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, 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 May 14, 1998...11,315,311.
1
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
Data Transmission Network Corporation
Period ended March 31, 1998 and December 31, 1997
UNAUDITED 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
<S> <C> <C>
Cash $ 623,619 $ 837,170
Accounts receivable, net of allowance for
doubtful accounts of $810,000 9,206,337 7,629,296
Prepaid expenses 841,758 825,577
Deferred commission expense 3,173,672 3,302,972
Total Current Assets 13,845,386 12,595,015
Property and Equipment
Equipment Used By Subscribers 230,399,091 224,620,148
Equipment and Leasehold Improvements 24,807,184 23,155,237
255,206,275 247,775,385
Less: Accumulated Depreciation 144,855,569 135,265,090
Net Property and Equipment 110,350,706 112,510,295
Intangible Assets from Acquisitions, net of accumulated
amortization of $11,229,668 and $9,728,684 33,943,568 34,764,802
Other Assets 2,389,754 2,560,786
$160,529,414 $162,430,898
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 7,046,101 $ 6,985,053
Accrued expenses 5,921,516 5,319,506
Current portion of long-term debt 24,279,583 21,810,833
Total Current Liabilities 37,247,200 34,115,392
Long-Term Debt 64,806,248 58,248,540
Subordinated Long-Term Notes, net of unamortized
discount of $0 and $357,170 - 14,642,830
Equipment Deposits 472,756 484,017
Unearned Revenue 25,125,497 22,743,946
Stockholders' Equity
Common stock, par value $.001 authorized
20,000,000 shares, issued 11,236,037 and 11,148,052 11,236 11,148
Paid-in capital 31,997,609 31,326,683
Retained earnings 868,868 858,342
Total Stockholders' Equity 32,877,713 32,196,173
$160,529,414 $162,430,898
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to interim financial statements
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Data Transmission Network Corporation
Quarter ended March 31, 1998 and 1997
UNAUDITED 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
<S> <C> <C>
Subscriptions $ 27,744,227 $ 23,109,539
Additional services 1,775,949 1,638,786
Communication services 2,701,053 2,313,358
Advertising 1,091,996 1,176,732
Service initiation fees 1,111,922 1,228,458
Total Revenue 34,425,147 29,466,873
Expenses
Selling, general and administrative 16,880,366 13,992,613
Sales commissions 2,760,054 2,333,055
Depreciation and amortization 11,083,416 10,211,971
Total Expense 30,723,836 26,537,639
Operating Income 3,701,311 2,929,234
Interest expense 2,026,712 2,394,864
Other income, net 23,807 32,249
Income Before Income Taxes 1,698,406 566,619
Income tax provision 611,000 205,000
Income Before Extraordinary Item 1,087,406 361,619
Extraordinary Item, net of tax (6) 1,076,880 -
Net Income $ 10,526 $ 361,619
- ---------------------------------------------------------------------------------------------------------------------------
Basic Income Per Share
Income before Extraordinary Item $ 0.10 $ 0.03
Extraordinary Item (0.10) -
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.00 $ 0.03
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Income Per Share
Income before Extraordinary Item $ 0.09 $ 0.03
Extraordinary Item (0.09) -
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.00 $ 0.03
- ---------------------------------------------------------------------------------------------------------------------------
Basic Shares Outstanding 11,196,999 11,054,973
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Shares Outstanding 12,130,968 12,014,402
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to interim financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------
Data Transmission Network Corporation
Quarter ended March 31, 1998 and 1997
UNAUDITED 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 10,526 $ 361,619
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 11,083,416 10,211,971
Amortization of debt issue costs and discount 584,120 36,970
Deferred income taxes (55,918) 176,500
Change in assets and liabilities:
Accounts receivable (1,572,041) 1,927,097
Prepaid expenses 73,819 (20,426)
Deferred commission expense 129,300 (105,111)
Accounts payable (1,233,752) (144,394)
Accrued expenses 462,010 146,374
Equipment deposits (11,261) (6,099)
Unearned revenue 2,296,551 1,461,660
Net Cash Provided by Operating Activities 11,766,770 14,046,161
Cash Flows from Investing Activities
Capital expenditures:
Equipment used by subscribers (4,451,417) (4,326,454)
Equipment and leasehold improvements (1,619,626) (571,747)
Acquisitions (606,750) (4,953,593)
Net Cash Used by Investing Activities (6,677,793) (9,851,794)
Cash Flows from Financing Activities
Proceeds
Term Notes 16,000,000 -
Exercise of stock options 671,014 346,936
Payments
Revolving Credit Line (1,000,000) (500,000)
Term Notes (5,973,542) (3,858,959)
Subordinated Notes (15,000,000) -
Net Cash Used by Financing Activities (5,302,528) (4,012,023)
Net Increase (Decrease) in Cash (213,551) 182,344
Cash at Beginning of Period 837,170 708,053
Cash at End of Period $ 623,619 $ 890,397
- ----------------------------------------------------------------------------------------------------------------------------------
<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 three months ended March 31, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
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 was no differences between net income and
comprehensive income during the three months ended March 31, 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 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. 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 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.
