SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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 August 13, 1999...11,692,641.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS
Data Transmission Network Corporation
As of June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
Unaudited 1999 1998
- ------------------------------------------------------------------------------------------------
ASSETS
Current Assets
<S> <C> <C>
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $1,300,000 for 1999 and 1998 11,515,830 10,475,426
Inventory (note 4) 3,989,458 3,575,580
Prepaid expenses 2,105,670 2,219,778
Deferred commission expense 3,077,662 2,695,475
------------------------------
Total Current Assets 20,688,620 18,966,259
Property and Equipment (note 5)
Equipment Used By Subscribers 251,208,841 244,613,085
Equipment and Leasehold Improvements 43,667,512 38,788,491
------------------------------
Total Property and Equipment 294,876,353 283,401,576
Less: Accumulated Depreciation 194,554,088 174,164,486
------------------------------
Net Property and Equipment 100,322,265 109,237,090
Intangible Assets from Acquisitions (note 3) 92,336,147 82,266,913
Less: Accumulated Amortization 24,322,500 18,121,533
------------------------------
Net Intangible Assets 68,013,647 64,145,380
Other Assets 5,790,982 4,836,353
------------------------------
$194,815,514 $197,185,082
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 7,137,160 $ 5,820,579
Accrued expenses 8,827,029 8,963,856
Current portion of long-term debt (note 6) 21,581,667 21,628,542
------------------------------
Total Current Liabilities 37,545,856 36,412,977
Revolving Debt (note 6) 62,000,000 55,500,000
Long-Term Debt (note 6) 34,329,165 45,119,998
Equipment Deposits 480,739 653,753
Unearned Revenue 27,980,129 27,348,468
Shareholders' Equity
Common stock, par value $.001, authorized
20,000,000 shares, issued 11,685,355 and 11,516,392 11,685 11,516
Paid-in capital 36,324,347 35,022,787
Accumulated deficit (3,856,407) (2,884,417)
------------------------------
Total Shareholders' Equity 32,479,625 32,149,886
------------------------------
$194,815,514 $197,185,082
- -----------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Data Transmission Network Corporation
Quarter and six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
--------------------------------------------------------------------------------
Unaudited 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C>
Subscriptions $ 33,431,835 $ 28,692,347 $ 66,555,277 $ 56,436,574
Equipment sales 1,267,661 -- 3,257,511 --
Additional services 1,978,315 1,805,567 3,791,885 3,581,516
Communication services 2,978,787 2,669,761 5,867,379 5,370,814
Advertising 787,160 779,564 1,932,389 1,871,560
Service initiation fees 708,736 850,243 1,432,070 1,962,165
---------------------------------------------------------------------------
41,152,494 34,797,482 82,836,511 69,222,629
---------------------------------------------------------------------------
Expenses
Selling, general and administrative 21,469,068 17,702,844 43,195,909 34,583,210
Cost of equipment sales 936,445 -- 2,654,287 --
Sales commissions 3,024,769 2,713,300 5,950,919 5,473,354
Depreciation and amortization 13,440,300 11,612,182 26,740,053 22,695,598
Non-recurring costs -- 5,800,000 735,828 5,800,000
---------------------------------------------------------------------------
38,870,582 37,828,326 79,276,996 68,552,162
---------------------------------------------------------------------------
Operating Income (Loss) 2,281,912 (3,030,844) 3,559,515 670,467
Interest expense 2,253,181 1,805,362 4,545,008 3,832,074
Other income, net 14,237 34,402 29,503 58,209
---------------------------------------------------------------------------
Income (Loss) Before Income Taxes
and Extraordinary Item 42,968 (4,801,804) (955,990) (3,103,398)
Income tax provision (benefit) 245,500 (1,725,262) 16,000 (1,114,262)
---------------------------------------------------------------------------
Loss Before Extraordinary Item (202,532) (3,076,542) (971,990) (1,989,136)
Extraordinary Item, net of tax -- -- -- 1,076,880
---------------------------------------------------------------------------
Net Loss $ (202,532) $ (3,076,542) $ (971,990) $ (3,066,016)
- --------------------------------------------------------------------------------------------------------------------
Basic Loss Per Share
Loss before Extraordinary Item $ (0.02) $ (0.27) $ (0.08) $ (0.18)
Extraordinary Item, net of tax -- -- -- (0.09)
