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, 1999
- ---------------------- --------------
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 17, 1999...11,675,794.
<PAGE>
CONSOLIDATED BALANCE SHEETS
Data Transmission Network Corporation
As of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
Unaudited 1999 1998
- ---------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
<S> <C> <C>
Cash $ 807,716 $ --
Accounts receivable, net of allowance for
doubtful accounts of $1,300,000 for 1999 and 1998 11,143,397 10,475,426
Inventory (note 4) 3,568,789 3,575,580
Prepaid expenses 3,730,560 2,219,778
Deferred commission expense 2,846,676 2,695,475
---------------------------------------
Total Current Assets 22,097,138 18,966,259
Property and Equipment
Equipment Used By Subscribers 248,395,485 244,613,085
Equipment, Building and Leasehold Improvements (note 5) 40,995,360 38,788,491
---------------------------------------
289,390,845 283,401,576
Less: Accumulated Depreciation 184,317,628 174,164,486
---------------------------------------
Net Property and Equipment 105,073,217 109,237,090
Intangible Assets from Acquisitions (note 3) 86,641,705 82,266,913
Less: Accumulated Amortization 21,120,027 18,121,533
---------------------------------------
Net Intangible Assets 65,521,678 64,145,380
Other Assets 5,339,097 4,836,353
---------------------------------------
$ 198,031,130 $ 197,185,082
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,925,240 $ 5,820,579
Accrued expenses 10,217,354 8,963,856
Current portion of long-term debt (note 6) 21,581,667 21,628,542
---------------------------------------
Total Current Liabilities 37,724,261 36,412,977
Revolving Debt (note 6) 58,500,000 55,500,000
Long-Term Debt (note 6) 39,724,582 45,119,998
Equipment Deposits 447,688 653,753
Unearned Revenue 29,128,864 27,348,468
Shareholders' Equity
Common stock, par value $.001 authorized
20,000,000 shares, issued 11,668,637 and 11,516,392 11,669 11,516
Paid-in capital 36,147,941 35,022,787
Accumulated deficit (3,653,875) (2,884,417)
----------------------------------------
Total Shareholders' Equity 32,505,735 32,149,886
---------------------------------------
$ 198,031,130 $ 197,185,082
- ---------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Data Transmission Network Corporation
Quarter ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Unaudited 1999 1998
- -----------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C>
Subscriptions $ 33,123,442 $ 27,744,227
Equipment sales 1,989,850 -
Additional services 1,813,570 1,775,949
Communication services 2,888,592 2,701,053
Advertising 1,145,229 1,091,996
Service initiation fees 723,334 1,111,922
------------------------------------
41,684,017 34,425,147
------------------------------------
EXPENSES
Selling, general and administrative 21,726,841 16,880,366
Cost of equipment sales 1,717,842 -
Sales commissions 2,926,150 2,760,054
Depreciation and amortization 13,299,753 11,083,416
Non-recurring costs 735,828 -
------------------------------------
40,406,414 30,723,836
------------------------------------
OPERATING INCOME 1,277,603 3,701,311
Interest expense 2,291,827 2,026,712
Other income, net 15,266 23,807
------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (998,958) 1,698,406
Income tax provision (benefit) (229,500) 611,000
------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (769,458) 1,087,406
EXTRAORDINARY ITEM, net of tax - 1,076,880
------------------------------------
NET INCOME (LOSS) $ (769,458) $ 10,526
- -----------------------------------------------------------------------------------------------------
BASIC INCOME (LOSS) PER SHARE
Income (loss) before Extraordinary item $ (0.07) $ 0.10
Extraordinary item, net of tax - (0.10)
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ (0.07) $ 0.00
- -----------------------------------------------------------------------------------------------------
DILUTED INCOME (LOSS) PER SHARE
Income (loss) before Extraordinary item $ (0.07) $ 0.09
Extraordinary item, net of tax - (0.09)
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ (0.07) $ 0.00
- -----------------------------------------------------------------------------------------------------
BASIC SHARES OUTSTANDING 11,578,742 11,196,999
DILUTED SHARES OUTSTANDING 11,578,742 12,130,968
- -----------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Data Transmission Network Corporation
Three months ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Unaudited 1999 1998
- ---------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) $ (769,458) $ 10,526
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 13,299,753 11,083,416
Amortization of debt issue costs and discount 19,160 26,240
Extraordinary loss on early extinguishment of debt - 1,682,880
Deferred income taxes (369,500) (55,918)
Change in assets and liabilities:
Accounts receivable (669,422) (1,572,041)
Inventory 6,791 -
Prepaid expenses (1,510,782) 73,819
Deferred commission expense (151,201) 129,300
Deferred debt issuance costs (150,950) -
Accounts payable 154,656 (1,233,752)
Accrued expenses 1,059,898 462,010
Equipment deposits (206,065) (11,261)
Unearned revenue 1,735,396 2,296,551
------------------------------------
Net Cash Provided by Operating Activities 12,448,276 12,891,770
Cash Flows From Investing Activities
Capital expenditures:
Equipment used by subscribers (3,887,397) (4,451,417)
Equipment and leasehold improvements (2,241,987) (1,619,626)
Acquisitions (4,194,192) (606,750)
------------------------------------
Net Cash Used by Investing Activities (10,323,576) (6,677,793)
Cash Flows from Financing Activities
Proceeds:
Revolving Credit Line 3,000,000 -
Term Notes - 16,000,000
Exercise of stock options 1,125,307 671,014
Payments:
Revolving Credit Line - (1,000,000)
Term Notes (5,442,291) (5,973,542)
Subordinated notes and prepayment costs - (16,125,000)
-----------------------------------
Net Cash Used by Financing Activities (1,316,984) (6,427,528)
-----------------------------------
Net Increase (Decrease) in Cash 807,716 (213,551)
Cash at Beginning of Period - 837,170
-----------------------------------
Cash at End of Period $ 807,716 $ 623,619
- ---------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
4
<PAGE>
NOTES TO INTERIM CONSOLIDATED 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 1998 Annual Report, this report was
incorporated by reference in Form 10-K for the fiscal period ended December 31,
1998. The results of operations for the quarter ended March 31, 1999 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 Kavouras Inc., National Datamax, Inc.,
DTN Market Communications Group, Inc., DTN Acquisition, Inc., Asset Growth
Corporation, Paragon Software, Inc., and Weather Services Corporation.
