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, 1998
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, 1998...11,400,668.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS
Data Transmission Network Corporation
As of June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
Unaudited 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
<S> <C> <C>
Cash $ -- $ 837,170
Accounts receivable, net of allowance for
doubtful accounts of $900,000 and $810,000 9,481,724 7,629,296
Prepaid expenses 694,804 825,577
Deferred commission expense 2,889,884 3,302,972
------------------------------------------
Total Current Assets 13,066,412 12,595,015
Property and Equipment
Equipment Used By Subscribers 236,352,581 224,620,148
Equipment and Leasehold Improvements 27,556,067 23,155,237
------------------------------------------
263,908,648 247,775,385
Less: Accumulated Depreciation 154,867,177 135,265,090
------------------------------------------
Net Property and Equipment 109,041,471 112,510,295
Intangible Assets from Acquisitions, net of accumulated
amortization of $12,813,553 and $9,728,684 42,288,355 34,764,802
Other Assets 4,351,950 2,560,786
$168,748,188 $162,430,898
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 8,953,870 $ 6,985,053
Accrued expenses 10,008,257 5,319,506
Current portion of long-term debt 22,701,458 21,810,833
------------------------------------------
Total Current Liabilities 41,663,585 34,115,392
Long-Term Debt 69,410,830 58,248,540
Subordinated Long-Term Notes, net of unamortized
discount of $0 and $357,170 -- 14,642,830
Equipment Deposits 462,024 484,017
Unearned Revenue 26,279,076 22,743,946
Stockholders' Equity
Common stock, par value $.001 authorized
20,000,000 shares, issued 11,389,370 and 11,148,052 11,389 11,148
Paid-in capital 33,128,958 31,326,683
Retained earnings (deficit) (2,207,674) 858,342
-----------------------------------------
Total Stockholders' Equity 30,932,673 32,196,173
------------------------------------------
$168,748,188 $162,430,898
- -------------------------------------------------------------------------------------------------------------------
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Data Transmission Network Corporation
Quarter and six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
<S> <C> <C> <C> <C>
Unaudited 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Subscription $28,692,347 $25,066,285 $56,436,574 $48,175,824
Additional services 1,805,567 1,658,832 3,581,516 3,297,618
Communication services 2,669,761 2,469,476 5,370,814 4,782,834
Advertising 779,564 934,883 1,871,560 2,111,615
Service initiation fees 850,243 1,261,811 1,962,165 2,490,269
---------------------------------------------------------------------------
Total Revenue 34,797,482 31,391,287 69,222,629 60,858,160
---------------------------------------------------------------------------
Expenses
Selling, general
and administrative 17,702,844 15,494,553 34,583,210 29,487,166
Sales commissions 2,713,300 2,388,067 5,473,354 4,721,122
Depreciation and amortization 11,612,182 10,459,090 22,695,598 20,671,061
Non-recurring satellite costs 5,800,000 -- 5,800,000 --
---------------------------------------------------------------------------
Total Expense 37,828,326 28,341,710 68,552,162 54,879,349
---------------------------------------------------------------------------
Operating Income (Loss) (3,030,844) 3,049,577 670,467 5,978,811
Interest expense 1,805,362 2,324,826 3,832,074 4,719,690
Other income, net 34,402 32,310 58,209 64,559
---------------------------------------------------------------------------
Income (Loss) Before Income Taxes and
Extraordinary Item (4,801,804) 757,061 (3,103,398) 1,323,680
Income tax provision (benefit) (1,725,262) 271,500 (1,114,262) 476,500
---------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Item (3,076,542) 485,561 (1,989,136) 847,180
Extraordinary Item,
net of tax (6) -- -- (1,076,880) --
---------------------------------------------------------------------------
Net Income (Loss) $(3,076,542) $ 485,561 $(3,066,016) $ 847,180
- ----------------------------------------------------------------------------------------------------------------------
Basic Income (Loss) Per Share
Income (loss) before Extraordinary Item $ (0.27) $ 0.04 $ (0.18) $ 0.08
Extraordinary Item -- -- (0.09) --
- ----------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ (0.27) $ 0.04 $ (0.27) $ 0.08
- ----------------------------------------------------------------------------------------------------------------------
Diluted Income (Loss) Per Share
Income (loss) before Extraordinary Item $ (0.27) $ 0.04 $ (0.18) $ 0.07
Extraordinary Item -- -- (0.09) --
- ----------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ (0.27) $ 0.04 $ (0.27) $ 0.07
- ----------------------------------------------------------------------------------------------------------------------
Basic Shares Outstanding 11,322,939 11,089,815 11,259,969 11,072,394
- ----------------------------------------------------------------------------------------------------------------------
Diluted Shares Outstanding 11,322,939 12,068,932 11,259,969 12,041,667
- ----------------------------------------------------------------------------------------------------------------------
<FN>
See note to interim financial statements.