- --------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ (0.27) $ (0.08) $ (0.27)
- --------------------------------------------------------------------------------------------------------------------
Diluted Loss Per Share
Loss before Extraordinary Item $ (0.02) $ (0.27) $ (0.08) $ (0.18)
Extraordinary Item, net of tax -- -- -- (0.09)
- --------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ (0.27) $ (0.08) $ (0.27)
- --------------------------------------------------------------------------------------------------------------------
Basic Shares Outstanding 11,676,065 11,322,939 11,627,404 11,259,969
- --------------------------------------------------------------------------------------------------------------------
Diluted Shares Outstanding 11,676,065 11,322,939 11,627,404 11,259,969
- --------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Data Transmission Network Corporation
Six months ended June 30, 1999 and 1998
Unaudited 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net loss $ (971,990) $ (3,066,016)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 26,740,053 22,695,598
Amortization of debt issue costs and discount 38,321 30,306
Extraordinary loss on early extinguishment of debt - 1,682,880
Deferred income taxes (842,000) (2,022,180)
Change in assets and liabilities:
Accounts receivable (1,040,404) (1,832,428)
Inventory (413,878) -
Prepaid expenses 114,108 130,773
Deferred commission expense (382,187) 413,088
Deferred debt issuance costs (150,950) -
Accounts payable 1,366,579 1,544,184
Accrued expenses (430,427) 4,373,251
Equipment deposits (173,014) (21,993)
Unearned revenue 586,661 3,345,131
------------------------------------------
Net Cash Provided by Operating Activities 24,440,872 27,272,594
Cash Flows from Investing Activities
Capital expenditures:
Equipment used by subscribers (6,702,121) (11,294,198)
Equipment and leasehold improvements (4,914,139) (4,308,509)
Acquisitions (9,788,634) (10,237,488)
------------------------------------------
Net Cash Used for Investing Activities (21,404,894) (25,840,195)
Cash Flows from Financing Activities
Proceeds:
Revolving Credit Line 6,500,000 9,000,000
Term Notes - 16,000,000
Exercise of stock options 1,301,729 1,802,516
Payments:
Term Notes (10,837,707) (12,947,085)
Subordinated notes and prepayment costs - (16,125,000)
------------------------------------------
Net Cash Used for Financing Activities (3,035,978) (2,269,569)
------------------------------------------
Net Decrease in Cash - (837,170)
Cash at Beginning of Period - 837,170
------------------------------------------
Cash at End of Period $ - $ -
- -------------------------------------------------------------------------------------------------------------------
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 and six months ended June 30,
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 transferred the 850 subscribers 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.
In January 1999, the Company and SmartServ Online, Inc., (SSOL) based
in Stamford, CT, (OTC-BB:SSOL) signed a Letter of Intent whereby the Company
would merge with SmartServ Online, Inc. Shareholders of SmartServ Online, Inc.
would receive stock of the Company. The Letter of Intent had been signed by the
holders of a majority of the stock of SSOL on a fully diluted basis.
In May 1999, the Company and SSOL agreed to forgo the proposed merger
and amend certain terms and provisions of the original License Agreement dated
April 1998. Under the new terms, DTN agreed to pay additional consideration of
$5,458,000 to SSOL in return for an exclusive, perpetual, worldwide license, to
insure a long-term business alliance. In addition, the Company received warrants
to purchase 300,000 shares
5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
of the Common Stock of SmartServ at an exercise price of $8.60 per share. The
Company capitalized the additional consideration as an intangible asset
(goodwill) and is amortizing this amount, including the remaining unamortized
amount of the original $1,905,000 or $1,524,000, using the straight-line method
over ten years, dating back to the original agreement date of April 1, 1998.
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 $3,419,000 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 $3,808,000 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
6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(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 $9,909,000 as an intangible
asset (goodwill) and is amortizing this cost using the straight-line method over
five years.