2. EARNINGS (LOSS) 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 and warrants.
3. ACQUISITIONS
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 $133,205 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. The Company has capitalized $337,600 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 plus $1,055,000 for minimum payments for the first
twelve months of the contract. 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
first year minimum payments in excess of the calculated payments have been
capitalized as part of the purchase price. The Company has capitalized
$1,905,000 as an intangible asset (goodwill) and is amortizing this cost using
the straight-line method over five years.
On January 26, 1999, the Company and SmartServ Online, Inc., (SSOL) based
in Stamford, CT, (OTC-BB:SSOL) signed a Letter of Intent whereby the Company
will merge with SmartServ Online, Inc. Shareholders of SmartServ Online, Inc.
will receive stock of the Company. The Letter of Intent has been signed by the
holders of a majority of the stock of SSOL on a fully diluted basis.
5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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, assume the assets and
liabilities of National Datamax, Inc., plus pay an earn-out based upon revenue
growth from quarter ending December 31, 1997, through quarter ending September
30, 1999. National Datamax is a wholly owned subsidiary of DTN and operates out
of California. The Company has capitalized $3,274,822 as an intangible asset
(primarily goodwill) and is amortizing this cost using the straight-line method
over three to five years.
Kavouras, Inc.
In July of 1998, DTN signed an agreement to acquire 100% of the capital
stock outstanding in Kavouras Inc. 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. The Company agreed to assume the
assets and liabilities of Kavouras, Inc. and pay $22,650,000 cash of which,
$20,650,000 was paid at closing. The remaining $2,000,000 cash will be paid out
in equal $400,000 payments over the next five anniversary dates of closing.
Kavouras is a wholly owned subsidiary of DTN and operates out of Minnesota under
the name DTN Kavouras Weather Services. The Company has capitalized $18,208,749
as an intangible asset (primarily goodwill) and is amortizing this cost using
the straight-line method over five to ten years.
In a related transaction, in April of 1998, Kavouras signed a License
Agreement with Earthwatch Communication, Inc. for the exclusive rights to use,
market, license and sell the Licensed Products of a U.S. Patent, which provides
a "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 Communication, Inc., which is being capitalized as an
intangible asset and amortized using the straight-line method over ten years.
Weather Services Corporation
In December of 1998, the Company acquired 100% of the capital stock
outstanding in Weather Services Corporation (WSC). WSC provides meteorological
consulting and worldwide commercial weather information to internet, newspaper,
utilities, broadcasters, agribusinesses and municipalities. The Company agreed
to pay $3,807,700 cash to acquire the stock and assume certain liabilities plus
a warrant to purchase 20,000 shares of DTN's common stock at $34.00. The Company
has capitalized $3,806,533 as an intangible asset (goodwill) and is amortizing
this cost using the straight-line method over ten years. The fair value of the
warrant is included in shareholder's equity.
Waterman Associates
In January of 1999, DTN acquired Waterman Associates, a business engaged in
the business of creating, assembling, marketing and distributing information in
the natural gas and electric energy industries. This information is made
available to DTN subscribers as part of the DTN Natural Gas and Electric
services. DTN acquired Waterman Associates for $350,000 cash. The company has
capitalized $397,000 as an intangible asset (goodwill) and is amortizing this
cost using the straight-line method over five years.
Paragon Software, Inc.
In March of 1999, the Company acquired Asset Growth Corporation (AGC) and
the option to purchase Paragon Software, Inc. (PSI). AGC, a holding company,
held an option to purchase PSI. In order to acquire PSI, DTN purchased both AGC
and PSI. PSI is an Internet Company that supplies real-time streaming
(continuously updated) quotes to investors. PSI markets its product under the
name InterQuote (www.interquote.com). The Company agreed to pay $9.5 million
cash. Approximately $5.3 million was paid in October 1998 and the remainder was
paid in March 1999. The Company has capitalized $9,908,510 as an intangible
asset (goodwill) and is amortizing this cost using the straight-line method over
five years.
6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Financial Information
All of the acquisitions have been accounted for using the purchase
method of accounting. With the exception of National Datamax, Kavouras, PSI and
WSC, the acquisitions in 1998 and 1999 were primarily acquisitions of
subscribers and not entire businesses. The following unaudited pro forma
financial information reflects the consolidated results of operations of the
Company for the three months ended March 31, 1998 as though the Kavouras,
National Datamax, PSI and WSC acquisitions, had occurred at the beginning of the
period presented. The remaining acquisitions were deemed not material in nature
to the overall operating statements of the Company, thus are excluded from the
pro forma information disclosure. This pro forma information has been prepared
for comparative purpose only and does not necessarily represent actual operating
results that may be achieved in the future or that would have occurred had the
acquisition been consummated on January 1, 1998.