</FN>
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Data Transmission Network Corporation
Six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Unaudited 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ (3,066,016) $ 847,180
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 22,695,598 20,671,061
Amortization of debt issue costs and discount 588,186 73,940
Deferred income taxes (2,022,180) 419,500
Change in assets and liabilities:
Accounts receivable (1,832,428) 1,547,442
Prepaid expenses 130,773 (86,142)
Deferred commission expense 413,088 (218,493)
Accounts payable 1,544,184 778,461
Accrued expenses 4,373,251 (526,934)
Equipment deposits (21,993) (15,297)
Unearned revenue 3,345,131 2,279,159
------------------------------------------
Net Cash Provided by Operating Activities 26,147,594 25,769,877
Cash Flows From Investing Activities
Capital expenditures
Equipment used by subscribers (11,294,198) (9,475,479)
Equipment and leasehold improvements (4,308,509) (1,635,178)
Acquisitions (10,237,488) (5,216,299)
------------------------------------------
Net Cash Used by Investing Activities (25,840,195) (16,326,956)
Cash Flows from Financing Activities
Proceeds
Revolving Credit Line 9,000,000 --
Term Notes 16,000,000 --
Exercise of stock options 1,802,516 591,701
Payments
Revolving Credit Line -- (500,000)
Term Notes (12,947,085) (10,020,000)
Subordinated Notes (15,000,000) --
------------------------------------------
Net Cash Used by Financing Activities (1,144,569) (9,928,299)
------------------------------------------
Net Decrease in Cash (837,170) (485,378)
Cash at Beginning of Period 837,170 708,053
------------------------------------------
Cash at End of Period $ -- $ 222,675
- ----------------------------------------------------------------------------------------------------------------
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
4
<PAGE>
NOTES TO INTERIM FINANCIAL STATEMENTS
1. 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 all 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 1997 Annual Report, this report was
incorporated by reference in Form 10-K for the fiscal period ended December 31,
1997. The results of operations for the quarter and six months ended June 30,
1998 and 1997 are not necessarily indicative of the results to be expected for
the full year. All financial statements are prepared on a consolidated basis to
include the Company's wholly owned subsidiaries of National Datamax, Inc. and
DTN Market Communications Group, Inc.
2. EARNINGS PER SHARE
Earnings per share is calculated based on the Financial Accounting
Standards Board (FASB) Statement No. 128 which requires dual presentation of
Basic and Diluted earnings per share. Basic earnings per share data are based on
the weighted average outstanding common shares during the period. Diluted
earnings per share data are based on the weighted average outstanding common
shares and the effect of all dilutive potential common shares, including stock
options. All prior periods earnings per share data have been restated in
accordance with FASB No. 128.
3. ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130 "Reporting of Comprehensive income." SFAS No. 130 establishes standards
for the display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity during
a period except those resulting from the issuance of shares of stock and
distributions to stockholders. There were no differences between net income and
comprehensive income during the quarter and six months ended June 30, 1998 and
1997.
In June 1997, the FASB issued statement No. 131, Disclosure about
segments of an Enterprise and Related Information. FASB No. 131 establishes
standards for the way public enterprises report information about operating
segments. The Company does not expect this statement will have any material
impact on its current reporting requirements.
4. ACQUISITIONS
Market Quoters, Northern Data & Market Communications Group
During the first quarter of 1997, the Company acquired 2,900 real-time
commodity subscribers through two separate acquisitions. In January,
approximately 500 of the subscribers were acquired from Market Quoters and
Northern Data Services for $750,000 cash. The remaining 2,400 subscribers were
acquired in March from Market Communications Group, LLC (MCG), a joint venture
between Reuters America Inc., and Farmland Industries, Inc. The Company paid
$3.6 million cash for the 2,400 subscribers, certain assets and certain assumed
liabilities. In total, approximately $4.5 million was capitalized as intangible
assets (goodwill) and the Company is amortizing this cost using the
straight-line method over three to eight years. The MCG acquisition included the
preferred rights to distribute relevant Reuters real-time news and information
to the commodities, energy and metals markets.
5
<PAGE>
The Network, Inc.
In July of 1997, the Company acquired the assets of The Network, Inc.,
an electronic cotton trading network service. The Company agreed to pay
$1,000,000 cash over five years. The Company paid $200,000 in cash in 1997 and
will pay $200,000 cash on each of the next four anniversary dates. The Company
has the option to terminate the agreement at any time and cease all payments and
return the assets to the owner. The Company is capitalizing the $200,000
payments when made as an intangible asset (goodwill) and amortizing this cost
using the straight-line method over 12 months. In effect, if all payments are
made, the Company is amortizing the $1,000,000 purchase price over five years.
Arkansas Farm Bureau Acres Service
In October of 1997, the Company agreed to acquire the approximately 700
subscribers on the ACRES platform from the Arkansas Farm Bureau (AFB). The
Company agreed to pay $600 for each subscriber that converts to a DTN service.
The Company believes the majority will convert to a DTN service. In addition,
the Company will pay the AFB a $6 monthly residual for the lesser of the life of
the subscriber or ten years for those subscribers converting to a DTN service.
The Company has capitalized $363,950 as an intangible asset (goodwill) and is
amortizing this cost using the straight-line method over eight years.
Market Information of Colorado, Inc.