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 six months ended June 30, 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 June 30, 1998
---------------------------------------- -----------------------------
<S> <C>
Revenues $ 80,903,664
Income (loss) before
Extraordinary item $ (4,736,080)
Income (loss) per share before
Extraordinary item
Basic $ (0.42)
Diluted $ (0.42)
---------------------------------------- -----------------------------
</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>
June 30, 1999 December 31, 1998
<S> <C> <C>
Raw Materials $ 2,711,219 $ 2,684,857
Work-in-Process 806,856 728,415
Finished Goods 471,383 162,308
-----------------------------------------
Total $ 3,989,458 $ 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:
June 30, 1999 December 31, 1998
<S> <C> <C>
Equipment $ 37,987,708 $ 33,198,540
Building 2,468,803 2,460,486
Land 220,269 220,269
Leasehold Improvements 2,990,732 2,909,196
-----------------------------------------
Total $ 43,667,512 $ 38,788,491
</TABLE>
7
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
6. LONG-TERM DEBT AND LOAN AGREEMENTS
June 31, 1999 December 31, 1998
Revolving Credit Agreement
<S> <C> <C>
Revolving Credit Line $ 62,000,000 $ 55,500,000
Term Notes 27,625,000 34,421,875
Term Credit Agreement
Term notes 28,285,832 32,326,665
------------------------------------------
Total Loan Agreements 117,910,832 122,248,540
Less current portion 21,581,667 21,628,542
------------------------------------------
Total Long-Term Debt 96,329,165 100,619,998
</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 June 30, 1999, $62,000,000 of the
total commitment had been borrowed, with the remaining $60,900,000 available to
the Company subject to certain restrictions as discussed below.
Additional borrowings under the Revolving Credit Agreement are
available to the Company, as long as at the time of the advance, no default
exists with any of the Company loan agreements and the ratio of the Company's
total borrowings to operating cash flow ("the Leverage Ratio") does not exceed
thirty-six. As of June 30, 1999, based on current operating cash flow, the
Company would be able to borrow the entire amount of the remaining $60,900,000
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 June 30, 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 June 30,
1999, $62,000,000 of the total borrowings outstanding had not been converted to
term loans. As of June 30, 1999, $27,625,000 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
June 30, 1999 the commitment fee was 1/4% on all unused revolving credit
commitment. Effective July 1, 1999, the commitment fee will be 1/8%. 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
June 30, 1999, the principal balance was $28,285,832 with $14,810,250 accruing
at a variable interest rate of NY prime rate less one-half of one percent, or
7.25% and the remaining $13,475,582 accruing at fixed interest rates ranging
from 8.25% to 8.36%. Effective July 1, 1999, the variable rate will be accruing
at 7.50% and the fixed portion at 7.75%.
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
9
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
farm implement dealer; weather, pricing, news and transportation information for
the produce industry; and an electronic marketing system for the cotton
industry.