<TABLE>
<CAPTION>
Pro Forma March 31, 1998
<S> <C>
Revenues $ 40,570,514
Income (loss) before
extraordinary item $ (374,692)
Income (loss) per share before
extraordinary item
Basic $ (0.03)
Diluted $ (0.03)
</TABLE>
4. INVENTORY
Inventories are primarily related to the equipment sales as a result of
the acquisition of Kavouras. The major classes of inventory are as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
<S> <C> <C>
Raw Materials $ 2,401,071 $ 2,684,857
Work-in-Process 770,791 728,415
Finished Goods 396,927 162,308
Total $ 3,568,789 $ 3,575,580
</TABLE>
<TABLE>
<CAPTION>
5. EQUIPMENT, BUILDING AND LEASEHOLD IMPROVEMENTS
Equipment, building and leasehold improvements are stated at cost. The
respective costs of the classes of assets are as follows:
March 31, 1999 December 31, 1998
<S> <C> <C>
Equipment $ 35,342,346 $ 33,198,540
Building 2,468,803 2,460,486
Land 220,269 220,269
Leasehold Improvements 2,963,942 2,909,196
Total $ 40,995,360 $ 38,788,491
</TABLE>
7
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
6. LONG-TERM DEBT AND LOAN AGREEMENTS
March 31, 1999 December 31, 1998
Revolving Credit Agreement
<S> <C> <C>
Revolving Credit Line $ 58,500,000 $ 55,500,000
Term Notes 31,000,000 34,421,875
Term Credit Agreement
Term notes 30,306,249 32,326,665
Total Loan Agreements 119,806,249 122,248,540
Less current portion 21,581,667 21,628,542
Total Long-Term Debt 98,224,582 100,619,998
</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, 2001 unless extended, provides for a total commitment of up to
$122,900,000 in new borrowings. As of March 31, 1999, $58,500,000 of the total
commitment had been borrowed, with the remaining $64,400,000 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
March 31, 1999, based on current operating cash flow, the Company would be able
to borrow the entire amount of the remaining $64,400,000 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, 2001. The minimum stockholders equity required
to be maintained is $24,618,040 as of December 31, 1998. 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> <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>
8
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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,
1999, the Revolving Credit Rate is 6.75%.
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 7). As of March 31,
1999, $58,500,000 of the total borrowings outstanding had not been converted to
term loans. As of March 31, 1999, $31,000,000 of term loans was outstanding with
monthly installments due up through 2002 having interest rates ranging from
7.50% to 7.865%.
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, 1999 the commitment fee was 1/4% 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 which began January 31, 1997. As of
March 31, 1999, the principal balance was $30,306,249 with $15,868,124 accruing
at a variable interest rate of NY prime rate less one-half of one percent, or
7.25% and the remaining $14,438,125 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.
7. SUBORDINATED LONG-TERM NOTES
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, $557,880 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. INDUSTRY SEGMENT DATA
The Company operates in four principal industry segments - Agricultural,
Weather, Financial and Energy. All segments provide comprehensive,
time-sensitive information and communication services for their respective
industries.
The Agricultural segment (DTN Ag Services) provides information and
services, including: agricultural market information, delayed and real-time
futures and options quotes and comprehensive news and weather for a variety of
agribusiness industries; equipment locator and inventory management service for
the farm implement dealer; weather, pricing, news and transportation information
for the produce industry; and an electronic marketing system for the cotton
industry.
9
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Weather segment (DTN Weather Services) provides a comprehensive weather
information system to meet the weather information needs of many industries
including: aviation, broadcast, construction, forestry, marine, transportation,
turf-related operations, emergency management and any other business relying on
weather information to help carry out its operations.
The Financial segment (DTN Financial Services) provides comprehensive
information and services including: real-time quotes, news, charts and alerts
for professional investors delivered via proprietary hardware, PC or over the
internet; delayed quotes, business news and economic data for the individual
investor; wholesale mortgage rates and prices for the mortgage industry; and
software and data services to financial planners and independent brokers.
The Energy segment (DTN Energy Services) provides pricing information and
communications services including: delayed futures and options quotes plus
selected financial information for the refined fuels industry, thus linking the
refiners with their customers and real-time or delayed options and futures
quotes, weather, news and information for the gas and electricity industries.
The Other segment (Other Services) is general corporate activities not
attributable to a specific industry segment and other industry services not
material in nature and elimination of inter-segment activity.
Management primarily evaluates performance of each segment based on
operating cash flow (EBITDA) defined as operating income before depreciation and
amortization expense. Included in the segment activity are corporate allocations
to the industry segments. The Company does not allocate income taxes and
infrequent or extraordinary items to the individual industry segments.