In February of 1998, DTN acquired 100 subscribers receiving real-time
commodities and futures information from Market Information of Colorado, Inc.
(MIC) for $135,000 cash. The Company to date has capitalized $112,500 as an
intangible asset (goodwill) and is amortizing this cost using the straight-line
method over eight years.
CDS Group, Inc.
In March of 1998, DTN acquired CDS Group, Inc. (CDS) for $250,000 cash
and the assumption of certain liabilities. CDS is engaged in the business of
marketing software for tracking bales of cotton for businesses in the cotton
industry. This acquisition complements the acquisition of The Network, Inc.
(discussed above), an electronic cotton trading network. The Company has
capitalized $313,000 as an intangible asset (goodwill) and is amortizing this
cost using the straight-line method over five years.
SmartServ Online, Inc.
In April of 1998, DTN signed an agreement to acquire exclusive rights
to market the Internet based financial services information products of
SmartServ Online, their internet information distribution technology, and their
subscribers for $850,000 cash. These services include: SmartServ Pro, now DTN
IQ, a real-time, tick-by-tick stock quote and news service, and TradeNet and
BrokerNet, real-time trading and account information services for the brokerage
industry. This agreement transfers the 850 subscribers currently using SmartServ
Online to DTN. All new subscribers to these services will be DTN customers and
DTN will pay SmartServ Online, Inc. an ongoing royalty based on revenues. The
Company has capitalized $850,000 as an intangible asset (goodwill) and is
amortizing this cost using the straight-line method over five years.
National Datamax, Inc.
In June of 1998, DTN signed an agreement to acquire 100% of the capital
stock outstanding of National Datamax, a software development and information
services firm specializing in integrated systems for the financial services
industry. DTN has agreed to pay $3,000,000 cash, plus an earn-out based upon
revenue growth from quarter ending December 31, 1997, through quarter ending
June 30, 1999, which is currently estimated to be approximately $5,500,000.
National Datamax is a wholly owned subsidiary of DTN and operate out of
California. The Company has capitalized $3,224,000 as an intangible asset
(goodwill) and is amortizing this cost using the straight-line method over three
to five years.
Kavouras, Inc.
In March of 1998, DTN announced an agreement in principle, for the
acquisition of 100% of the capital stock outstanding in Kavouras. Kavouras is
engaged in the development, design, manufacture, marketing and service of
meteorological equipment and provides meteorological data services to
government, aviation, commercial broadcast and other industries, including DTN.
DTN agreed to pay $22,650,000 cash for this transaction, which closed on July 1,
1998. Accordingly, the impact of this acquisition will be recorded in the third
quarter of 1998.
6
<PAGE>
In a related transaction, in April of 1998, Kavouras signed a License
Agreement with Earthwatch Communication, Inc.'s for the exclusive rights to use,
market, license and sell the Licensed Products of U.S. Patent No. 5,379,215,
"Method for Creating a 3D Image of Terrain and Associated Weather." In
conjunction with the acquisition agreement, an Assignment Agreement was signed
on March 30, 1998, between Kavouras and the Company to assign this License to
DTN Market Communications Group, Inc., a wholly owned subsidiary of the Company.
As a result of this assignment, the Company paid $3,000,000 cash for the License
Agreement with Earthwatch, which is being capitalized as goodwill and amortized
using the straight-line method over ten years.
<TABLE>
<CAPTION>
5. LONG-TERM DEBT AND LOAN AGREEMENTS
June 30, 1998 December 31, 1997
Revolving Credit Agreement
<S> <C> <C>
Revolving Credit Line $13,500,000 $ 4,500,000
Term notes 42,244,788 35,151,040
Term Credit Agreement
Term notes 36,367,500 40,408,333
---------------------------------------
Total Loan Agreements 92,112,288 80,059,373
---------------------------------------
Less current portion 22,701,458 21,810,833
---------------------------------------
Total Long-Term Debt $69,410,830 $58,248,540
---------------------------------------
</TABLE>
The Company has a revolving credit agreement, as amended, with a group
of banks (the "Revolving Credit Agreement"). The Revolving Credit Agreement,
which expires June 30, 2000 unless extended, provides for a total commitment of
up to $65,000,000 in new borrowings. As of June 30, 1998, $13,500,000 of the
total commitment had been borrowed, with the remaining $51,500,000 available to
the Company subject to certain restrictions as discussed below.
Additional borrowings under the Revolving Credit Agreement are
available to the Company, as long as at the time of the advance, no default
exists with any of the Company loan agreements and the ratio of the Company's
total borrowings to operating cash flow ("the Leverage Ratio") does not exceed
thirty-six. As of June 30, 1998 based on current operating cash flow, the
Company would be able to borrow approximately $26,700,000 of the remaining
$51,500,000 commitment available.
In addition to the restrictions mentioned above with respect to
advances, total debt outstanding is limited to forty-eight time's monthly
operating cash flow. The Company is also required to maintain total
stockholders' equity of at least $23,500,000 plus fifty percent (50%) of net
income (but not losses) at fiscal year end through June 30, 2000. The minimum
stockholders equity required to be maintained is $24,618,040 as of December 31,
1997. The Company is required to maintain a ratio of quarterly operating cash
flow to interest expense (as defined) of at least 2.25 to 1. The Company is
permitted to pay cash dividends in any one year, which are, in the aggregate,
less than 25% of the Company's net operating profit after taxes in the previous
four quarters.
