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 September 30, 1999
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Commission File Number 0-15405
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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 November 15,
1999...11,961,454.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS
Data Transmission Network Corporation
As of September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
Unaudited 1999 1998
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
<S> <C> <C>
Cash $ 361,127 $ --
Accounts receivable, net of allowance for
doubtful accounts of $1,500,000 and $1,300,000 10,736,930 10,475,426
Inventory (note 4) 4,138,808 3,575,580
Prepaid expenses 1,888,001 2,219,778
Deferred commission expense 3,004,464 2,695,475
----------------------------------------------
Total Current Assets 20,129,330 18,966,259
Property and Equipment (note 5)
Equipment Used By Subscribers 256,657,830 244,613,085
Equipment and Leasehold Improvements 45,825,281 38,788,491
----------------------------------------------
Total Property and Equipment 302,483,111 283,401,576
Less: Accumulated Depreciation 204,779,298 174,164,486
----------------------------------------------
Net Property and Equipment 97,703,813 109,237,090
Intangible Assets from Acquisitions (note 3) 92,598,746 82,266,913
Less: Accumulated Amortization 27,554,384 18,121,533
----------------------------------------------
Net Intangible Assets 65,044,362 64,145,380
Other Assets 5,852,322 4,836,353
----------------------------------------------
$ 188,729,827 $ 197,185,082
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,156,670 $ 5,820,579
Accrued expenses 8,049,660 8,963,856
Current portion of long-term debt (note 6) 21,581,667 21,628,542
----------------------------------------------
Total Current Liabilities 35,787,997 36,412,977
Revolving Debt (note 6) 60,500,000 55,500,000
Long-Term Debt (note 6) 28,933,748 45,119,998
Equipment Deposits 505,258 653,753
Unearned Revenue 26,701,058 27,348,468
Shareholders' Equity
Common stock, par value $.001, authorized
20,000,000 shares, issued 11,947,826 and 11,516,392 11,948 11,516
Paid-in capital 40,339,364 35,022,787
Accumulated deficit (4,049,546) (2,884,417)
-----------------------------------------------
Total Shareholders' Equity 36,301,766 32,149,886
----------------------------------------------
$ 188,729,827 $ 197,185,082
- -------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Data Transmission Network Corporation
Quarter and nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------------------------------------------------------------------
Unaudited 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C>
Subscriptions $ 33,761,580 $ 30,915,513 $ 100,316,857 $ 87,352,087
Equipment sales 1,545,548 3,182,376 4,803,059 3,182,376
Additional services 2,094,320 1,758,971 5,886,205 5,340,487
Communication services 3,118,741 2,577,992 8,986,120 7,948,806
Advertising 553,970 603,771 2,486,359 2,475,331
Service initiation fees 434,919 694,917 1,866,989 2,657,082
----------------------------------------------------------------------------
41,509,078 39,733,540 124,345,589 108,956,169
----------------------------------------------------------------------------
Expenses
Selling, general and administrative 21,486,556 19,400,145 64,682,465 53,983,355
Cost of equipment sales 1,112,105 2,477,646 3,766,392 2,477,646
Sales commissions 3,237,931 2,827,486 9,188,850 8,300,840
Depreciation and amortization 13,460,352 12,904,025 40,200,405 35,599,623
Non-recurring costs -- -- 735,828 5,800,000
----------------------------------------------------------------------------
39,296,944 37,609,302 118,573,940 106,161,464
----------------------------------------------------------------------------
Operating Income 2,212,134 2,124,238 5,771,649 2,794,705
Interest expense 2,211,702 2,297,570 6,756,710 6,129,644
Other income, net 12,929 189,203 42,432 247,412
----------------------------------------------------------------------------
Income (Loss) Before Income Taxes
and Extraordinary Item 13,361 15,871 (942,629) (3,087,527)
Income tax provision (benefit) 206,500 5,884 222,500 (1,108,378)
-----------------------------------------------------------------------------
Income (Loss) Before Extraordinary
Item (193,139) 9,987 (1,165,129) (1,979,149)
Extraordinary Item, net of tax -- -- -- 1,076,880
----------------------------------------------------------------------------