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>
Quarter Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ----------------------------------------------------------------------------------------------------------------
External revenues
<S> <C> <C> <C> <C>
DTN Ag Services $ 21,249,780 $ 22,419,045 $ 42,936,092 $ 45,288,102
DTN Weather Services 9,241,596 3,960,255 19,194,078 7,503,880
DTN Financial Services 4,830,082 3,158,660 9,361,861 6,217,078
DTN Energy Services 4,678,842 4,018,740 9,003,218 7,882,298
Other Services 1,152,194 1,240,782 2,341,262 2,331,271
- ----------------------------------------------------------------------------------------------------------------
Total $ 41,152,494 $ 34,797,482 $ 82,836,511 $ 69,222,629
- ----------------------------------------------------------------------------------------------------------------
Inter-segment revenues
DTN Ag Services $ - $ - $ - $ -
DTN Weather Services 556,067 - 1,097,337 -
DTN Financial Services 10,858 5,623 23,725 5,623
DTN Energy Services - - - -
Other Services - - - -
- ----------------------------------------------------------------------------------------------------------------
566,925 5,623 1,121,062 5,623
Inter-segment elimination (566,925) (5,623) (1,121,062) (5,623)
- -----------------------------------------------------------------------------------------------------------------
Total $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------
Operating Income
DTN Ag Services $ 3,514,567 $ 4,703,342 $ 7,225,353 $ 9,742,010
DTN Weather Services (1,191,446) 11,975 (2,624,921) (480,001)
DTN Financial Services (1,266,041) (893,122) (2,728,050) (1,349,781)
DTN Energy Services 1,872,011 1,502,951 3,441,468 2,913,972
Other Services (Note a) (647,179) (8,355,990) (1,754,335) (10,155,733)
- -----------------------------------------------------------------------------------------------------------------
Total $ 2,281,912 $ (3,030,844) $ 3,559,515 $ 670,467
- ----------------------------------------------------------------------------------------------------------------
Depreciation and Amortization
DTN Ag Services $ 8,101,617 $ 8,282,205 $ 16,291,539 $ 16,478,339
DTN Weather Services 2,561,961 1,202,466 5,085,398 2,274,538
DTN Financial Services 1,688,723 1,005,272 3,188,066 1,865,178
DTN Energy Services 379,763 556,912 792,952 1,100,122
Other Services 708,236 565,327 1,382,098 977,421
- ----------------------------------------------------------------------------------------------------------------
Total $ 13,440,300 $ 11,612,182 $ 26,740,053 $ 22,695,598
- ----------------------------------------------------------------------------------------------------------------
Interest Expense
DTN Ag Services $ 898,335 $ 1,445,780 $ 1,987,037 $ 3,075,353
DTN Weather Services 886,326 164,095 1,781,041 344,153
DTN Financial Services 325,652 102,775 526,071 221,372
DTN Energy Services 43,087 38,372 88,274 82,800
Other Services 99,781 54,340 162,585 108,396
- ----------------------------------------------------------------------------------------------------------------
Total $ 2,253,181 $ 1,805,362 $ 4,545,008 $ 3,832,074
- ----------------------------------------------------------------------------------------------------------------
Operating Cash Flow (EBITDA) (Note b)
DTN Ag Services $ 11,616,184 $ 12,985,547 $ 23,516,892 $ 26,220,349
DTN Weather Services 1,370,515 1,214,441 2,460,477 1,794,537
DTN Financial Services 422,682 112,150 460,016 515,397
DTN Energy Services 2,251,774 2,059,863 4,234,420 4,014,094
Other Services (Note a) 61,057 (7,790,663) (372,237) (9,178,312)
- -----------------------------------------------------------------------------------------------------------------
Total $ 15,722,212 $ 8,581,338 $ 30,299,568 $ 23,366,065
- ----------------------------------------------------------------------------------------------------------------
(a) Operating income and operating cash flow includes non-recurring costs of
$0.7 million for severance costs in the first quarter of 1999 and $5.8
million for satellite costs related to Galaxy IV outage in the second
quarter of 1998
(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 42%
of the Company's total assets at June 30, 1999 compared with 46% at December 31,
1998. The Company has also made significant investments during 1998 and the
first six months of 1999 to acquire subscribers and businesses that fit the
Company's business model. The net intangible assets (primarily goodwill) from
acquisitions are 35% of the Company's total assets at June 30, 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 $24.4 million for the
first six months of 1999 compared to $27.3 million for the same period in 1998.
This decrease of $2.9 million was primarily the result of the $6.9 million
increase in operating cash flow (EBITDA), defined as operating income before
depreciation and amortization expense, offset by $8.5 million decrease from the
change in assets and liabilities, $0.7 million increase in interest expense and
an increase in cash taxes paid of $0.4 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used by investing activities was $21.4 million for the first
six months of 1999 compared to $25.8 million for the same period in 1998. The
decrease of $4.4 million was the result of the Company's reductions in capital
expenditures, primarily $4.6 million of equipment used by subscribers. The
Company is utilizing a prior year build-up of inventory to help offset the need
for additional equipment purchases.