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 to operating cash flow
(the "Leverage Ratio"). The following table outlines the "Leverage Ratio", the
applicable Margin, Unused Commitment Fees and Fixed Note Margin to be discussed
below.
<TABLE>
<CAPTION>
- ---------------------------------- -------------- -------------------------- ----------------------
Leverage Ratio Margin Unused Commitment Fee Fixed Note Margin
- ---------------------------------- -------------- -------------------------- ----------------------
<S> <C> <C> <C>
greater than 42 .250% .375% 2.25%
greater than 36 and less than = 42 .500% .250% 2.25%
greater than 30 and less than = 36 .750% .250% 2.00%
greater than 24 and less than = 30 1.000% .250% 2.00%
greater than 18 and less than = 24 1.250% .125% 1.75%
less than = 18 1.375% .125% 1.75%
- ---------------------------------- --------------- -------------------------- ----------------------
</TABLE>
7
<PAGE>
The Revolving Credit Rate is the First National Bank of Omaha's
"National Base Rate", minus the applicable Margin. The base rate is adjusted
monthly, with the interest rate margin (as defined above) changed quarterly. As
of June 30, 1998, the Revolving Credit Rate is 7.125%.
The Company has the option to convert the outstanding revolving credit
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
Company's option, a variable interest rate of 1/4% over the Revolving Credit
Rate or at a fixed rate of 3/8% over the Revolving Credit Rate in effect on the
date of notice (as defined) or the applicable Fixed Note Margin (based on the
"Leverage Ratio") over the average of the 3 and 5 year U. S. treasury
securities, as quoted in the prior month "Federal Reserve Statistical Release",
whichever is greater. Through a refinancing of Senior Subordinated Notes, as of
March 17, 1998, the Company converted $16,000,000 of revolving credit to term
notes accruing interest at the rate of 7.50% (see footnote 6). As of June 30,
1998, $13,500,000 of the total borrowings outstanding had not been converted to
term loans. As of June 30, 1998, $42,244,788 of term loans was outstanding with
monthly installments due up through 2001 having interest rates ranging from
7.50% to 9.25%.
The Company pays a commitment fee of 1/8 - 3/8% on the unused portion
of the total revolving credit commitment based on the "Leverage Ratio". As of
June 30, 1998 the commitment fee was 1/8% on all unused revolving credit
commitment. In the event the "Leverage Ratio" exceeds 36, any term note accruing
interest at less than 7.5% is included in a "Trigger Event". The Company is
obligated to pay the holders of such term notes a fee of 0.375% of the
outstanding balance of the notes upon the occurrence of the Trigger Event and
like amounts on the six month anniversary and the twelve month anniversary of
the Trigger Event.
The Company has a Term Credit Agreement dated February 26, 1997, with a
group of banks providing for an aggregate principal amount of $48,490,000 to be
repaid in 72 equal principal installments beginning January 31, 1997. As of June
30, 1998, the principal balance was $36,367,500 with $19,041,750 accruing at a
variable interest rate of NY prime rate less one-half of one percent, or 8.00%
and the remaining $17,325,750 accruing at fixed interest rates ranging from
8.25% to 8.36%.
The revolving credit lines are classified as long-term debt since the
Company has the ability and the intent to maintain these obligations for longer
than one year.
Substantially all of the Company's assets are pledged as collateral
under the Company's long-term debt and loan agreements.
6. 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 subordinated 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 had 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.
The Company also issued a warrant to the investor to purchase 75,000
shares of the Company's $.001 par value common stock at $7.39 per share (as
adjusted after the three-for-one stock split) 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.
On March 17, 1998, the Company refinanced its Senior Subordinated Notes
with 7.50% Senior converted notes with fixed principal payments plus interest.
The Company recorded an extraordinary loss for the pre-payment penalty of
$1,125,000 or 7.5% of the principal balance of $15,000,000 to retire the
Subordinated Notes early. In addition, $579,340 of debt issuance and discount
costs related to the senior subordinated notes were also recorded as an
extraordinary loss in the first quarter of 1998.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
GENERAL OVERVIEW
The equipment used by subscribers is a large capital investment for the
Company. This equipment accounts for 59% of the Company's total assets. The
Company has also made significant investments during 1997 and the first six
months of 1998 to acquire subscribers and businesses that fit into its business
model. The net intangible assets (goodwill) resulting from these acquisitions is
25% of the Company's total assets. The acquisitions of subscribers and
businesses are expected to enhance the long-term operating performance and
financial condition of the Company. The investments in subscriber equipment
require the Company to increase long-term debt until cash generated from
operating activities is sufficient to support future investments. The Company's
overall financing strategy is simple, use long-term debt financing versus
equity, whenever possible, to prevent the dilution of shareholder value.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities for the first six months of
1998 was $26,147,594 compared to $25,769,877 for the same period in 1997. This
increase of $377,717 was primarily the result of the $4,193,810 from the change
in assets and liabilities plus the $887,616 reduction in interest expense
related to the Company's investing activities for subscriber equipment and
acquisitions. The change in assets and liabilities and the reduction in interest
expense were offset by the $3,283,807 decrease in operating cash flow and the
$1,076,880 extraordinary item, net of tax, due to early extinguishment of
subordinated debt.