Net Income (Loss) $ (193,139) $ 9,987 $ (1,165,129) $ (3,056,029)
- --------------------------------------------------------------------------------------------------------------------
Basic Loss Per Share
Loss before Extraordinary Item $ (0.02) $ -- $ (0.10) $ (0.18)
Extraordinary Item, net of tax -- -- -- (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ -- $ (0.10) $ (0.27)
- -------------------------------------------------------------------------------------------------------------------
Diluted Loss Per Share
Loss before Extraordinary Item $ (0.02) $ -- $ (0.10) $ (0.18)
Extraordinary Item, net of tax -- -- -- (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ -- $ (0.10) $ (0.27)
- -------------------------------------------------------------------------------------------------------------------
Basic Shares Outstanding 11,722,374 11,406,837 11,659,060 11,308,925
- -------------------------------------------------------------------------------------------------------------------
Diluted Shares Outstanding 11,722,374 12,265,219 11,659,060 11,308,925
- -------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Data Transmission Network Corporation
Nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Unaudited 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net loss $ (1,165,129) $ (3,056,029)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 40,200,405 35,599,623
Amortization of debt issue costs and discount 57,481 34,371
Extraordinary loss on early extinguishment of debt -- 1,682,880
Deferred income taxes (922,500) (1,164,049)
Change in assets and liabilities:
Accounts receivable (261,503) (1,271,026)
Inventory (563,228) 702,618
Prepaid expenses 331,777 (448,538)
Deferred commission expense (308,989) 724,429
Deferred debt issuance costs (150,950) --
Accounts payable 386,090 (932,060)
Accrued expenses (1,317,420) 1,203,727
Equipment deposits (148,495) (648,281)
Unearned revenue (692,410) 2,462,720
------------------------------------------
Net Cash Provided by Operating Activities 35,445,129 34,890,385
Cash Flows from Investing Activities
Capital expenditures:
Equipment used by subscribers (12,044,745) (17,028,323)
Equipment and leasehold improvements (7,071,908) (6,573,292)
Acquisitions (10,051,233) (28,170,659)
------------------------------------------
Net Cash Used for Investing Activities (29,167,886) (51,772,274)
Cash Flows from Financing Activities
Proceeds:
Revolving credit line 5,000,000 38,000,000
Term notes -- 16,000,000
Exercise of stock options 5,317,009 2,568,645
Payments:
Term notes (16,233,125) (24,398,926)
Subordinated notes and prepayment costs -- (16,125,000)
------------------------------------------
Net Cash Provided (Used) by Financing Activities (5,916,116) 16,044,719
------------------------------------------
Net Increase (Decrease) in Cash 361,127 (837,170)
Cash at Beginning of Period -- 837,170
------------------------------------------
Cash at End of Period $ 361,127 $ --
- -------------------------------------------------------------------------------------------------------------------
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 Data Transmission Network Corporation (the Company or DTN), 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 nine months ended September 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 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, Inc. (SSOL) based in Stamford, CT (OTC-BB:SSOL), 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 of 1999, the Company and SSOL signed a Letter of Intent whereby
the Company would merge with SmartServ Online, Inc. and 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 of 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,
5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
to insure a long-term business alliance. In addition, the Company received
warrants to purchase 300,000 shares 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 $3,482,000 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 to
Steven Kavouras as a non-compete. Kavouras, Inc. is a wholly owned subsidiary of
DTN and operates out of Minnesota under the name DTN Kavouras Weather Services.
The Company has capitalized $18,209,000 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 $3,807,000 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.
6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 $9,500,000 cash.
Approximately $5,300,000 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.