On July 1, 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
On October 24, 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 $266,750 as an intangible asset (goodwill) and is
amortizing this cost using the straight-line method over eight years. The
Company believes the remaining customers will be converted by June 30, 1998.
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 $90,000 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.
CDS is engaged in the business of marketing software for tracking bales of
cotton for businesses in the cotton industry. This acquisition complements our
acquisition of The Network, Inc. (discussed above), an electronic cotton trading
network. The Company has capitalized $250,000 as an intangible asset (goodwill)
and is amortizing this cost using the straight-line method over five years.
SmartServ Online, Inc.
In March of 1998, DTN announced an agreement to acquire exclusive
rights to market the Internet based financial services information products of
SmartServ Online. These services include: SmartServ, 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 closed this
transaction April 23, 1998 and paid $850,000 cash for the exclusive rights and
subscribers.
Kavouras, Inc.
In March of 1998, DTN announced an agreement in principle among DTN and
the principal shareholders of Kavouras for the acquisition by DTN of their stock
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. The closing is dependent on approval by regulatory authorities.
National Datamax, Inc.
In April of 1998, DTN announced an agreement to acquire all the capital
stock 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.
6
<PAGE>
<TABLE>
<CAPTION>
5. LONG-TERM DEBT AND LOAN AGREEMENTS
------------------------------ ------------------------- ----------------------
March 31, 1998 December 31, 1997
------------------------------ ------------------------- ----------------------
Revolving Credit Agreement
<S> <C> <C>
Revolving Credit Line $ 3,500,000 $ 4,500,000
Term notes 47,197,917 35,151,040
Term Credit Agreement
Term notes 38,387,914 40,408,333
-------------------------------------------
Total Loan Agreements 89,085,831 80,059,373
-------------------------------------------
Less current portion 24,279,583 21,810,833
-------------------------------------------
Total Long-Term Debt $64,806,248 $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, 1999 unless extended, provides for a total commitment of
up to $17,000,000 in new borrowings. As of March 31, 1998, $3,500,000 of the
total commitment had been borrowed, with the remaining $13,500,000 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 or the subordinated notes
agreement (see Note 6), 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, 1998
based on current operating cash flow, the Company would be able to borrow all of
the remaining $13,500,000 commitment available.
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. 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 $23,500,000 plus fifty percent (50%) of net
income (but not losses) at fiscal year end through June 30, 1999. 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 (excluding long-term
subordinated debt) 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>
7
<PAGE>
- ------------------------------ ----------------------- --------------------------------- ---------------------------
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>
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 March 31, 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 1/2% over the Revolving Credit Rate 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 March 31, 1998, $3,500,000 of the total borrowings
outstanding had not been converted to term loans. As of March 31, 1998,
$47,197,917 of term loans were outstanding with monthly installments due up
through 2001 having interest rates ranging from 7.500% 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
March 31, 1998 the commitment fee was 1/8% on all unused revolving credit
commitment. Additionally, if total borrowings (excluding long-term subordinated
debt) exceeds 36 times the Operating Cash Flow (as defined), the Company will be
required to pay a closing fee of 1/2% on all new borrowings made after that
point in time. In the event the total borrowings exceed 36 times Operating Cash
Flow, 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
March 31, 1998, the principal balance was $38,387,914 with $20,099,622 accruing
at a variable interest rate of NY prime rate less one-half of one percent, or
8.00% and the remaining $18,288,292 accruing at fixed interest rates ranging
from 8.25% to 8.36%.