NET CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities for the first six months of 1998
was $25,840,195 compared to $16,326,956 for the same period in 1997. This
increase was primarily the result of the Company's multiple acquisitions closed
on during the first six months of 1998, and increased purchases for information
distribution software and equipment.
As it relates to the Company's investing activities, the Company had
$28,597,173 of negative working capital compared to $28,102,490 at June 30, 1998
and 1997, respectively. This increase in working capital deficiency was in part
created by the growth in accounts receivable brought on by a growing subscriber
base and a bigger mix of customers now invoicing on an annual basis compared to
quarterly as was previously the standard. This increase was more than offset by
the increase in accrued expenses due mostly to the liabilities associated with
the non-recurring satellite costs. In addition, the current portion of long-term
debt decreased from period to period, even with the increase in the number of
acquisitions. This shows the Company's ability to pay down debt while continuing
to grow.
In keeping with the Company's growth strategy of developing services
for niche markets plus acquisitions that fit into our business model and/or
competitive strategies, DTN has closed on several acquisitions during the first
six months of 1998. The Company paid $10,237,488 on these acquisitions compared
to $5,216,299 during the same period in 1997. Among these acquisitions (which
are discussed in more detail in footnote 4 of the notes to interim financial
statements are SmartServ Online, Inc. and National Datamax, Inc., both of which
provide services for the financial services industry.
Subsequent to June 30, 1998, in July of 1998, DTN acquired 100% of the
capital stock outstanding of Kavouras, Inc., a company engaged in the
development, design, manufacture, marketing and service of meteorological
equipment and provides weather-related services to government, aviation,
commercial broadcast and other industries. Among other things, this acquisition
will provide DTN with control of a major source of content that will enable the
Company to strengthen its role as a leading provider of timely weather
information.
9
<PAGE>
Currently, all these acquisitions have been financed by utilizing the
Company's revolving credit line, which provides for a total commitment of up to
$65,000,000 in new borrowings (see footnote 5 of the notes to interim financial
statements).
NET CASH USED BY FINANCING ACTIVITIES
Net cash used by financing activities was $1,144,569 for the first six
months of 1998 and $9,928,299 for the same period of 1997. The decrease in net
cash used by financing activities can primarily be attributed to proceeds from
the Revolving Credit Line for acquisitions closed during the first six months of
1998. The Company continues to generate free cash flow and pay down debt while
continuing to grow through adding subscribers and business acquisitions. This
can be done primarily due to the excess cash generated by its operating
activities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
COMPETITION: The Company operates in a highly competitive environment,
competing with information and communication services utilizing various types of
electronic media, including satellite delivery, TV Cable delivery, the Internet,
electronic bulletin boards, television, radio, cellular, and telephone
communications. In addition to the various electronic publishers, the Company
competes with print media and "old information gathering habits." Many of the
Company's actual and potential competitors have substantially greater resources
than the Company.
INFLATION: The Company believes that inflationary trends have a limited
effect on the business. However, since a large percentage of the Company's
subscribers and revenues are related to agricultural industries, the general
state of the agricultural economy may impact the Company's business operations
and financial condition.
INDEBTEDNESS: The Company anticipates that internally generated cash
flow and its bank credit lines will be sufficient to fund operating activities,
capital expenditures and principal payments on long-term debt.
TECHNOLOGY: Although the business of the Company is subject to the
continuous changes in technology, the Company is currently unaware of any new
technology which is likely to replace its present electronic delivery systems,
equipment and the business applications these systems and equipment are designed
to provide at a competitive price.
YEAR 2000: The Company is conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the Year 2000
Issue. The Company plans to use internal resources to perform the review and
make programming changes or replacements as necessary. The Company is pursuing
Year 2000 compliance statements from all vendors that provide services or
products critical to the operation of the Company's systems. The Company does
not expect the cost of making the necessary changes to be significant. The
Company expects its Year 2000 conversion project to be completed on a timely
basis, however, failure to do so or failure on the part of third parties with
whom the Company does business could materially impact operations and financial
results.
10
<PAGE>
RESULTS OF OPERATIONS
GENERAL OVERVIEW
The financial dynamics of the Company's business operations are similar
to businesses that sell monthly subscriptions such as electronic publications
and communications and cable TV companies. The financial dynamics are similar
because DTN makes an initial investment of variable marketing costs to obtain
new subscribers (generally a one year subscription agreement) and the Company
makes a capital expenditure to provide the subscriber with the necessary
equipment to receive the Company's services.
In addition, DTN has a level of fixed costs, such as FM and Ku
satellite leases, certain news and weather, quotes, information providers and
administrative expenses, not directly affected by the number of subscribers
receiving the Company's services.