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>
September 30, 1999 December 31, 1998
<S> <C> <C>
Raw Materials $ 2,760,647 $ 2,684,857
Work-in-Process 806,856 728,415
Finished Goods 571,305 162,308
-------------------------------------------------
Total $ 4,138,808 $ 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:
September 30, 1999 December 31, 1998
<S> <C> <C>
Equipment $ 40,126,992 $ 33,198,540
Building 2,468,803 2,460,486
Land 220,269 220,269
Leasehold Improvements 3,009,217 2,909,196
-----------------------------------------
Total $ 45,825,281 $ 38,788,491
</TABLE>
<TABLE>
<CAPTION>
6. LONG-TERM DEBT AND LOAN AGREEMENTS
September 30, 1999 December 31, 1998
Revolving Credit Agreement
<S> <C> <C>
Revolving Credit Line $ 60,500,000 $ 55,500,000
Term Notes 24,250,000 34,421,875
Term Credit Agreement
Term notes 26,265,415 32,326,665
------------------------------------------
Total Loan Agreements 111,015,415 122,248,540
Less current portion 21,581,667 21,628,542
------------------------------------------
Total Long-Term Debt 89,433,748 100,619,998
</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 September 30, 1999, $60,500,000 of
7
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
the total commitment had been borrowed, with the remaining $62,400,000 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
September 30, 1999, based on current operating cash flow, the Company would be
able to borrow the entire amount of the remaining $62,400,000 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>
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 September
30, 1999, the Revolving Credit Rate is 7.00%.
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
September 30, 1999 the commitment fee was 1/8% on all unused revolving credit
commitment. In the event the "Leverage Ratio" exceeds 36, any term note accruing
interest at less than 7.5% is included in a "Trigger Event". The Company is
obligated to pay the holders of such term notes a fee of 0.375% of the
outstanding balance of the notes upon the occurrence of the Trigger Event and
like amounts on the six month anniversary and the twelve month anniversary of
the Trigger Event.
The Company has 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 September
30, 1999, $60,500,000 of the total borrowings outstanding had not been converted
to term loans. As of September 30, 1999, $24,250,000 of term loans was
outstanding with monthly installments due up through 2002 having interest rates
ranging from 7.50% to 7.865%.
8
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Company has a Term Credit Agreement with a group of banks of
$48,490,000 to be repaid in 72 equal principal installments beginning January
31, 1997. As of September 30, 1999, the principal balance was $26,265,415 with
$13,752,373 accruing at a variable interest rate of NY prime rate less one-half
of one percent, or 7.75% and the remaining $12,513,042 accruing at fixed
interest rate of 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 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
table on page 10 summarizes additional information regarding the Company's
individual industry segments:
9
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ------------------------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
- -----------------------------------------------------------------------------------------------------------------
External revenues
<S> <C> <C> <C> <C>
DTN Ag Services $ 21,116,758 $ 21,539,640 $ 64,052,850 $ 66,827,742
DTN Weather Services 9,331,010 9,435,531 28,525,088 16,939,411
DTN Financial Services 4,977,392 3,381,722 14,339,253 9,598,800
DTN Energy Services 4,843,740 4,007,813 13,846,958 11,890,111
Other Services 1,240,178 1,368,834 3,581,440 3,700,105
- ----------------------------------------------------------------------------------------------------------------
Total $ 41,509,078 $ 39,733,540 $ 124,345,589 $ 108,956,169
- ----------------------------------------------------------------------------------------------------------------
Inter-segment revenues
DTN Ag Services $ - $ - $ - $ -
DTN Weather Services 625,004 505,000 1,722,341 505,000
DTN Financial Services 9,521 4,647 33,246 10,270
DTN Energy Services - - - -
Other Services - - - -
- ----------------------------------------------------------------------------------------------------------------
634,525 509,647 1,755,587 515,270
Inter-segment elimination (634,525) (509,647) (1,755,587) (515,270)
- -----------------------------------------------------------------------------------------------------------------
Total $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------
Operating Income
DTN Ag Services $ 3,388,224 $ 3,683,277 $ 10,613,577 $ 13,425,287
DTN Weather Services (1,218,014) (584,216) (3,842,935) (1,064,217)
DTN Financial Services (1,333,207) (743,771) (4,061,257) (2,093,552)
DTN Energy Services 1,765,719 1,539,366 5,207,187 4,453,338
Other Services (Note a) (390,588) (1,770,418) (2,144,923) (11,926,151)
- -----------------------------------------------------------------------------------------------------------------
Total $ 2,212,134 $ 2,124,238 $ 5,771,649 $ 2,794,705
- ----------------------------------------------------------------------------------------------------------------
Depreciation and Amortization
DTN Ag Services $ 8,075,895 $ 8,346,507 $ 24,367,434 $ 24,824,846
DTN Weather Services 2,607,685 2,178,908 7,693,083 4,453,446
