $(0.11) $(0.08)
============ ============
Weighted Average Number of Shares
Outstanding 3,323,615 3,292,440
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Quarter Ended
Unaudited March 31, 1996 March 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(356,991) $(272,972)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,745,528 4,365,465
Amortization of debt issue costs and discount 32,190 32,190
Deferred income taxes (205,500) (154,000)
Change in assets and liabilities:
Accounts receivable 399,234 (197,820)
Prepaid expenses (270,743) (72,440)
Deferred commission expense (428,775) (101,481)
Accounts payable (167,473) (692,431)
Accrued expenses 264,211 275,670
Equipment deposits (12,402) (9,684)
Unearned revenue 762,621 967,143
------------ ------------
Net Cash Provided By Operating Activities 5,761,900 4,139,640
Cash Flows From Investing Activities
Capital expenditures:
Equipment used by subscribers (9,217,459) (2,837,756)
Equipment and leasehold improvements (1,808,088) (660,682)
------------ ------------
Net Cash Used By Investing Activities (11,025,547) (3,498,438)
Cash Flows From Financing Activities
Proceeds from long-term debt 6,750,000 1,500,000
Principal payments on long-term debt (2,296,875) (2,375,000)
Proceeds from the exercise of stock options and warrants 240,686 32,111
------------ ------------
Net Cash Provided (Used) By Financing Activities 4,693,811 (842,889)
------------ ------------
Net Decrease in Cash (569,836) (201,687)
Cash at Beginning of Period 780,018 720,343
------------ ------------
Cash at End of Period $210,182 $518,656
============ ============
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
4
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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 audited 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 1995
Annual Report, which report was incorporated by reference in
Form 10-K for the fiscal period ended December 31, 1995.
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 March 31, 1996, $28,000,000 of the total
commitment had been borrowed, with the remaining $6,500,000
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 March 31, 1996, based on its current operating cash flow,
the company would be able to borrow all of the $6,500,000
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 through June 30, 1996 and, a
ratio of quarterly operating cash flow to interest expense (as
defined) of at least 2.25 to 1. The company is currently
restricted to paying no cash dividends.
5
<PAGE>
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 March 31, 1996, the
variable rate borrowings outstanding are accruing interest at
the prime rate of 8.25%.
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
1/4% over the base rate (as determined in the preceding
paragraph) or, at the company's option, may be at a fixed rate
of 3/4% over the base rate, or, 2.50% over the average of the
3 and 5 year U.S. treasury securities whichever is greater. As
of March 31, 1996, $28,000,000 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. SUBORDINATED 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.
6
<PAGE>
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.
5. ACCOUNTING PRONOUNCEMENT:
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," which will be
effective for the Company beginning January 1, 1996. SFAS No.
123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair
value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based
compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per
share annually.
6. ACQUISITIONS:
Effective May 3, 1996, the Company closed on an "Asset
Acquisition" of Broadcast Partners, an information provider
primarily in the agricultural industry. The Company will
acquire substantially all the assets of Broadcast Partners for
$63.5 million and the assumption of certain current
liabilities estimated to be $9.5 million. Included in the
acquisition, the Company will receive 39,000 agricultural
subscribers. The acquisition was financed with a combination
of approximately $15 million of privately placed common stock
equity and with six year term debt making up the balance.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Effective May 3, 1996, the Company closed on an "Asset Acquisition" of
Broadcast Partners, an information provider primarily in the agricultural
industry. The Company acquired substantially all the assets of Broadcast
Partners for $63.5 million and the assumption of certain "non-interest bearing"
current liabilities estimated to be $9.5 million. The Company will receive
39,000 agricultural subscribers. After the acquisition, the Company will have
more than 115,000 subscribers in the agribusiness industry. The acquisition was
financed with a combination of approximately $15 million of privately placed
common stock equity and with six year term debt making up the balance.
The equipment used by subscribers is a large capital investment for the
company. This equipment accounts for 75% of the company's total assets. The
company does not have a large amount of current assets compared to capital
equipment.
Net cash provided by operating activities in 1996 was $5,761,900
compared to $4,139,640 in 1995. The increase was due mainly to an increase in
operating cash flow (operating income before depreciation and amortization). The
increase was offset by the increases in interest expense.