During 1992, the Company entered into a loan agreement and borrowed
$2,000,000 solely for the repurchase of the Company's outstanding common stock
(the "Stock Repurchase" Agreement). As of December 31, 1997, the amounts
borrowed under the Stock Repurchase Agreement, have been fully repaid.
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.
8
<PAGE>
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 item 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 item in the first quarter of 1998.
9
<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 63% of the Company's total assets. The
Company has also made significant investments during 1997 and the first quarter
of 1998 to acquire subscribers and businesses that fit into its business model.
The net intangible assets (goodwill) resulting from these acquisitions is 21% of
the Company's total assets. The acquisitions of subscribers and businesses is
expected to enhance the long-term operating performance and financial condition
of the Company. The investments in subscriber equipment may 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 three months of
1998 was $11,766,770 compared to $14,046,161 for the same period in 1997. This
decrease of $2,279,391 was primarily the result of the $1,076,880 extraordinary
item, net of tax, due to early extinguishment of subordinated debt and the
$3,114,475 from the change in assets and liabilities. This decrease was offset
by the $1,643,522 increase in operating cash flow (operating income before
depreciation and amortization expense) plus the $368,152 reduction in interest
expense related to the Company's investing activities for subscriber equipment
and acquisitions.
NET CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities for the first three months of
1998 was $6,677,793 compared to $9,851,794 for the same period in 1997. This
decrease was primarily the result of the Company's acquisition of Market
Communications Group, LLC in March of 1997 for $3.6 million This decrease was
slightly offset by the smaller acquisitions entered into during the first
quarter of 1998.
As it relates to the Company's investing activities, the Company had
$23,401,814 of negative working capital compared to $27,388,677 for the first
three months of 1998 and 1997, respectively. This decrease in working capital
deficiency was primarily created by the growth in accounts receivable as a
result of a growing subscriber base and a larger mix of customers now paying on
an annual basis compared to quarterly, as was previously the standard. Also, a
growing number of government and group subscribers paying in arrears have
impacted accounts receivable. In addition, the current portion of long-term debt
remained relatively flat, showing the Company's ability to reduce debt while
continuing to grow.
On October 24, 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 $266,750 as an intangible asset (goodwill) and is
amortizing this cost using the straight-line method over eight years. The
Company believes the remaining customers will be converted by June 30, 1998.
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 $90,000 as an
intangible asset (goodwill) and is amortizing this cost using the straight-line
method over eight years.
10
<PAGE>
In March of 1998, DTN acquired CDS Group, Inc. (CDS) for $250,000 cash.
CDS is engaged in the business of marketing software for tracking bales of
cotton for businesses in the cotton industry. This acquisition complements our
acquisition of The Network, Inc. (discussed above), an electronic cotton trading
network. The Company has capitalized $250,000 as an intangible asset (goodwill)
and is amortizing this cost using the straight-line method over five years.
During the first quarter of 1997, the Company acquired 2,900 real-time
commodity subscribers through two separate acquisitions. 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 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 associated liabilities. In
total, approximately $4.5 million was capitalized as intangible assets
(goodwill) and the Company is amortizing using the straight line method over
three to eight years. Also important with the MCG acquisition was the
acquisition of the exclusive rights to resell relevant Reuters real-time news
and information to the commodities, energy and metals markets.
NET CASH USED BY FINANCING ACTIVITIES
Net cash used by financing activities was $5,302,528 for the first
three months of 1998 and $4,012,023 for the same period of 1997. The Company
reduced its debt while continuing to grow subscribers and make business
acquisitions. The reduction of debt is primarily due to the excess cash
generated by 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.
11
<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.
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 a full
quarter. The service becomes a core service after reaching this level in the
developmental process. These costs decreased 32% during the first three months
of 1998 over 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.
