UNITED STATES SECURITIES AND EXCHANGE COMMISSION 		 WASHINGTON, D.C. 20549 		 _____________________ 			FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) 	 of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 [ ] Transition report pursuant to section 13 or 15(d) 	 of the Securities Exchange Act of 1934 	 Commission File Number 333-50049 				 --------- 		 DTI HOLDINGS, INC. (Exact name of registrant as specified in its charter) 	 Missouri 43-1828147 (State of Incorporation) (I.R.S. Employer 				 Identification No.) 	 8112 Maryland Ave, 4th Floor 		St. Louis, Missouri 63105 	 (Address of principal executive offices) 		 (314) 880-1000 	 (Registrant's telephone number) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 	 Yes X No 	 _____ ____ No non-affiliates of the registrant own common stock of the registrant. 		 DTI HOLDINGS, INC. 			 FORM 10-Q 			 June 30, 2001 			TABLE OF CONTENTS 							 Page PART I FINANCIAL INFORMATION Item 1. Financial Statements 	 Condensed Consolidated Balance Sheets at 3 	 December 31, 2000 and June 30, 2001 	 (Unaudited) 	 Condensed Consolidated Statements of 4 	 Operations for the Three and Six Months 	 Ended June 30, 2000 and 2001 (Unaudited) 	 Condensed Consolidated Statements of Cash 5 	 Flows for the Six Months Ended June 30, 2000 	 and 2001 (Unaudited) 	 Notes to Condensed Consolidated Financial 6 	 Statements (Unaudited) Item 2. Management's Discussion and Analysis of 10 	 Financial Condition and Results of 	 Operations Item 3. Quantitative and Qualitative Disclosures 16 	 about Market Risk PART II OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 		 PART I - FINANCIAL INFORMATION 		 DTI HOLDINGS, INC. AND SUBSIDIARIES 		 CONDENSED CONSOLIDATED BALANCE SHEETS 					 December 31, June 30, 						 2000 2001 					 ------------ ------------ Assets (Unaudited) Current assets: Cash and cash equivalents $ 10,639,366 $ 1,712,470 Trade accounts receivable, net 626,091 799,247 Other receivables - 4,952,620 Prepaid and other current assets 1,550,789 1,473,931 					 ------------ ------------ 	Total current assets 12,816,246 8,938,268 Property and equipment, net 361,314,245 381,810,349 Deferred financing costs, net 6,020,632 2,440,139 Prepaid fiber usage rights 349,628 313,460 Other assets 626,637 790,806 					 ------------ ------------ 	Total $381,127,388 $394,293,022 					 ============ ============ Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 23,566,886 $ 6,110,402 Revolving credit facility from parent - 39,000,000 Demand loan from parent - 94,000,000 IRU payable 7,093,000 7,093,000 Vendor financing 5,836,766 3,641,859 Taxes payable 2,311,584 3,371,982 Interest payable to parent - 4,734,473 Senior discount notes, net of unamortized 	 underwriter's discount of 	 $2,634,050 and $0, respectively 191,376,908 - Other accrued liabilities 3,919,650 4,653,960 					 ------------ ------------ 	Total current liabilities 234,104,794 162,605,676 Senior discount notes, net of unamortized underwriter's discount of $2,593,278, and $2,088,383, respectively 188,414,535 200,604,673 Deferred revenues 41,148,937 47,256,860 Vendor financing 2,100,030 - 					 ------------ ------------ 	Total liabilities 465,768,296 410,467,209 					 ------------ ------------ Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $.01 par value, 20,000 shares authorized, no shares issued and outstanding - - Convertible series A preferred stock, $.01 par value, (aggregate liquidation preference of $45,000,000) 30,000 shares authorized, issued and outstanding 300 300 Common stock, $.01 par value, 100,000,000 shares authorized, 30,000,000 shares issued and outstanding 300,000 300,000 Additional paid-in capital 44,213,063 44,213,063 Common stock warrants 10,421,336 10,421,336 Unearned compensation (18,190) - Loan to stockholder (1,593,122) - Accumulated deficit (137,964,295) (71,108,886) 					 ------------ ------------ 	Total stockholders' equity (deficit) (84,640,908) (16,174,187) 					 ------------ ------------ Total $381,127,388 $394,293,022 					 ============ ============ See notes to condensed consolidated financial statements. 				