Net cash used by investing activities increased significantly for the
first quarter of 1996 over 1995 to $11,025,547 from $3,498,438. This increase
was primarily due to the increase in subscriber equipment needed for the higher
sales volume generated from the expanded sales force. In addition, in early 1995
the company was utilizing a higher than normal inventory level from late 1994 to
meet its equipment needs.
The company had negative working capital $10,890,100 for the period
ended March 31, 1996, compared to $9,747,300 for the same period in 1995. This
working capital deficiency was increased due to the growth in accounts payable
primarily due to an increase in the amount due to vendors for equipment used by
subscribers of $1,915,000 and $3,202,600 for the purchase of Knight Ridder
Financial subscribers. These two items accounted for over a $5,000,000 increase
in the working capital deficiency for the first quarter of 1996 over 1995.
This working capital deficiency created by the increase in accounts
payable was somewhat offset by an increase in accounts receivable of $2,581,000
for the quarter ended March 31, 1996 over 1995. Accounts receivable increased
from the same perod a year ago due to the 18% growth in total subscribers and a
changing subscriber base due to the expansion of the company's new services
offered.
Net cash provided by financing activities increased to $4,693,811 for
the first quarter of 1996 from $(842,889) for the same period in 1995. This
increase was generated by borrowings needed to purchase the equipment used by
subscribers.
8
<PAGE>
The company anticipates that the internally generated cash flow and
bank credit lines will be sufficient to fund operating activities, capital
expenditures and principle payments on long-term debt.
RESULTS OF OPERATIONS
Revenues:
Total revenues for the first quarter of 1996 increased 40% over the same
period of 1995. This increase was strongly supported by increases from most
of the revenue categories. A main factor was the growth in total
subscribers from 84,600 at March 31, 1995 to 99,600 one year later. The
growth can be attributed to the expansion of the sales force, expansion of
the services available and the addition of 2,900 subscribers acquired from
Knight-Ridder Financial in the third quarter of 1995. On a per subscriber
per month basis, operating revenue (subscription, communication, additional
services and advertising revenues) increased to $60.42 up from $51.82 for
the first quarter of 1996 and 1995, respectively.
Subscriptions:
A strong 18% increase in subscribers and an increasing revenue per
month on all new sales from $60 to $64 helped contribute to the 41%
growth in subscription revenue for the first quarter of 1996 over 1995.
Communication Services:
Communication revenue continued steady growth with a 37% increase for
the period ended March 31, 1996 compared to the same period in 1995.
The primary increases came from the DTNergy service which transmits
refiner's prices and other communications to wholesalers.
Service Initiation Fees:
The expanded sales force created during the last half of 1995,
resulting in increased sales, was the primary reason for the 81%
increase in service initiation fee revenue for the first quarter of
1996 compared to the same period of 1995.
Expenses:
Total expenses for the first quarter of 1996 grew 41% over the same period
of 1995. The main reasons for the increase were the expansion of; the sales
force, service and support needed for the increasing subscriber base and
net development costs associated with the development of new services.
Selling, General and Administrative:
Selling, general and administrative expenses grew 42% for the first
quarter of 1996 compared to the same period in 1995. As a percentage of
revenue, these expenses held
9
<PAGE>
constant at 56%. The increase resulted from the expanding sales force
and continued investment in new developmental services. On a per
subscriber per month basis, these costs were $36.14 for the first
quarter of 1996 compared to $30.28 for the same period of 1995.
Sales Commissions:
The first quarter of 1996 showed a significant increase in the sales
commission expense over the same period one year ago. The main reasons
for the increase were the expansion of the sales force, resulting in
higher sales, and the continued growth in DTNergy commissions which are
based on DTNergy subscribers and revenues.
Depreciation and Amortization:
Depreciation and amortization expense grew 32% in the period ended
March 31, 1996 over the same period of 1995. The increase can be
directly related to the growth in equipment used by subscribers.
However, as a percentage of revenue the trend is downward, from 32% for
the first quarter of 1995 to 30% for the same period in 1996.