The Company's growth strategy includes developing services for niche
markets plus acquisitions that fit into their business model and/or competitive
strategies. In May 1999, the Company completed an amendment to its existing
license agreement with SmartServ Online (SSOL) and its services, primarily DTN
IQ (www.dtniq.com), to create a long-term business relationship with SSOL
including an exclusive, perpetual, worldwide license. In addition, the Company
closed on two acquisitions during the first quarter of 1999. Among these
acquisitions (which are discussed in more detail in footnote 3 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 Company paid $9.8 million cash for these acquisitions
and the license agreement compared to $10.2 million cash for acquisitions during
the same period in 1998.
The acquisitions in the first six months 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 for financing activities was $3.0 million for the first
six months of 1999 compared to $2.3 million for the same period a year ago. The
increase of $0.7 million in net cash used for financing activities is primarily
attributed to the $0.5 million reduction in proceeds from the exercise of stock
options.
The Company reduced its total debt by $4.3 million during the first six
months of 1999 compared with $2.6 million for the same period of 1998.
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. 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.
Economic Conditions: 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.
o 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
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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
June 30, 1999. The estimated cost of using internal resources through June 30,
1999 was $.9 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 second quarter of 1999, while the
remaining estimated costs of using internal resources to effect Y2K compliance
is less than $.1 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 June 30, 1999 increased to 165,100 compared to
160,100 for the same period in 1998 and 159,300 at December 31, 1998. During the
first quarter of 1999, 4,200 subscribers were added primarily through the
acquisition of Paragon Software, Inc. The annualized subscriber retention rate
was 81.4% for the first six months of 1999 compared to 84.7% at June 30, 1998
and 80.6% for the year ended December 31, 1998.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
In addition, Internet subscribers continued to grow and at June 30,
1999 totaled 12,700 as compared to 2,100 at June 30, 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 second quarter of 1999 increased
83% to $15.7 million compared to $8.6 million for 1998. Excluding the
non-recurring satellite costs of $5.8 million (as discussed on page 17),
operating cash flow would have been $14.4 million for the second quarter of
1998.
Operating cash flow (EBITDA) for the six months ended June 30, 1999
increased 30% to $30.3 million compared to $23.4 million for the same period of
1998. Excluding the non-recurring severance costs (as discussed on page 17) of
$0.7 million in the first quarter of 1999 and non-recurring satellite costs of
$5.8 million in the second quarter of 1998, operating cash flow for the first
six months of 1999 would have been $31.0 million compared to $29.2 million for
the same period of 1998.
Operating cash flow margin (EBITDA margin), excluding non-recurring
costs, for the second quarter and first six months of 1999 were 38% and 37%
compared to 41% and 42% for the same periods of 1998. These decreases in EBITDA
margins, excluding non-recurring costs, are primarily a result of the Kavouras
acquisition operating results. Excluding non-recurring costs and the Kavouras
operating results, operating cash flow margins for the second quarter and first
six months of 1999 would have been 43%. 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 second quarter and first six months of 1999 increased to $1.9
million and $3.6 million compared to $1.3 million and $2.3 million for the same
periods of 1998, respectively.
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 a positive $8.0 million for the second quarter of 1999 compared to a
negative $2.8 million for the same period of 1998. Excluding the non-recurring
satellite costs, free cash flow would have been $3.0 million for the second
quarter of 1998.
Equipment capital expenditures were down 42% to $5.5 million for the
second quarter of 1999 compared to $9.5 million for the same period of 1998.
Included in the second quarter of 1999 were $2.2 million of non-recurring
expenditures primarily for satellite equipment and the DIRECTV and WX.COM
projects. Excluding these costs, free cash flow would have been $10.2 million
for the second quarter of 1999.
Free cash flow for the first six months ended June 30, 1999 increased
to $14.1 million up from $3.9 million for the same period in 1998. Excluding the
non-recurring severance costs and the non-recurring satellite costs, free cash
flow for the first six months of 1999 would have been $14.9 million compared to
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
$9.7 million for the same period in 1998. Excluding the non-recurring severance
costs and the $4.2 million non-recurring equipment capital expenditures, free
cash flow would have been $19.1 for the first six months of 1999.