DTN's operating cash flow (operating income before depreciation and
amortization expense) is a key indicator monitored by DTN management. Growth in
operating cash flow results from a growing base of subscribers covering the
Company's fixed expenses. Operating cash flow is affected by the Company's
research and development activities.
DTN accumulates research and development activities as "Net Development
Costs". The Company defines "Net Development Costs" as 1) market research
activities, 2) the expenses of hardware and software engineering, research and
development, and 3) the negative operating cash flow (prior to corporate
allocations plus interest) of new services. The Company includes new services in
the "Net Development Costs" classification until the service shows positive
operating cash flow prior to corporate allocations plus interest for the full
quarter. The service becomes a core service after reaching this level in the
developmental process. These costs decreased 18% to $2.3 million during the
first six months of 1998, compared to $2.8 million for the same period of 1997.
This decrease was primarily the result of the consolidation of the Salt Lake
City operations into Omaha, during the later part of 1997, and a decrease in the
negative cash flow associated with the DTN Auto operations.
Recent Developments:
On Wednesday morning May 20, 1998, nearly all of DTN's 160,000
subscribers were unable to receive their data service due to loss of control of
the Galaxy IV satellite by PanAmSat. In a press release by PanAmSat, Robert
Bednarek, Senior Vice President and Chief Technology Officer, indicated that the
loss of the on-board spacecraft control processors caused the satellite to lose
its fixed orientation to earth.
On Wednesday afternoon, May 20, solutions were available to restore
service for the majority of DTN's subscribers. By late afternoon on Thursday,
May 21, solutions were available for all subscribers.
The loss of control of Galaxy IV by PanAmSat had a significant impact
on DTN operations. The Company switched all satellite customers to Telestar 5,
which is a more powerful satellite and has a larger footprint or a larger
coverage of geographical area. This satellite includes coverage of Mexico,
Hawaii and Alaska. Although this allows future opportunities for DTN, the cost
to DTN is significant. The costs related to the failure of Galaxy IV includes
telecommunications, labor, satellite costs and customer communications and these
unusual non-recurring costs are estimated to be $5.8 million and were recorded
in May of 1998. These other costs are the Company's estimate to convert
subscribers to the new satellite and handle the large customer service call
volume, duplicate satellite charges and other service costs related to this
change.
Although the Company believes the estimate is reasonable based on all
available information, the impact of customer retention is more difficult to
quantify and actual costs may vary from the estimate. DTN management believes
the impact from this problem will not significantly impact the longer-term
growth prospects of the Company. The Galaxy IV failure will have an impact on
subscription sales related to the months of May, June and July due to the
Company utilizing the sales force to adjust subscriber satellite dishes.
11
<PAGE>
Operating Cash Flow:
Operating cash flow (operating income before depreciation and
amortization expense) declined 36% and 12% for the second quarter and first six
months of 1998 to $8.6 million and $23.4 million, as compared to the same
periods of 1997 of $13.5 million and $26.7 million. Excluding the unusual
non-recurring costs of $5.8 million related to Galaxy IV, operating cash flow
grew 6% and 9% for the second quarter and first six months of 1998 to $14.4
million and $29.2 million, compared to the same periods of 1997 of $13.5 million
and $26.7 million.
REVENUES
Total revenues for the second quarter and first six months of 1998
increased 11% and 14% to $34.8 million and $69.2 million, compared to $31.4
million and $60.9 million for the same periods of 1997. These increases were
attributed to a 4% growth in subscribers at the end of the six months ended June
30, 1998 to 160,100 from 153,700 in 1997 and a 7% and 9% increase in operating
revenue per subscriber per month. Operating revenue, consisting of
subscriptions, additional services, communications and advertising, increased to
$70.62 and $70.04 per subscriber per month for the second quarter and first six
months of 1998, up from $65.76 and $64.45 for the same periods of 1997.
Subscriptions:
Subscription revenue grew 14% and 17% to $28.7 million and $56.4
million for the second quarter and first six months of 1998, compared to $25.1
million and $48.2 million for the same periods of 1997. The increase was
primarily due to increases in total subscribers, the ability to move subscribers
to higher priced services and acquisitions completed in the past 12 months.
Subscription revenue per subscriber per month for all new subscription sales was
$76 for the first six months of 1998 compared to $66 for the same period of
1997. On a per subscriber per month basis, subscription revenues increased 9%
and 10% to $59.69 and $58.77 for the second quarter and first six months of 1998
compared to $54.71 and $53.19 for the same periods of 1997.
Additional Services:
Additional service revenue increased 9% to $1.8 million and $3.6
million during both the second quarter and the first six months of 1998,
compared to $1.7 million and $3.3 million for the same periods of 1997. The
Company continues to expand the list of services available on an "a la carte"
basis. The Company believes weak agriculture markets have impacted the growth in
additional service revenues. On a per subscriber per month basis, additional
services revenue for the second quarter and first six months of 1998 was $3.76
and $3.73 per subscriber compared to $3.62 and $3.64 in 1997.