Inter-segment revenues have been recorded at amounts approximating market. The
following table summarizes additional information regarding the Company's
individual industry segments:
10
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
- -------------------------------------------------------------------------------
External revenues
<S> <C> <C>
DTN Ag Services $ 21,686,312 $ 22,869,057
DTN Weather Services 9,952,482 3,543,625
DTN Financial Services 4,531,779 3,058,418
DTN Energy Services 4,324,376 3,863,558
Other Services 1,189,068 1,090,489
- -------------------------------------------------------------------------------
Total $ 41,684,017 $ 34,425,147
- -------------------------------------------------------------------------------
Inter-segment revenues
DTN Ag Services $ - $ -
DTN Weather Services 541,270 -
DTN Financial Services 12,867 -
DTN Energy Services - -
Other Services - -
- -------------------------------------------------------------------------------
554,137 -
Inter-segment elimination (554,137) -
- -------------------------------------------------------------------------------
Total $ - $ -
- -------------------------------------------------------------------------------
Operating Income
DTN Ag Services $ 3,710,786 $ 5,038,668
DTN Weather Services (1,433,475) (491,976)
DTN Financial Services (1,462,009) (456,659)
DTN Energy Services 1,569,457 1,411,021
Other Services (Note a) (1,107,156) (1,799,743)
- -------------------------------------------------------------------------------
Total $ 1,277,603 $ 3,701,311
- -------------------------------------------------------------------------------
Depreciation and Amortization
DTN Ag Services $ 8,189,922 $ 8,196,134
DTN Weather Services 2,523,437 1,072,072
DTN Financial Services 1,499,343 859,906
DTN Energy Services 413,189 543,210
Other Services 673,862 412,094
- -------------------------------------------------------------------------------
Total $ 13,299,753 $ 11,083,416
- -------------------------------------------------------------------------------
Interest Expense
DTN Ag Services $ 1,088,702 $ 1,629,573
DTN Weather Services 894,715 180,058
DTN Financial Services 200,419 118,597
DTN Energy Services 45,187 44,428
Other Services 62,804 54,056
- -------------------------------------------------------------------------------
Total $ 2,291,827 $ 2,026,712
- -------------------------------------------------------------------------------
Operating Cash Flow (EBITDA) (Note b)
DTN Ag Services $ 11,900,708 $ 13,234,802
DTN Weather Services 1,089,962 580,096
DTN Financial Services 37,334 403,247
DTN Energy Services 1,982,646 1,954,231
Other Services (Note a) (433,294) (1,387,649)
- -------------------------------------------------------------------------------
Total $ 14,577,356 $ 14,784,727
- -------------------------------------------------------------------------------
(a) 1999 operating income and operating cash flow includes $0.7 million for
non-recurring severance costs.
(b) Operating cash flow (EBITDA) defined as operating income before
depreciation and amortization expense.
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
GENERAL OVERVIEW
The equipment used by subscribers is a large capital investment for the
Company. The cost of subscriber equipment, net of depreciation, accounts for 44%
of the Company's total assets at March 31, 1999 compared with 46% at December
31, 1998. The Company has also made significant investments during 1998 and the
first three months of 1999 to acquire subscribers and businesses that fit the
Company's business model. The net intangible assets (primarily goodwill) from
acquisitions are 33% of the Company's total assets at March 31, 1999. The
acquisitions of subscribers and businesses are expected to enhance the long-term
operating performance and financial condition of the Company. The investment in
acquisitions has required the Company to increase long-term debt. The Company's
management plans to continually review this strategy to support the growth of
the Company.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $12.4 million for the first
quarter of 1999 compared to $12.9 million for the same period in 1998. This
decrease of $0.5 million was primarily the result of the $0.2 million decrease
in operating cash flow (EBITDA), defined as operating income before depreciation
and amortization expense and the $0.3 million increase in interest expense.
Excluding the $0.7 million of non-recurring severance costs, primarily related
to the resignation of the Company's Chairman and CEO, net cash provided by
operating activities for the first quarter of 1999, would have been $13.1
million compared to $12.9 million for the first quarter of 1998.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used by investing activities was $10.3 million for the first
quarter of 1999 compared to $6.7 million for the same period in 1998. The
increase of $3.6 million was the result of the Company's acquisitions closed
during the first three months of 1999. Capital expenditures remained flat at
$6.1 million for the first quarter of 1999 and 1998.
The Company's growth strategy includes developing services for niche
markets plus acquisitions that fit into their business model and/or competitive
strategies. The Company closed on two acquisitions during the first quarter of
1999. The Company paid $4.2 million cash on these acquisitions compared to $0.6
million cash during the same period in 1998. Among these acquisitions (which are
discussed in more detail in footnote 4 of the notes to interim financial
statements) was Paragon Software, Inc., an Internet company that supplies
real-time streaming quotes under the product name InterQuote
(www.interquote.com).
The acquisitions in the first quarter of 1999 were financed by utilizing
the Company's revolving credit line, which provides for a total commitment of up
to $122.9 million.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used by financing activities was $1.3 million for the first
quarter of 1999 compared to $6.4 million for the same period a year ago. The
decrease of $5.1 million in net cash used by financing activities is primarily
attributed to the reduction in net debt payments as a result of the $3.6
increase in cash required to fund new acquisitions during the first quarter of
1999.
The Company reduced its total debt by $2.4 million during the first quarter
of 1999 compared with $5.6 million for the same period of 1998. Excluding the
$3.6 million increase in cash required to fund acquisitions, the Company would
have had the ability to reduce its debt by $6.0 million during the first quarter
of 1999.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FACTORS THAT MAY AFFECT FUTURE RESULTS
Acquisitions: The Company's strategy includes continued growth through
acquisitions of complimentary services, technologies or businesses, which may
result in the diversion of management's attention from the day-to-day operations
of the Company's business. Other risks include, but are not limited to, possible
difficulties in the integration of operations, products and personnel,
difficulty in applying internal controls to acquired businesses and particular
problems, liabilities or contingencies related to the businesses being acquired.