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 2.0 for the period ended June 30, 1999
compared to 1.8 for the period ended June 30, 1998. The debt leverage ratio is
$117.9 million of total long-term debt (including current portion) divided by
$59.9 million of last twelve months operating cash flow (EBITDA) for the twelve
month period ending June 30, 1999. Excluding $0.7 million non-recurring
severance costs for the quarter ended March 31, 1999, the debt leverage ratio
would have been 1.9 for the period ended June 30, 1999. This ratio demonstrates
the Company's ability to pay off total long-term debt in 1.9 years.
Non-recurring 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. During the second quarter of
1998, the Company took a non-recurring charge of $5.8 million related to the
satellite outage of Galaxy IV.
REVENUES
Total revenues for the second quarter of 1999 increased 18% to $41.2
million compared to $34.8 million for the second quarter of 1998. Total revenues
for the six months ended June 30, 1999 increased 20% to $82.8 million compared
to $69.2 million for the same period of 1998.
The Company attributed the revenue increases for the second quarter and
first six months of 1999 compared to the same periods of 1998 primarily to
revenue generated by acquisitions. At a segment level, excluding acquisitions,
three out of four of the Company's main segments (Weather Services, Financial
Services and Energy Services) showed solid revenue growth for the quarter and
six months ended June 30, 1999 compared with the prior year. This growth was
primarily driven by an increasing subscriber base, as well as, upgrading the
existing customers to more sophisticated and higher priced services. The Ag
Services segment showed a decrease in revenue for the quarter and six months
ended June 30, 1999 compared with the prior year, due in part to the continued
weakness in agricultural economy. The increase in revenues resulted in total
revenues on a per subscriber per month basis increasing to $83 and $85 for the
second quarter and first six months of 1999 compared to $72 for the same periods
of 1998.
Subscriptions:
Subscription revenue for the second quarter and first six months of
1999 grew 17% and 18% to $33.4 million and $66.6 million compared to $28.7
million and $56.4 million for the same periods 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 second
quarter of 1999 was $75 compared to $68 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 second quarter and first six months of
1999, growing to $68 compared to $60 and $59 for the same periods in 1998.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $1.2 million and $3.1 million of meteorological equipment and radar sales
for the second quarter and first six months of 1999.
Additional Services:
Additional service revenue for the second quarter and first six months
of 1999 grew 10% and 6% to $2.0 million and $3.8 million compared to $1.8
million and $3.6 million for the same periods in 1998. This growth is very
positive when considering the on-going weak agriculture markets. The Company has
added some higher priced add-on services in the financial services area which is
adding to the overall growth.
Communication Services:
Communications services revenue increased 12% and 9% to $3.0 million
and $5.9 million for the second quarter and first six months of 1999 compared to
$2.7 million and $5.4 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 second quarter of 1999 was $6.03 compared to
$5.55 for the second quarter of 1998.
Advertising:
Advertising revenue remained flat at $0.8 million and $1.9 million for
the second quarter and first six months of 1999 and 1998. The continued weakness
in the 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 second quarter of 1999 was $1.59 compared
to $1.62 for the second quarter of 1998.
Service Initiation Fees:
Service initiation fees revenue decreased 17% and 27% to $0.7 million
and $1.4 million for the second quarter and first six months of 1999 compared to
$0.9 million and $2.0 million for the same periods 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 second quarter of 1999 was $1.44 compared to $1.77 for
the second quarter of 1998.
EXPENSES
Total expenses increased 3% and 16% to $38.9 million and $79.3 million
for the second quarter and first six months of 1999 compared to $37.8 million
and $68.6 million for the same periods of 1998. The increase in expenses were
primarily related to expenses from acquisitions (including the $0.9 million and
$2.5 million of costs of equipment sales for the second quarter and first six
months of 1999), 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 second quarter and
first six months of 1999 grew 21% and 25% to $21.5 million and $43.2 million
compared to $17.7 million and $34.6 million for the same periods of 1998. These
expenses as a percentage of total revenues were 52% for the second quarter and
first six months of 1999 compared to 51% and 50% for the same periods of 1998
and 52% for the first quarter of 1999.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cost of Equipment Sales:
Cost of equipment sales for the second quarter and first six months of
1999 were $0.9 million and $2.7 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 second quarter and first six months of 1999
increased 11% and 9% to $3.0 million and $6.0 million compared to $2.7 million
and $5.5 million for the same periods 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 second quarter and first six months of 1999
compared to 8% for the same periods of 1998.