Operating cash flow (operating income before depreciation and
amortization expense) grew 13% in the first quarter of 1998 compared to the
first quarter of 1997. This increase can be attributed to the growth in
subscribers and revenues. As a percentage of revenue, operating cash flow
decreased slightly to 43% for the first quarter of 1998 compared to 45% for the
same period in 1997. Operating cash flow and operating cash flow as a percentage
of revenue is one key measurement the Company uses to monitor its success.
REVENUES
Total revenues for the first quarter of 1998 increased 17% compared
with the same period of 1997. This increase was attributed to a 6% growth in
subscribers at the end of first quarter 1998 to 160,400 from 151,800 in 1997 and
a 9% increase in operating revenue per subscriber per month. Operating revenue,
consisting of subscriptions, additional services, communications and
advertising, increased to $69.55 per subscriber per month in the first quarter
of 1998, up from $63.56 in the first quarter of 1997.
Subscriptions:
Subscription revenue grew 20% for the first quarter of 1998 compared to
the same period of 1997. These increases were mainly due to the
increases in total subscribers, the ability to move the subscribers to
higher priced services and the acquisitions mentioned above.
Subscription revenue per subscriber per month for all new subscription
sales was $75 for the first quarter of 1998 compared to $65 for the
same period of 1997.
Additional Services:
Additional service revenue increased 8% during the first quarter of
1998 over the same period in 1997. This increase was the result of
subscriber increase and an expanding list of services available on an
"a la carte" basis. On a per subscriber per month basis, additional
services revenue for the first three months of 1998 was $3.71 up
slightly from $3.69 for the first three months of 1997.
Communication Services:
Communication services revenue recorded solid growth with a 17%
increase during the first quarter of 1998 compared to the same period
of 1997. This growth is primarily due to refiners continuing to send
more messages and other communications to its wholesalers via the
DTNergy services. On a per subscriber per month basis, these revenues
increased to $5.64 for the first three months of 1998 up from $5.21 for
the same period one year earlier.
12
<PAGE>
Advertising:
Advertising revenue showed a decrease of 7% for the first quarter of
1998 compared to the first quarter of 1997. This is primarily due to
increasing competition for companies advertising dollars along with a
shrinking number of customers due to mergers and consolidations in the
agricultural industries. On a per subscriber per month basis,
advertising revenue was $2.28 and $2.65 for the first quarter of 1998
versus 1997.
Service Initiation Fees:
Service initiation fees revenue fell 10% for the first quarter of 1998
compared to the same period of 1997. On a per sub per month basis,
these revenues decreased to $2.32 from $2.76 for the first three months
of 1998 compared to 1997.
EXPENSES
Total expenses increased 16% for the first quarter of 1998 compared to
the same period of 1997. The primary factors for this increase were the variable
expense growth relative to the 6% increase in total subscribers and the
continued efforts of expanding the sales and distribution support areas. As a
percentage of total revenue, total expenses decreased to 89% down from 90% for
the first three months of 1998 compared to 1997.
Selling, General & Administrative:
Selling, general and administrative expenses grew 21% during the first
quarter of 1998 over the same period in 1997. As a percentage of
revenue, these expenses were 49%, up from 48% one year earlier. On a
per subscriber per month basis, these costs were $35.24 and $31.49 for
the first quarter of 1998 and 1997 respectively.
Sales Commissions:
Sales commissions grew 18% for the first quarter of 1998 compared to
the first quarter of 1997. This increase is due to higher subscription
sales, incentive programs to the national sales force and sales
management related to an expanding sales force and higher cash flows in
DTNergy. On a per subscriber per month basis, sales commissions was
$5.76 versus $5.25 for the first quarter of 1998 compared to 1997. As a
percentage of revenue, commission expense remained flat at 8% for both
the first quarter of 1998 and 1997.
Depreciation And Amortization:
Depreciation and amortization expense grew 9% for the first quarter of
1998 over the same period of 1997. This increase was primarily due to
subscriber equipment related to the increase in total subscribers and
intangible assets (goodwill) from the acquisitions. On a per subscriber
per month basis, depreciation and amortization expense was $23.14
compared to $22.98 for the first quarter of 1998 and 1997 respectively.