If efforts to integrate past or future acquisitions fail, there could be a
material adverse effect on the Company's business, financial condition and
results of operations. The Company plans to pursue opportunities that it
believes fit its business strategy.
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.
Indebtedness: The Company anticipates that internally generated cash flow
and its bank credit lines will be sufficient to fund operating activities,
capital expenditures and service interest and principal payments on long-term
debt.
Economic Conditions: The Company's bank credit lines are based upon the
Company's ability to generate operating cash flow, a material decline in
operating cash flow could impact the Company's operations and ability to finance
the Company. Due to a large percentage of the Company's subscribers and revenues
being related to agricultural industries, the general state of the agricultural
economy may impact the Company's business operations and financial condition.
Technology: The business of the Company is subject to the continuous
changes in information distribution technology affecting how information is
distributed to the Company's customers. Currently, the primary information
distribution technology the Company utilizes for the delivery of information is
satellite. Other technologies used are the Internet, FM side band channels, VBI
(vertical blanking interval through a cable TV signal), leased land lines,
DIRECTV, E-mail and Fax. The Company is not aware of any other technology that
may replace the current electronic delivery systems and equipment at a
competitive price. New developments in electronic hardware capabilities and in
data distribution technologies could cause the Company's delivery systems and
equipment to become obsolete, economically inefficient or less attractive
compared to available alternatives. The improvement and enhancement (and
subsequent lower cost) of delivery technologies such as the Internet, DIRECTV
and cable are providing the Company with alternatives to its current primary
delivery method, which is satellite.
Year 2000 (Y2K): The Company is actively engaged in a comprehensive review
of its computer systems to identify and remediate the systems that could be
affected by the Year 2000 Issue. The Company is addressing the following
critical issues related to the Company's state of readiness, cost of addressing
Year 2000 issues, risks of Year 2000 issues, and contingency plans:
State of Readiness - The Company has identified the following major areas
of the Company dependent on computer software and hardware that may be affected
by the Y2K issues.
Service delivery - The Company transmits information and communications
services to subscribers via satellite, Internet, FM side band channels,
VBI, leased landlines, DIRECTV, E-mail and Fax. The Company has been
engaged in identifying, remediating and testing any system that could
result in an interruption of the delivery of the Company's services to
subscribers.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Customer Service - The Company provides customer service to subscribers
using telephone systems, using administrative systems to ship equipment
and/or modify the services that subscribers receive. The Company has been
engaged in identifying, remediating and testing any system that could
result in an interruption of customer service provided to subscribers.
Cash flow - The Company maintains administrative systems that track
services provided to subscribers, invoice subscribers and apply cash
payments remitted for services received by subscribers. The Company has
been engaged in identifying, remediating and testing any system that could
result in an interruption of cash flow from subscribers.
Physical environment - The Company maintains facilities for employees,
operating computer data centers and distributing subscriber equipment. The
Company has been engaged in identifying, remediating and testing the
possibility of any environmental control, such as heating and cooling
systems, inhibiting the use of the Company's facilities.
The Company has made progress in its efforts to address the Year 2000 issue
and ensure systems and data will be functional beyond 1999. The following
phases, which to some extent are being conducted concurrently, are on schedule
to be completed by the listed completion dates.
Inventory - The Company has conducted an inventory of all custom developed
software and third party vendor supplied software used internally by the
Company. The Company has also conducted an inventory of all third party
data feeds that are transmitted to the Company for rebroadcast. The Company
has also conducted an inventory of all hardware related to the transmission
of data and internal administrative operations. The Company had completed
this phase as of December 31, 1998.
Assess Business Impact - The Company has reviewed the business impact of
specific systems if they were to fail due to incorrect date processing past
2000. The Company has identified these systems related to internal
administrative systems, third party data feeds and hardware as critical or
non-critical to normal business operations. The Company had completed this
phase as of December 31, 1998.
Remediation and Testing - The Company is remediating software and hardware
systems and conducting detailed Y2K testing to produce standardized
`evidence' of Y2K compliance. The Company's estimated completion date is
September 30, 1999.
Manage Subsequent Changes - All system modifications made subsequent to Y2K
testing that are date related will be regression tested and documented. The
Company's estimated completion date is December 31, 1999.
Cost of Addressing Year 2000 Issues - The Company has used existing
internal resources to perform all work on the phases discussed above through
March 31, 1999. The estimated cost of using internal resources through March 31,
1999 was $.7 million. The Company plans to complete all system modifications and
testing required to resolve Y2K issues using existing internal resources and
does not expect the cost of making the necessary changes to be significant.
Approximately $.2 million was spent during the first quarter of 1999, while the
remaining estimated costs of using internal resources to effect Y2K compliance
is less than $.3 million.
Risks of Year 2000 Issues and Contingency Plan - 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. The Company
believes the worst case scenario would be the failure of the communication
systems providing information and communications to the Company's customers. If
any of the satellites used by the Company were to fail, it is possible that the
Company could shift all of its satellite subscribers to other satellites or its
Internet based products. The Company is working with various third party vendors
to verify Year 2000 compliance, and if necessary, securing alternate sources of
service or products if compliance is not obtained. In the event that one
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
or more data providers fail, it is possible the Company could integrate
information from another data provider into its data feed.