Depreciation and Amortization:
Depreciation and amortization expense for the second quarter and first
six months of 1999 increased 16% and 18% to $13.4 million and $26.7 million
compared to $11.6 million and $22.7 million for the same periods of 1998. These
increases are primarily due to the increase in the amortization related to
intangible assets (primarily goodwill) associated with acquisitions.
Amortization expense related to acquisitions for the second quarter and first
six months of 1999 increased $1.6 million and $3.1 million over the same periods
of 1998. Offsetting these increases was a continued decrease in depreciation
expense to $10.2 million for the second quarter of 1999 compared to $10.3
million and $10.4 million for the first quarter of 1999 and fourth quarter of
1998, respectively. As a percentage of total revenues, depreciation and
amortization expense for the second quarter and first six months of 1999 were
33% and 32% compared to 33% for the same periods of 1998.
OPERATING INCOME
Operating income (EBIT) for the second quarter of 1999 increased to
$2.3 million compared to an operating loss of $3.0 million for the second
quarter of 1998. Excluding the non-recurring satellite costs of $5.8 million,
operating income would have been $2.8 million for the second quarter of 1998.
Operating income (EBIT) for the six months ended June 30, 1999
increased 431% to $3.6 million compared to $0.7 million for the same period of
1998. Excluding the non-recurring severance costs of $0.7 million in the first
quarter of 1999 and the non-recurring satellite costs of $5.8 million in the
second quarter of 1998, operating income for the first six months of 1999 would
have been $4.3 million compared to $6.5 million for the same period of 1998.
These decreases in operating income, when excluding non-recurring
costs, 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 second quarter and first six months of
1999 increased to $3.2 million and $6.2 million compared to $1.6 million and
$3.1 million for the same periods of 1998.
INTEREST EXPENSE
Interest expense for the second quarter and first six months of 1999
increased 25% and 19% to $2.3 million and $4.5 million compared to $1.8 million
and $3.8 million for the same periods 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 has remained steady at 5% for
all periods presented.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAX PROVISION (BENEFIT)
The Company's effective income tax rate for the second quarter and
first six months of 1999 varies considerably from the statutory rate primarily
due to non-deductible goodwill from the Company's acquisitions. The effective
tax rate for the second quarter and first six months of 1998 was 36%.
LOSS BEFORE EXTRAORDINARY ITEM
Loss before extraordinary item for second quarter of 1999 was $0.2
million or $.02 per share on a diluted basis, compared to a loss of $3.1 million
or $.27 per share on a diluted basis for the first quarter of 1998. Excluding
the non-recurring satellite costs of $5.8 million, the income before
extraordinary item for the second quarter of 1998 would have been $0.6 million
or $.06 per share on a diluted basis.
Loss before extraordinary item for the first six months of 1999 was
$1.0 million or $.08 per share on a diluted basis, compared to a loss of $2.0
million or $.18 per share on a diluted basis. Excluding the non-recurring
severance and non-recurring satellite costs, the loss before extraordinary item
for the first six months of 1999 would have been $0.5 million or $.04 per share
on a diluted basis compared to income of $1.7 million or $.14 per share on a
diluted basis for the same period of 1998.
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 LOSS
The net loss for the second quarter of 1999 was $0.2 million or $.02
per share on a diluted basis, compared to a net loss of $3.1 million or $.27 per
share on a diluted basis for the second quarter of 1998. Excluding the
non-recurring satellite costs, the net income for the second quarter of 1998
would have been $0.6 million or $.06 per share on a diluted basis.