Communication Services:
Communications services revenue grew 8% and 12% to $2.7 million and
$5.4 million during the second quarter and first six months of 1998, compared to
$2.5 million and $4.8 million for the same periods of 1997. This growth is due
to refiners continuing to increase message volume and other communications to
wholesalers via DTNergy Services. The addition of the DTN Cotton Network is also
a contributing factor to the increase. On a per subscriber per month basis,
communications revenues increased to $5.55 and $5.59 for the second quarter and
first six months of 1998, up from $5.39 and $5.28 for the same periods of 1997.
Advertising:
Advertising revenue fell 17% and 11% to $.8 million and $1.9 million
for the second quarter and first six months of 1998, compared to $.9 million and
$2.1 million for the same periods of 1997. Advertising had a record year in 1997
fueled by strong advertising related to new product introductions by companies
in the agriculture industry. On a per subscriber per month basis, advertising
revenue was $1.62 and $1.95 for the second quarter and first six months of 1998,
compared to $2.04 and $2.33 in 1997.
12
<PAGE>
Service Initiation Fees:
Service initiation fees revenue fell 33% and 21% to $.9 million and
$2.0 million for the second quarter and first six months of 1998, compared to
$1.3 million and $2.5 million for the same periods of 1997. This decline is
primarily due to slower sales in the agricultural division, the direct result of
the weak agricultural markets. On a per subscriber per month basis, these
revenues decreased to $1.77 and $2.04 for the second quarter and first six
months of 1998, compared to $2.75 for both the same periods in 1997.
EXPENSES
Total expenses increased 33% and 25% to $37.8 million and $68.6 million
for the second quarter and first six months of 1998, compared to $28.3 million
and $54.9 million for the same periods of 1997. Excluding the unusual
non-recurring costs of $5.8 million related to Galaxy IV, total expenses
increased 13% and 14% for the second quarter and first six months of 1998
compared to the same periods of 1997. The increase in expenses, excluding the
unusual non-recurring costs related to Galaxy IV, were primarily related to the
Company's growth in subscribers and initiatives to expand sales and distribution
efforts along with administrative functions to support this growth. Total
expenses as a percentage of revenue, excluding the unusual non-recurring costs
related to Galaxy IV, remained relatively flat at 92% and 91% for the second
quarter and first six months of 1998, compared to 90% for both the same periods
of 1997.
Selling General & Administrative:
Selling, general and administrative expenses grew 14% and 17% to $17.7
million and $34.6 million during the second quarter and first six months of
1998, compared to $15.5 million and $29.5 million for the same periods in 1997.
These expenses were 51% and 50% of revenues for the periods above in 1998
compared to 49% and 48% in 1997. On a per subscriber per month basis, these
expenses were up 9% and 11% to $36.83 and $36.01 for the second quarter and
first six months of 1998 compared to $33.82 and $32.56 for the same periods of
1997.
Sales Commissions:
Sales commissions grew 14% and 16% to $2.7 million and $5.5 million for
the second quarter and first six months of 1998, compared to $2.4 million and
$4.7 million for the same periods of 1997. This increase is primarily due to
incentive programs to the national sales force and sales management related to
expanding the sales force and higher cash flows in DTNergy. On a per subscriber
per months basis, sales commissions increased 8% and 9% to $5.64 and $5.70 for
the second quarter and first six months of 1998, compared to $5.21 for both the
same periods of 1997.
Depreciation and Amortization:
Depreciation and amortization expense grew 11% and 10% to $11.6 million
and $22.7 million for the second quarter and first six months of 1998, compared
to $10.5 million and $20.7 million for the same periods of 1997. This increase
was primarily due to subscriber equipment related to the increase in subscribers
and the goodwill associated with the acquisitions. Depreciation and amortization
expenses, as a percentage of revenues, were down to 33% for the first six months
of 1998, compared to 34% for the same period of 1997. On a per subscriber per
month basis, depreciation and amortization expenses increased to $24.16 and
$23.63 for the second quarter and first six months of 1998, compared to $22.83
and $22.82 for the same periods of 1997.
OPERATING INCOME (LOSS)
Operating income (loss) decreased to ($3.0 million) and $0.7 million
for the second quarter and first six months of 1998, compared to $3.0 million
and $6.0 million for the same periods of 1997. Excluding the unusual
non-recurring costs of $5.8 million related to Galaxy IV, operating income
decreased 9% to $2.8 million for the second quarter of 1998 compared to $3.0
million in 1997. For the first six months of 1998, operating income increased 8%
to $6.5 million compared to $6.0 million for the same period of 1997. Operating
income, excluding the unusual non-recurring costs related to Galaxy IV, as a
percentage of revenue, declined to 8% and 9% for the second quarter and first
six months of 1998, compared to 10% for both the same periods of 1997. On a per
subscriber per month basis, operating income, excluding costs related to Galaxy
IV, was up 2% to $6.74 for the first six months of 1998, compared to $6.60 for
the same period of 1997.