The Company is currently developing contingency plans for those systems
identified as critical to normal business operations. The contingency plan will
include focusing on early detection, planned reactions and subsequent
remediation of unforeseen issues. The Company's estimated completion of a formal
contingency plan is September 30, 1999. The Company believes there are no
foolproof contingency plans that cover every possible failure.
Based upon currently available information, management believes the Company
will meet its compliance goals and does not anticipate that the cost of Y2K
compliance will have a material impact on the Company's financial condition,
results of operations or liquidity. The achievement of these goals is dependent
upon many factors, some outside of the Company's control. In the event that the
Company's internal systems or internal system of critical vendors fail to
achieve Y2K compliance, the Company's business and its results of operations
could be adversely impacted.
Forward Looking Statements: From time to time, information provided by the
Company, statements made by its employees or information included in its filings
with the Securities and Exchange Commission (including this Form 10-Q and
documents incorporated by reference) may contain statements which are not
historical facts, so-called "forward-looking statements". These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual future results
may differ significantly from those stated in any forward-looking statements.
Forward-looking statements involve a number of risk and uncertainties,
including, but not limited to, product demand, pricing, market acceptance,
inflation, risks in product and technology development, product competition,
acquisitions, key personnel, and other risk factors detailed in this Quarterly
Report on Form 10-Q and in the Company's other Securities and Exchange
Commission filings.
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 satellite based services. Internet
subscribers utilize their own personal computer.
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.
Subscribers:
The Company's subscriber count and subscriber retention rates are
measurements used by management to help forecast where revenues will be in the
future. Total subscribers at March 31, 1999 increased to 163,900 compared to
160,400 for the same period in 1998 and 159,300 at December 31, 1998. Included
in total subscribers for the first quarter 1999 were 4,200 subscribers added
primarily through the acquisition of Paragon Software, Inc. The annualized
subscriber retention rate was 82.4% for the first quarter ended March 31, 1999
compared to 86.3% at March 31, 1998 and 80.6% for the year ended December 31,
1998.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
In addition, the Company continued to see growth in Internet subscribers,
which totaled 10,400 at March 31, 1999 as compared to 1,600 at March 31, 1998
and 4,700 at December 31, 1998. These Internet subscribers are primarily in the
Agriculture and Financial Divisions.
Operating Cash Flow:
The Company's operating cash flow (EBITDA), defined as 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, as well as, increased revenues on per subscriber basis covering the
Company's fixed expenses.
Operating cash flow (EBITDA) for the first quarter of 1999 decreased 1% to
$14.6 million compared to $14.8 million for 1998. Excluding the non-recurring
severance costs of $0.7 million (as discussed below), operating cash flow would
have increased 4% to $15.3 million compared to $14.8 million for the same period
of 1998.
Operating cash flow margin (EBITDA margin) for the first quarter of 1999
was 35.0% compared to 42.9% for the first quarter of 1998. Excluding the
non-recurring severance costs of $0.7 million and the Kavouras acquisition
operating results, operating cash flow margin for the first quarter of 1999
would have been 42.4% compared to 42.9% for 1998. Kavouras equipment sales have
lower EBITDA margins than subscription sales, and will tend to lower the
Company's total operating cash flow margin.
Net Development Costs:
Operating cash flow is also affected by the Company's research and
development activities. DTN accumulates research and development activities as
"Net Development Costs". The Company defines these 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 the development of new services. Net Development
Costs for the first quarter of 1999 increased 73% to $1.7 million compared to
$1.0 million for the first quarter of 1998.
Free Cash Flow:
Free cash flow, defined as operating cash flow less equipment capital
expenditures and interest is a measurement used by DTN's management team to
monitor the Company's source of funds available to grow the business. Free cash
flow was $6.2 million for the first quarter of 1999 compared to $6.7 million for
the same period one year ago.
While equipment capital expenditures were flat at $6.1 million for the
first quarter of 1999 and 1998, included in the first quarter of 1999 were $2.0
million of non-recurring expenditures for satellite equipment and the DIRECTV
project. Excluding these costs and the non-recurring severance costs, free cash
flow would have been $8.9 million for the first quarter of 1999 compared to $6.7
million in 1998.
Debt Leverage Ratio:
The Company's debt leverage ratio is defined as total long-term debt
(including current portion) divided by last twelve months operating cash flow
(EBITDA). The debt leverage ratio was 2.3 for the first quarter of 1999 compared
to 1.6 for the first quarter of 1998. The debt leverage ratio is $119.8 million
of total long-term debt (including current portion) divided by $52.8 million of
last twelve months operating cash flow (EBITDA) for the twelve month period
ending March 31, 1999. Excluding $0.7 million non-recurring severance costs for
the quarter ended March 31, 1999 and $5.8 million non-recurring satellite costs
for the quarter ended June 30, 1998; the debt leverage ratio would have been 2.0
for the period ended March 31, 1999. This ratio demonstrates the Company's
ability to pay off total long-term debt in 2.0 years.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Non-recurring Severance Costs:
During the first quarter of 1999, the Company took a non-recurring charge
of $0.7 million for severance payments, primarily related to the resignation of
the Company's Chairman and CEO.