DTN Financial Services 1,710,821 1,170,345 4,898,887 3,035,523
DTN Energy Services 363,500 517,763 1,156,452 1,617,885
Other Services 702,451 690,502 2,084,549 1,667,923
- ----------------------------------------------------------------------------------------------------------------
Total $ 13,460,352 $ 12,904,025 $ 40,200,405 $ 35,599,623
- ----------------------------------------------------------------------------------------------------------------
Interest Expense
DTN Ag Services $ 755,984 $ 1,383,270 $ 2,743,021 $ 4,458,623
DTN Weather Services 890,063 711,787 2,671,104 1,055,940
DTN Financial Services 302,875 113,952 828,946 335,324
DTN Energy Services 39,790 37,666 128,064 120,466
Other Services 222,990 50,895 385,575 159,291
- ----------------------------------------------------------------------------------------------------------------
Total $ 2,211,702 $ 2,297,570 $ 6,756,710 $ 6,129,644
- ----------------------------------------------------------------------------------------------------------------
Operating Cash Flow (EBITDA) (Note b)
DTN Ag Services $ 11,464,119 $ 12,029,784 $ 34,981,011 $ 38,250,133
DTN Weather Services 1,389,671 1,594,692 3,850,148 3,389,229
DTN Financial Services 377,614 426,574 837,630 941,971
DTN Energy Services 2,129,219 2,057,129 6,363,639 6,071,223
Other Services (Note a) 311,863 (1,079,916) (60,374) (10,258,228)
- -----------------------------------------------------------------------------------------------------------------
Total $ 15,672,486 $ 15,028,263 $ 45,972,054 $ 38,394,328
- ----------------------------------------------------------------------------------------------------------------
(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>
10
<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 41%
of the Company's total assets at September 30, 1999 compared with 46% at
December 31, 1998. The Company has also made significant investments during 1998
and the first nine months of 1999 to acquire subscribers and businesses that fit
the Company's business model. The net intangible assets (primarily goodwill)
from acquisitions are 34% of the Company's total assets at September 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 been financed with internally generated funds and
long-term debt. The Company's management continually reviews this financing
strategy to support the growth of the Company.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $35.4 million for the first
nine months of 1999 compared to $34.9 million for the same period in 1998. This
increase of $0.5 million was primarily the result of the $7.6 million increase
in operating cash flow (EBITDA), defined as operating income before depreciation
and amortization expense, offset by the $4.5 million decrease from change in
assets and liabilities, $0.6 million increase in interest expense and an
increase in cash taxes paid of $0.9 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used by investing activities was $29.2 million for the first nine
months of 1999 compared to $51.8 million for the same period in 1998. The
decrease of $22.6 million was primarily the result of the Company's reduction in
acquisition costs. The Company closed on the Kavouras, Inc. acquisition in July
of 1998 in which the Company paid $20.7 million at closing. In addition, the
Company has reduced capital expenditures, primarily $5.0 million of equipment
used by subscribers.
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 $10.1 million cash for these acquisitions
and the license agreement during the first nine months of 1999 compared to $28.2
million cash for acquisitions during the same period in 1998.
The acquisitions in the first nine 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 $5.9 million for the first nine
months of 1999 compared to a source of cash of $16.0 million for the same period
a year ago. The primary change in the cash flows from financing activities for
the first nine months of 1999 compared to 1998 was a result of the Kavouras
acquisition in July of 1998, which required $20.7 million cash.
The Company reduced its total debt by $11.2 million during the first nine
months of 1999 compared with increasing total debt by $20.2 million for the same
period of 1998.
11
<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.
12
<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 had completed this phase as of
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
September 30, 1999. The estimated cost of using internal resources through
September 30, 1999 was $1.0 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 $.1 million was spent during the third 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
13
<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
detailed contingency plan is November 26, 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 September 30, 1999 increased to 165,400 compared to
158,400 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 81.7% for the first nine months of 1999 compared to 82.1% at September 30,
1998 and 80.6% for the year ended December 31, 1998.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
In addition, Internet subscribers continued to grow and at September 30,
1999 totaled 13,900 as compared to 3,900 at September 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 a per subscriber basis covering
the Company's fixed expenses.
Operating cash flow (EBITDA) for the third quarter of 1999 increased 4% to
$15.7 million compared to $15.0 million for 1998.