13
<PAGE>
INTEREST EXPENSE
Interest expense decreased 22% and 19% to $1.8 million and $3.8 million
for the second quarter and first six months of 1998, compared to $2.3 million
and $4.7 million for the same periods of 1997. This decrease is the result of
the Company using free cash flow to pay down debt. The Company's improving debt
leverage ratio has allowed the company to lower its pricing on new borrowings
for revolving credit and fixed debt, for example, the $16 million of term debt
to pay off the company's 11.25% subordinated debt. Interest expense as a
percentage of revenue has declined to 5% and 6% of revenues for the second
quarter and first six months of 1998, compared to 7% and 8% for the same periods
of 1997.
INCOME TAX PROVISION (BENEFIT)
The Company's effective income tax rate was 36% for the second quarter
and first six months of 1998 and 1997.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
The net loss before extraordinary item for second quarter and first six
months of 1998 was $3.1 million and $2.0 million or $.27 and $.18 per share on a
diluted basis for the periods, compared to a net income of $.5 million and $.8
million or $.04 and $.07 per share on a diluted basis for the same periods of
1997. Excluding the unusual non-recurring cost of $5.8 million related to Galaxy
IV, the income before-extraordinary item for the second quarter and first six
months of 1998 was $.6 million and $1.7 million or $.06 and $.14 per share on a
diluted basis, compared to $.5 million and $.8 million or $.04 and $.07 per
share on a diluted basis for the same periods of 1997.
EXTRAORDINARY ITEM, NET OF TAX
During the first quarter of 1998, the Company refinanced its 11.25%
Senior Subordinated Notes with 7.5% Senior Notes. With this refinancing, the
Company took a one-time charge of $1.1 million or ($.09) per share on a diluted
basis, net of tax, for pre-payment penalties and write-offs of unamortized debt
issuance and discount costs.
NET INCOME (LOSS)
The net loss for the second quarter and first six months of 1998 was
$3.1 million or $.27 per share on a diluted basis for both periods, compared to
net income of $.5 million and $.8 million or $.04 and $.07 per share on a
diluted basis for the same periods of 1997. Net income, excluding the unusual
non-recurring costs related to Galaxy IV, was $.6 million or $.06 per share on a
diluted basis for the second quarter and first six months of 1998, compared to
$.5 million and $.8 million or $.04 and $.07 per share on a diluted basis for
the same periods of 1997.
14
<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 22, 1998
adjourned to May 21, 1998.
(b) Directors Elected - Roger R. Brodersen, Scott Fleck,
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 1998,
9,723,223 votes for, 2,969 votes against and 7,230
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
- Filed news release on June 11, 1998 relating to new
satellite agreement and outage costs.
- Filed stock purchase agreement on July 15, 1998
relating to the acquisition of Kavouras, Inc.
(27) Financial Data Schedule (Required)
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its 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
VP, CFO, Secretary and Treasurer
Dated this 14th day of August, 1998.
15
<PAGE>
EXHIBIT 11
COMPUTATION OF INCOME PER SHARE
Data Transmission Network Corporation
Quarter and six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
<S> <C> <C> <C> <C>
Unaudited 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item $(3,076,542) $ 485,561 $(1,989,136) $ 847,180
Extraordinary Item, net of tax -- -- (1,076,880) --
--------------------------------------------------------------------
Net Income (Loss) $(3,076,542) $ 485,561 $(3,066,016) $ 847,180
- ------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (1) 11,322,939 11,089,815 11,259,969 11,072,394
Add shares applicable to stock options
& warrants -- 979,117 -- 969,273
--------------------------------------------------------------------
Total Shares (2) 11,322,939 12,068,932 11,259,969 12,041,667
- ------------------------------------------------------------------------------------------------------------------------
Basic Income (Loss) Per Share
Income (loss) before Extraordinary Item $ (0.27) $ 0.04 $ (0.18) $ 0.08
Extraordinary Item -- -- (0.09) --
- ------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (0.27) $ 0.04 $ (0.27) $ 0.08
- ------------------------------------------------------------------------------------------------------------------------
Diluted Income (Loss) Per Share
Income (loss) before Extraordinary Item $ (0.27) $ 0.04 $ (0.18) $ 0.07
Extraordinary Item -- -- (0.09) --
- ------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (0.27) $ 0.04 $ (0.27) $ 0.07
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Shares used in the Basic Earnings Per Share.
(2) Shares used in the Diluted Earnings Per Share.
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,381,724
<ALLOWANCES> 900,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,066,412
<PP&E> 263,908,648
<DEPRECIATION> 154,867,177
<TOTAL-ASSETS> 168,748,188
<CURRENT-LIABILITIES> 41,663,585
<BONDS> 69,410,830
0
0
<COMMON> 11,389
<OTHER-SE> 30,921,284
<TOTAL-LIABILITY-AND-EQUITY> 168,748,188
<SALES> 69,222,629
<TOTAL-REVENUES> 69,222,629
<CGS> 0
<TOTAL-COSTS> 68,552,162
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,832,074
<INCOME-PRETAX> (3,103,398)
<INCOME-TAX> (1,114,262)
<INCOME-CONTINUING> (1,989,136)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,076,880)
<CHANGES> 0
<NET-INCOME> (3,066,016)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