REVENUES
Total revenues for the first quarter of 1999 increased 21% to $41.7 million
compared to $34.4 million for the first quarter of 1998. The Company attributed
the revenue increases for the first quarter of 1999 compared to the first
quarter of 1998 primarily to revenue generated by acquisitions. Total revenues
on a per subscriber per month basis for the first quarter of 1999 were $87
compared to $72 for the first quarter of 1998.
Subscriptions:
Subscription revenue for the first quarter of 1999 grew 19% to $33.1
million compared to $27.7 million for the first quarter of 1998. 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. The Company continues to add new subscribers at higher subscription
rates than the average of all subscriptions on a per subscriber per month basis.
Subscription revenue per subscriber, per month for all new subscription sales
for the first quarter of 1999 was $73 compared to $69 for total subscription
revenue per subscriber, per month for the Company. The increase in subscribers
from new subscription sales and acquisitions resulted in total subscription
revenues on a per subscriber per month basis for the first quarter of 1999,
growing to $69 compared to $58 for the same period in 1998.
Equipment Sales:
The Company's July 1, 1998 acquisition of Kavouras, Inc., in Minneapolis,
added a new market niche for the Company, the manufacture and sale of various
meteorological equipment and radar systems. The Kavouras acquisition added $2.0
million of meteorological equipment and radar sales for the first quarter of
1999.
Additional Services:
Additional service revenue for the first quarter of 1999 remained steady at
$1.8 million compared to the same period in 1998. The Company believes weak
agriculture markets have impacted the growth in additional service revenues.
Additional service revenue on a per subscriber per month basis for the first
quarter of 1999 was $3.77 compared to $3.71 for the first quarter of 1998.
Communication Services:
Communications services revenue increased 7% to $2.9 million for the first
quarter of 1999 compared to $2.7 million for the same period of 1998. This
increase is primarily due to refiners increasing message volume and other
communications to wholesalers via DTNergy Services. Communication services
revenue on a per subscriber per month basis for the first quarter of 1999 was
$6.00 compared to $5.64 for the first quarter of 1998.
Advertising:
Advertising revenue held constant at $1.1 million for the first quarter of
1999 and 1998. The weak agriculture economy has negatively impacted the
advertising revenues of the Company, but has remained level compared to 1998.
Advertising revenue on a per subscriber per month basis for the first quarter of
1999 was $2.38 compared to $2.28 for the first quarter of 1998.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Service Initiation Fees:
Service initiation fees revenue for the first quarter of 1999 fell 35% to
$.7 million compared to $1.1 million for the first quarter of 1998. This decline
is primarily due to a change in the mix of the make-up of the Company's sales,
from the traditional satellite sales to more internet sales, where a lower
upfront initiation fee is charged. Service initiation fees revenue on a per
subscriber per month basis for the first quarter of 1999 was $1.50 compared to
$2.32 for the first quarter of 1998.
EXPENSES
Total expenses for the first quarter of 1999 increased 32% to $40.4 million
compared to $30.7 million for the first quarter of 1998. The increase in
expenses, excluding the non-recurring severance costs, were related to expenses
from acquisitions (including the $1.7 million of costs of equipment sales), the
Company's growth in subscribers and the increase in amortization expense from
these acquisitions.
Selling General & Administrative:
Selling, general and administrative expenses for the first quarter of 1999
grew 29% to $21.7 million compared to $16.9 million for the first quarter of
1998. These expenses as a percentage of total revenues were 52% for the first
quarter of 1999 compared to 49% for the first quarter of 1998 and 52% for the
fourth quarter of 1998.
Cost of Equipment Sales:
Cost of equipment sales for the first quarter of 1999 was $1.7 million.
These expenses are primarily the result of the Kavouras acquisition which
brought a new market niche for the Company, the manufacture and sale of various
meteorological equipment and radar systems.
Sales Commissions:
Sales commissions for the first quarter of 1999 increased 6% to $2.9
million compared to $2.8 million for the first quarter of 1998. This increase is
primarily the result of new incentive programs within the four divisional sales
forces resulting in an increase in gross sales as well as an increase in DTNergy
cash flows from which commissions are based. These expenses as a percentage of
total revenues decreased to 7% for the first quarter of 1999 compared to 8% for
the first quarter of 1998.
Depreciation and Amortization:
Depreciation and amortization expense for the first quarter of 1999
increased 20% to $13.3 million compared to $11.1 million for the first quarter
of 1998. These increases are primarily due to the increase in the amortization
related to intangible assets (primarily goodwill) associated with acquisitions.
Of the $2.2 million increase in depreciation and amortization, $1.5 million of
the increase is related to amortization. As a percentage of total revenues,
depreciation and amortization expense for the first quarter of 1999 remained
flat at 32% for the first quarter of 1999 and 1998.
OPERATING INCOME
Operating income (EBIT) for the first quarter of 1999 decreased 65% to $1.3
million compared to $3.7 million for the first quarter of 1998. Excluding the
non-recurring severance costs of $0.7 million, operating income for the first
quarter of 1999 would have been $2.0 million compared to $3.7 million for 1998.