Operating cash flow (EBITDA) for the nine months ended September 30, 1999
increased 20% to $46.0 million compared to $38.4 million for the same period of
1998. Excluding the non-recurring severance costs (as discussed on page 16) 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
nine months of 1999 would have been $46.7 million compared to $44.2 million for
the same period of 1998.
Operating cash flow margin (EBITDA margin), excluding non-recurring costs,
were 38% for the third quarter and first nine months of 1999 compared to 38% and
41% 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 third quarter and first nine 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 third quarter and first nine months of 1999 were $1.8 million and
$5.4 million compared to $2.4 million and $4.7 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 $6.0 million for the third quarter of 1999 compared to $4.7 million for
the same period of 1998.
Equipment capital expenditures for the third quarter of 1999 were down 6%
to $7.5 million compared to $8.0 million for the same period of 1998. Included
in the third quarters of 1999 and 1998 were $3.1 million and $.6 million of
one-time expenditures primarily for satellite equipment and the DIRECTV project,
respectively. The Company completed payments on these projects during the third
quarter of 1999. Excluding these costs, free cash flow would have been $9.1
million for the third quarter of 1999 compared to $5.3 million for the third
quarter of 1998.
Free cash flow for the first nine months ended September 30, 1999 increased
to $20.1 million up from $8.7 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 nine months of 1999 would have been $20.8 million compared to
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
$14.5 million for the same period in 1998. Excluding the one time severance
costs and the $7.3 million non-recurring equipment capital expenditures, free
cash flow would have been $28.1 for the first nine 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 1.8 for the period ended September 30,
1999 compared to 2.2 for the period ended September 30, 1998. The debt leverage
ratio at September 30, 1999 is based on $111.0 million of total long-term debt
(including current portion) divided by $60.6 million of last twelve months
operating cash flow (EBITDA) for the twelve month period ending September 30,
1999. This ratio demonstrates the Company's ability to pay off total long-term
debt in 1.8 years.
Non-recurring Costs:
During the first quarter of 1999, the Company incurred non-recurring costs
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
incurred non-recurring costs of $5.8 million related to the satellite outage of
Galaxy IV.
REVENUES
Total revenues for the third quarter of 1999 increased 4% to $41.5 million
compared to $39.7 million for the third quarter of 1998. Total revenues for the
nine months ended September 30, 1999 increased 14% to $124.3 million compared to
$109.0 million for the same period of 1998.
The Company attributes the revenue increases for the third quarter and
first nine months of 1999 compared to the same periods of 1998 primarily to
revenue generated by the increase in subscribers, an increase in average
subscription rates and 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
nine months ended September 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 nine months
ended September 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 $84 and $85 for
the third quarter and first nine months of 1999 compared to $83 and $76 for the
same periods of 1998.
Subscriptions:
Subscription revenue for the third quarter and first nine months of 1999
grew 9% and 15% to $33.8 million and $100.3 million compared to $30.9 million
and $87.4 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 third quarter
of 1999 was $74 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 third quarter and first nine months of 1999,
growing to $68 compared to $65 and $61 for the same periods in 1998.
16
<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 operations contributed
$1.3 million and $4.4 million of these equipment sales for the third quarter and
first nine months of 1999 compared with $3.2 million for the same periods of
1998.
Additional Services:
Additional service revenue for the third quarter and first nine months of
1999 grew 19% and 10% to $2.1 million and $5.9 million compared to $1.8 million
and $5.3 million for the same periods in 1998. The growth remains positive
during a period of weak agriculture markets. In addition, the Company added
higher priced add-on services in the financial services area which added to the
overall growth.
Communication Services:
Communications services revenue increased 21% and 13% to $3.1 million and
$9.0 million for the third quarter and first nine months of 1999 compared to
$2.6 million and $7.9 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 third quarter of 1999 was $6.29 compared to
$5.39 for the third quarter of 1998.
Advertising:
Advertising revenue remained flat at $0.6 million and $2.5 million for the
third quarter and first nine 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 third quarter of 1999 was $1.12 compared to
$1.26 for the third quarter of 1998.
Service Initiation Fees:
Service initiation fees revenue decreased 37% and 30% to $0.4 million and
$1.9 million for the third quarter and first nine months of 1999 compared to
$0.7 million and $2.7 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 third quarter of 1999 was $0.88 compared to $1.45 for
the third quarter of 1998.