As a percentage of revenue for the first quarter of 1998, depreciation
and amortization expense decreased to 32%, down from 35% for the same
period of 1997.
OPERATING INCOME
Operating income increased 26% for the first quarter of 1998 compared
to the same period in 1997. This is the direct result of the above mentioned
growth in revenues and expenses. On a per subscriber per month basis, operating
income was $7.73 compared to $6.59 for the first three months of 1998 compared
to the same period in 1997. As a percentage of revenue, this item increased to
11% up from 10% for the periods discussed.
INTEREST EXPENSE
Interest expense decreased by 15% for the first quarter of 1998 over
the first quarter of 1997. This decrease was primarily due to the Company's
ability to pay down debt and lower interest rates due to its improving leverage
ratio. This ratio determines pricing for the Company's debt. (see note 5). As a
percentage of revenue, interest expense declined to 6% down from 8% from the
first quarter of 1998 compared to 1997.
13
<PAGE>
INCOME BEFORE EXTRAORDINARY ITEM
Income before extraordinary item for the first quarter of 1998 was
$1,087,406 or $0.09 per share on a diluted basis, compared to $361,619 or $0.03
per share on a diluted basis for the first quarter 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 $1,076,880 or ($0.09) per share on a diluted
basis , net of tax, for pre-payments penalties and write-offs of unamortized
debt issuance and discount costs.
NET INCOME
Net income for the first quarter of 1998 was $10,526 or less than $0.01
per share on a diluted basis, compared to net income of $361,619 or $0.03 per
share on a diluted basis for the first quarter of 1997. These results were
primarily due to the above mentioned increased revenues and expenses offset by
the one-time extraordinary item due to the early extinguishment of debt during
the first quarter of 1998.
INCOME TAX PROVISION
The Company's effective income tax rate was 36% for the first quarter
of 1998 and 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 To Be 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 To Be Voted Upon
- Ratification of the appointment of Deloitte and Touche LLP
as independent auditors for 1998.
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.
(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 May, 1998.
15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
- -------------------------------------------------------------------------------------------------------------------------
COMPUTATION OF INCOME PER SHARE
Data Transmission Network Corporation
Quarter ended March 31, 1998 and 1997
UNAUDITED 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income Before Extraordinary Item $ 1,087,406 $ 361,619
Extraordinary Item, net of tax (6) 1,076,880 -
Net Income $ 10,526 $ 361,619
Average shares outstanding (1) 11,196,999 11,054,973
Add shares applicable to stock options & warrants 933,969 959,429
Total Shares (2) 12,130,968 12,014,402
Basic Income Per Share
Income before Extraordinary Item $ 0.10 $ 0.03
Extraordinary Item (0.10) -
Net Income $ 0.00 $ 0.03
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Income Per Share
Income before Extraordinary Item $ 0.09 $ 0.03
Extraordinary Item (0.09) -
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.00 $ 0.03
- ---------------------------------------------------------------------------------------------------------------------------
(1) Shares used in the Basic Earnings Per Share.
(2) Shares used in the Diluted Earnings Per Share.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 623,619
<SECURITIES> 0
<RECEIVABLES> 10,016,337
<ALLOWANCES> 810,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,845,386
<PP&E> 255,206,275
<DEPRECIATION> 144,855,569
<TOTAL-ASSETS> 160,529,414
<CURRENT-LIABILITIES> 37,247,200
<BONDS> 64,806,248
0
0
<COMMON> 11,236
<OTHER-SE> 32,866,477
<TOTAL-LIABILITY-AND-EQUITY> 160,529,414
<SALES> 34,425,147
<TOTAL-REVENUES> 34,425,147
<CGS> 0
<TOTAL-COSTS> 30,723,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,026,712
<INCOME-PRETAX> 1,698,406
<INCOME-TAX> 611,000
<INCOME-CONTINUING> 1,087,406
<DISCONTINUED> 0
<EXTRAORDINARY> 1,076,880
<CHANGES> 0
<NET-INCOME> 10,526
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>