These decreases in operating income are primarily related to the increase in
amortization expense related to the intangible assets (primarily goodwill) from
acquisitions. Amortization expense related to acquisitions for the first quarter
of 1999 was $3.0 million compared to $1.5 million for the first quarter of 1998.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTEREST EXPENSE
Interest expense for the first quarter of 1999 increased 13% to $2.3
million compared to $2.0 million for the first quarter of 1998. In the first
quarter of 1998 the Company refinanced its 11.25% Senior Subordinated Notes down
to 7.5% Senior converted notes. The increase in interest expense is a direct
result of an increase in debt, due to the financing of acquisitions with debt
versus equity. As a percentage of total revenue, interest expense for the first
quarter of 1999 and 1998 was 6%.
INCOME TAX PROVISION (BENEFIT)
The Company's effective income tax rate was 23% for the first quarter of
1999 compared to 36% for the same period in 1998. The 23% effective tax rate on
the tax benefit in the first quarter of 1999 is lower than the statutory rate
due primarily to non-deductible goodwill.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
Loss before extraordinary item for first quarter of 1999 was $0.7 million
or $.07 per share on a diluted basis, compared to income of $1.1 million or $.10
per share on a diluted basis for the first quarter of 1998. Excluding the
non-recurring severance costs of $0.7 million, the loss before extraordinary
item for the first quarter of 1999 would have been $0.2 million or $.02 per
share on a diluted basis.
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)
Net loss for the first quarter of 1999 was $0.7 million or $.07 per share
on a diluted basis, compared to $10,526 or less than $.01 per share on a diluted
basis for the first quarter of 1998. Excluding the non-recurring severance
costs, the net loss for the first quarter of 1999 would have been $0.2 million
or $.02 per share on a diluted basis.
19
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in interest rates
as discussed below.
Interest Rates
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its variable-rate debt instruments. The Company has
three components that make up its total bank loan debt: 1) Fixed Term Notes of
$45,438,125 or 38% of the total, 2) Variable Term Notes of $15,868,124 or 13% of
the total and 3) Revolving Credit Line of $58,500,000 or 49% of the total.
Assuming a hypothetical 10% change in 1999 interest rates, below is an analysis
of what the impact would have been on the first quarter of 1999 interest
expense:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Fixed Term Notes $ -
Variable Term Notes 30,100
Revolving Credit Line (a) 94,800
-----------
Total $ 124,900
</TABLE>
(a) The Company's Revolving Credit Agreement includes the ability to fix the
revolving credit line based on the Revolving Credit Rate in effect at the
beginning of the month (see Note 6). The ability to look back to the
interest rates at the beginning of the month, reduces the market risk of an
increase in First National Bank of Omaha's "National Base Rate".
Market risk for fixed-rate term debt is estimated as the potential change
in fair value from a hypothetical change in interest rates. The Company has
$45,438,125 of fixed term debt as of March 31, 1999 with an estimated fair value
of $46,083,278 or an increase of $645,153. The fair value was calculated using
existing terms of the debt and interest rates present valued at the Company's
current available term debt rate (see Note 6).
20
<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 28, 1999.
(b) Directors Elected - Jay H. Golding, Anthony S. Jacobs,
Peter H. Kamin, David K. Karnes, Joseph F. Mazzella, 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 1999, 10,451,098 votes
for, 8,650 votes against and 15,383 votes
abstained.
- Approval of the Company's 1999 Stock
Incentive Plan, 7,085,876 votes for,
891,632 votes against and 25,457
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 an amendment to the Company's
shareholder rights plan on March 12, 1999.
- Filed news release on April 2, 1999 relating to
the resignation of the Company's Chairman and
CEO, Roger R. Brodersen, from all his positions
as an officer and director of the Company
effective March 24, 1999.
(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/ Greg T. Sloma
--------------------------------------
Greg T. Sloma
President and Chief Operating Officer
By /s/ Brian L. Larson
--------------------------------------
Brian L. Larson
Sr. VP, CFO and Secretary
By /s/ Dan A. Petersen
--------------------------------------
Corporate Controller and Treasurer
Dated this 17th day of May, 1999.
21
<PAGE>
EXHIBIT 11
COMPUTATION OF INCOME PER SHARE
Data Transmission Network Corporation
Quarter ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Quarter Ended
Unaudited 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Income (Loss) Before Extraordinary Item $ (769,458) $ 1,087,406
Extraordinary Item, net of tax -- 1,076,880
-----------------------------------
Net Income (Loss) $ (769,458) $ 10,526
- -------------------------------------------------------------------------------------------------
Average shares outstanding (1) 11,578,742 11,196,999
Add shares applicable to stock options and warrants (2) -- 933,969
-----------------------------------
Total Shares (3) 11,578,742 12,130,968
- -------------------------------------------------------------------------------------------------
Basic Income (Loss) Per Share
Income (loss) before Extraordinary Item $ (0.07) $ 0.10
Extraordinary Item -- (0.10)
- -------------------------------------------------------------------------------------------------
Net Income (Loss) $ (0.07) $ 0.00
- -------------------------------------------------------------------------------------------------
Diluted Income (Loss) Per Share
Income (loss) before Extraordinary Item $ (0.07) $ 0.09
Extraordinary Item -- (0.09)
- -------------------------------------------------------------------------------------------------
Net Income (Loss) $ (0.07) $ 0.00
- -------------------------------------------------------------------------------------------------
<FN>
(1) Shares used in the Basic Earnings Per Share.
(2) The dilutive potential common shares outstanding in 1999 were 595,579 and
were not included in computing diluted earnings per share because their
efforts were anti-dilutive.
(3) Shares used in the Diluted Earnings Per Share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
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0
0
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