EXPENSES
Total expenses increased 4% and 12% to $39.3 million and $118.6 million for
the third quarter and first nine months of 1999 compared to $37.6 million and
$106.2 million for the same periods of 1998. The increase in expenses were
primarily related to expenses from acquisitions (including the $0.9 million and
$3.4 million of costs of equipment sales for the third quarter and first nine
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 third quarter and
first nine months of 1999 grew 11% and 20% to $21.5 million and $64.7 million
compared to $19.4 million and $54.0 million for the same periods of 1998. These
expenses as a percentage of total revenues were 52% for the third quarter and
first nine months of 1999 compared to 49% and 50% for the same periods of 1998.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cost of Equipment Sales:
Cost of equipment sales for the third quarter and first nine months of 1999
were $1.1 million and $3.8 million compared to $2.5 million for the same periods
of 1998. These expenses are primarily the result of the Kavouras operations
which bring a new market niche for the Company, the manufacture and sale of
various meteorological equipment and radar systems.
Sales Commissions:
Sales commissions for the third quarter and first nine months of 1999
increased 15% and 11% to $3.2 million and $9.2 million compared to $2.8 million
and $8.3 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 were 8% and 7% for the third quarter and first nine months of 1999
compared to 7% and 8% for the same periods of 1998.
Depreciation and Amortization:
Depreciation and amortization expense for the third quarter and first nine
months of 1999 increased 4% and 13% to $13.5 million and $40.2 million compared
to $12.9 million and $35.6 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 third quarter and first nine months of 1999
increased $0.8 million and $3.9 million over the same periods of 1998.
Offsetting these increases was a continued decrease in depreciation expense to
$10.2 million for the third quarter of 1999 compared to $10.5 million for the
third quarter of 1998. As a percentage of total revenues, depreciation and
amortization expense for the third quarter and first nine months of 1999 were
32% compared to 32% and 33% for the same periods of 1998.
OPERATING INCOME
Operating income (EBIT) for the third quarter of 1999 increased to $2.2
million compared to $2.1 million for the third quarter of 1998. Operating income
before amortization expense related to acquisitions increased 20% to $5.4
million for the third quarter of 1999 compared to $4.5 million for the same
period of 1998.
Operating income (EBIT) for the nine months ended September 30, 1999
increased 107% to $5.8 million compared to $2.8 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 nine months of 1999 would
have been $6.5 million compared to $8.6 million for the same period of 1998.
Operating income excluding non-recurring costs and before amortization expense
related to acquisitions increased 13% to $15.9 million for the first nine months
of 1999 compared to $14.1 million for the same period of 1998.
INTEREST EXPENSE
Interest expense for the third quarter of 1999 decreased 4% to $2.2 million
compared to $2.3 million for the third quarter of 1998. The decrease in interest
expense is primarily related to a decrease in total debt to $111.0 million at
September 30, 1999, from $114.9 million at September 30, 1998.
Interest expense for the first nine months of 1999 increased 10% to $6.8
million compared to $6.1 million for the same period of 1998. In the first
quarter of 1998 the Company refinanced its 11.25% Senior Subordinated Notes down
to 7.5% Senior converted notes. As a percentage of total revenue, interest
expense decreased to 5% for the third quarter and first nine months of 1999
compared to 6% for the same periods of 1998.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER INCOME, NET
For the third quarter of 1998, the Company received a federal income tax
refund from amended returns for prior years and as a result, recorded one-time
interest income of $181,000 from these refunds.
INCOME TAX PROVISION (BENEFIT)
The Company's effective income tax rate for the third quarter and first
nine 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 third quarter and first nine months of 1998 was 37% and 36%,
respectively.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
Loss before extraordinary item for third quarter of 1999 was $0.2 million
or $.02 per share on a diluted basis, compared to income of $9,987 or less than
$.01 per share on a diluted basis for the third quarter of 1998.