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 (prior to
corporate allocations plus interest) of new services. These costs were
$1,429,854 and $925,917 for the first quarter of 1996 and 1995,
respectively. Net developmental costs is one measurement of the
Company's investment in new services and technology.
Operating Cash Flow:
Operating cash flow (operating income before depreciation and
amortization expense) grew 31% for the first quarter of 1996 over the
same period of 1995. As a percent of revenue, operating cash flow
decreased from 36% to 34% for the periods stated. Operating cash flow
was negatively affected by the increase in net development costs and
other related expansion areas.
Interest Expense:
Higher borrowing requirements needed to fund purchases of equipment used by
subscribers and the debt incurred to acquire the 2,900 Knight-Ridder
Financial subscribers contributed to the 29% increase in the interest
expense. As a percent of revenue, interest expense decreased from nearly 8%
to 7% for the first quarter of 1995 and 1996, respecitvely.
Income Tax (Benefit) Provision:
The Company's effective income tax rate was 36% for the first quarter of
1996 and 1995.
10
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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 24,
1996.
(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
- Ratification of the appointment of Deloitte
and Touche LLP as independent auditors for
1996, 3,089,504 votes for, 1,200 votes
against and 4,902 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 and CEO
By /s/ Greg T. Sloma
-------------------------
Greg T. Sloma
President and Chief Operating Officer
By /s/ Brian L. Larson
-------------------------
Brian L. Larson
V.P., CFO, Secretary and Treasurer
Dated this 14th day of March, 1996.
11
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit 11
- --------------------------------------------------------------------------------
COMPUTATION OF NET INCOME PER SHARE
- --------------------------------------------------------------------------------
Quarter Ended
March 31, 1996 March 31, 1995
- --------------------------------------------------------------------------------
PRIMARY
Computation of income (loss)
per common and common
equivalent share:
<S> <C> <C>
Net income (loss) $ (356,991) $ (272,972)
=========== ===========
Average shares outstanding 3,323,615 3,292,440
Add shares applicable to stock
options & warrants (1) - -
Add shares applicable to stock
options & warrants prior to
conversion, using average market
price prior to conversion (1) - -
----------- -----------
Total shares 3,323,615 3,292,440
============ ===========
Per common share:
Net income (loss) (1) $ (0.11) $ (0.08)
============= ============
<FN>
(1) Shares applicable to warrants and stock options are included in the
calculation only when their impact is dilutive.
</FN>
</TABLE>
12
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<TABLE>
<CAPTION>
Exhibit 11-page 2
- --------------------------------------------------------------------------------
COMPUTATION OF NET INCOME PER SHARE
- --------------------------------------------------------------------------------
Quarter Ended
March 31, 1996 March 31, 1995
- --------------------------------------------------------------------------------
FULLY DILUTED
<S> <C> <C>
Computation of income per common
and common equivalent share:
Net income (loss) $(356,991) $(272,972)
=========== ===========
Average shares outstanding 3,323,615 3,292,440
Add shares applicable to stock
options & warrants (1) - -
Add shares applicable to stock
options & warrants prior to
conversion, using average market
price prior to conversion (1) - -
----------- -----------
Total shares 3,323,615 3,292,440
=========== ===========
Per common share:
Net income (loss) (1) $(0.11) $(0.08)
=========== ===========
<FN>
(1) Shares applicable to warrants and stock options are included in the
calculation only when their impact is dilutive.
</FN>
</TABLE>
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 210,182
<SECURITIES> 0
<RECEIVABLES> 6,377,342
<ALLOWANCES> 300,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,537,439
<PP&E> 156,489,960
<DEPRECIATION> 73,667,601
<TOTAL-ASSETS> 98,953,156
<CURRENT-LIABILITIES> 20,427,560
<BONDS> 52,519,539
0
0
<COMMON> 3,375
<OTHER-SE> 12,756,834
<TOTAL-LIABILITY-AND-EQUITY> 98,953,156
<SALES> 19,113,017
<TOTAL-REVENUES> 19,113,017
<CGS> 0
<TOTAL-COSTS> 18,356,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,345,245
<INCOME-PRETAX> (557,991)
<INCOME-TAX> (201,000)
<INCOME-CONTINUING> (356,991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (356,991)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