The net loss for the first six months of 1999 was $1.0 million or $.08
per share on a diluted basis, compared to a net loss of $3.1 million or $.27 per
share on a diluted basis for the same period of 1998. Excluding the
non-recurring costs related to severance and satellite outage and the one-time
debt extinguishment charges, the net loss for the first six months of 1999 would
have been $0.5 million or $.04 per share on a diluted basis compared to net
income of $1.7 million or $.14 per share on a diluted basis for the same period
of 1998.
20
<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 $41,100,582 or 35% of the total, 2) Variable Term Notes of $14,810,250 or 12%
of the total and 3) Revolving Credit Line of $62,000,000 or 53% 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 second quarter and first six months of
1999 interest expense:
<TABLE>
<CAPTION>
-------------------------- ---------------------- -----------------------
1999 Quarter Ended Six Months Ended
-------------------------- ---------------------- -----------------------
<S> <C> <C>
Fixed Term Notes $ - $ -
Variable Term Notes 28,400 58,500
Revolving Credit Line (a) 101,700 196,500
-------------------------- ---------------------- -----------------------
Total $ 130,100 $ 255,000
-------------------------- ---------------------- -----------------------
</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 $41,100,582 of fixed term debt as of June 30, 1999 with an estimated fair
value of $41,514,498 or an increase $413,916. 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).
21
<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
-------------------------------------
Dan A. Petersen
Corporate Controller and Treasurer
Dated this 13th day of August, 1999.
22
<PAGE>
EXHIBIT 11
COMPUTATION OF INCOME PER SHARE
Data Transmission Network Corporation
Quarter and Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Unaudited 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss Before Extraordinary Item $ (202,532) $ (3,076,542) $ (971,990) $ (1,989,136)
Extraordinary Item, net of tax -- -- -- 1,076,880
--------------------------------------------------------------------
Net Loss $ (202,532) $ (3,076,542) $ (971,990) $ (3,066,016)
- --------------------------------------------------------------------------------------------------------------------
Average shares outstanding (1) 11,676,065 11,322,939 11,627,404 11,259,969
Add shares applicable to stock options
and warrants (2) -- -- -- --
--------------------------------------------------------------------
Total Shares (3) 11,676,065 11,322,939 11,627,404 11,259,969
- -------------------------------------------------------------------------------------------------------------------
Basic Loss Per Share
Loss before extraordinary Item $ (0.02) $ (0.27) $ (0.08) $ (0.18)
Extraordinary item, net of tax -- -- - (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ (0.27) $ (0.08) $ (0.27)
- -------------------------------------------------------------------------------------------------------------------
Diluted Loss Per Share
Loss before extraordinary Item $ (0.02) $ (0.27) $ (0.08) $ 0.18)
Extraordinary item, net of tax -- -- - (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ (0.27) $ (0.08) $ (0.27)
- -------------------------------------------------------------------------------------------------------------------
(1) Shares used in the Basic Earnings Per Share.
(2) The dilutive potential common shares outstanding for the second quarter and
first six months of 1999 were 578,399 and 586,989 compared to 1,030,886 and
982,428 for the same periods of 1998. These shares were not included in
computing diluted earnings per share because their effects were
anti-dilutive.
(3) Shares used in the Diluted Earnings Per Share.
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,815,830
<ALLOWANCES> 1,300,000
<INVENTORY> 3,989,458
<CURRENT-ASSETS> 20,688,620
<PP&E> 294,876,353
<DEPRECIATION> 194,554,088
<TOTAL-ASSETS> 194,815,514
<CURRENT-LIABILITIES> 37,545,856
<BONDS> 96,329,165
0
0
<COMMON> 11,685
<OTHER-SE> 32,467,940
<TOTAL-LIABILITY-AND-EQUITY> 194,815,514
<SALES> 82,836,511
<TOTAL-REVENUES> 82,836,511
<CGS> 0
<TOTAL-COSTS> 79,276,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,545,008
<INCOME-PRETAX> (955,990)
<INCOME-TAX> 16,000
<INCOME-CONTINUING> (971,990)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (971,990)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