Loss before extraordinary item for the first nine months of 1999 was $1.2
million or $.10 per share on a diluted basis, compared to a loss of $2.0 million
or $.18 per share on a diluted basis for the same period in 1998. Excluding the
non-recurring severance and non-recurring satellite costs, the loss before
extraordinary item for the first nine months of 1999 would have been $0.7
million or $.06 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 INCOME (LOSS)
The net loss for the third quarter of 1999 was $0.2 million or $.02 per
share on a diluted basis, compared to net income of $9,987 or less than $.01 per
share on a diluted basis for the third quarter of 1998.
The net loss for the first nine months of 1999 was $1.2 million or $.10 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 nine months of 1999
would have been $0.7 million or $.06 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.
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
$36,763,042 or 33% of the total, 2) Variable Term Notes of $13,752,373 or 12% of
the total and 3) Revolving Credit Line with an outstanding balance of
$60,500,000 or 55% 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 28,000 86,500
Revolving Credit Line (a) 112,000 308,500
-------------------------- ---------------------- -----------------------
Total $ 140,000 $ 395,000
-------------------------- ---------------------- -----------------------
</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
$36,763,042 of fixed term debt as of September 30, 1999 with an estimated fair
value of $37,001,117 or an increase $238,075. 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. In addition, Scott
A. Fleck, Richard R. Jaros, J. Michael Parks and Jay E.
Ricks each resigned as a director of the Company effective
on March 24, 1999. The remaining directors of the Company
elected Jay H. Golding, Anthony S. Jacobs and Joseph F.
Mazzella as directors of the Company to fill three of the
vacancies on the Board of Directors resulting from such
resignations. The new Board of Directors then amended the
Bylaws of the Company to reduce from nine to seven the
number of directors of the Company. The new Board of
Directors also amended the Company's shareholder rights plan
to provide for such rights to expire on March 24, 1999,
therefore causing such rights to become unexercisable.
(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
-------------------------------------
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 15th day of November, 1999.
21
<PAGE>
COMPUTATION OF INCOME PER SHARE
Data Transmission Network Corporation
Quarter and Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
Unaudited 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (Loss) Before Extraordinary Item $ (193,139) $ 9,987 $ (1,165,129) $ (1,979,149)
Extraordinary Item, net of tax -- -- -- 1,076,880
-------------------------------------------------------------------
Net Loss $ (193,139) $ 9,987 $ (1,165,129) $ (3,056,029)
- --------------------------------------------------------------------------------------------------------------------
Average shares outstanding (1) 11,722,374 11,406,837 11,659,060 11,308,925
Add shares applicable to stock options
and warrants (2) -- 858,382 -- --
-------------------------------------------------------------------
Total Shares (3) 11,722,374 12,265,219 11,659,060 11,308,925
- -------------------------------------------------------------------------------------------------------------------
Basic Loss Per Share
Loss before extraordinary Item $ (0.02) $ -- $ (0.10) $ (0.18)
Extraordinary item, net of tax -- -- -- (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ -- $ (0.10) $ (0.27)
- -------------------------------------------------------------------------------------------------------------------
Diluted Loss Per Share
Loss before extraordinary Item $ (0.02) $ -- $ (0.10) $ 0.18)
Extraordinary item, net of tax -- -- -- (0.09)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.02) $ -- $ (0.10) $ (0.27)
- -------------------------------------------------------------------------------------------------------------------
(1) Shares used in the Basic Earnings Per Share.
(2) The dilutive potential common shares outstanding for the third quarter and
first nine months of 1999 was 607,450 compared to 941,079 for the first
nine months of 1999. 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>
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 361,127
<SECURITIES> 0
<RECEIVABLES> 12,236,930
<ALLOWANCES> 1,500,000
<INVENTORY> 4,138,808
<CURRENT-ASSETS> 20,129,330
<PP&E> 302,483,111
<DEPRECIATION> 204,779,298
<TOTAL-ASSETS> 188,729,827
<CURRENT-LIABILITIES> 35,787,997
<BONDS> 89,433,748
0
0
<COMMON> 11,948
<OTHER-SE> 36,289,818
<TOTAL-LIABILITY-AND-EQUITY> 188,729,827
<SALES> 124,345,589
<TOTAL-REVENUES> 124,345,589
<CGS> 0
<TOTAL-COSTS> 118,573,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,756,710
<INCOME-PRETAX> (942,629)
<INCOME-TAX> 222,500
<INCOME-CONTINUING> (1,165,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,165,129)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