-3- 	 DTI HOLDINGS, INC. AND SUBSIDIARIES 	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 			 (Unaudited) 						 Three Months Ended Six Months Ended 					 --------------------------- --------------------------- 						 June 30, June 30, June 30, June 30, 						 2000 2001 2000 2001 					 ------------ ------------ ------------ ------------ REVENUES: Telecommunications services: Carrier's carrier services $ 2,383,768 $ 4,589,821 $ 4,693,233 $ 8,200,249 End-user services 89,239 134,875 150,268 269,748 					 ------------ ------------ ------------ ------------ Total revenues 2,473,007 4,724,696 4,843,501 8,469,997 					 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Telecommunications services 3,091,715 4,706,132 6,098,484 9,021,805 Selling, general and administrative 1,371,839 1,495,098 2,762,551 2,903,834 Depreciation and amortization 3,708,179 4,842,288 7,202,403 9,463,158 					 ------------ ------------ ------------ ------------ Total operating expenses 8,171,733 11,043,518 16,063,438 21,388,797 					 ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (5,698,726) (6,318,822) (11,219,937) (12,918,800) OTHER INCOME (EXPENSE): Interest income 632,818 151,418 1,517,016 234,932 Interest expense (9,491,385) (7,725,170) (18,619,197) (16,030,586) 					 ------------ ------------ ------------ ------------ Total other income (expense) (8,858,567) (7,573,752) (17,102,181) (15,795,654) 					 ------------ ------------ ------------ ------------ NET LOSS BEFORE INCOME TAX BENEFIT (14,557,293) (13,892,574) (28,322,118) (28,714,454) TAX (PROVISION)/BENEFIT (2,234,331) (2,234,331) 38,315,098 					 ------------ ------------ ------------ ------------ NET INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM (16,791,624) (13,892,574) (30,556,449) 9,600,644 EXTRAORDINARY ITEM - GAIN ON EARLY EXTINGUISHMENT OF DEBT- NET OF TAX - - - 57,254,765 					 ------------ ------------ ------------ ------------ NET INCOME/(LOSS) $(16,791,624) $(13,892,574) $(30,556,449) $ 66,855,409 					 ============ ============ ============ ============ See notes to condensed consolidated financial statements. 				-4- 	 DTI HOLDINGS, INC. AND SUBSIDIARIES 	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 			 (Unaudited) 							Six Months Ended 						 --------------------------- 						 June 30, June 30, 							2000 2001 						 ------------ ------------ Cash flows provided by operating activities: Net (loss) income $(30,556,449) $ 66,855,409 Adjustments to reconcile net (loss) income to cash provided by operating activities: 	Depreciation and amortization 7,202,403 9,463,158 	Accretion of senior discount notes 17,232,273 10,499,712 	Amortization of deferred financing costs 957,057 529,840 	Amortization of unearned compensation 18,180 18,190 	Gain on early extinguishment of debt - (57,254,765) 	Deferred income taxes 3,234,331 (38,315,098) 	Other noncash items 376,052 363,669 	Changes in assets and liabilities: 	Trade accounts receivable (76,031) (173,156) 	 Other assets (12,064,305) (5,003,763) 	 Accounts payable 1,280,473 (17,456,484) 	 Other liabilities 729,469 5,092,621 	 Taxes payable 536,672 1,060,398 	 Deferred revenues 7,137,223 6,107,923 						 ------------ ------------ Net cash flows used in operating activities (3,992,652) (18,212,346) 						 ------------ ------------ Cash flows from investing activities: Increase in network and equipment (34,155,945) (26,191,528) 						 ------------ ------------ Net cash used in investing activities (34,155,945) (26,191,528) 						 ------------ ------------ Cash flows from financing activities: Proceeds from demand loan from parent - 94,000,000 Proceeds from credit facility from parent - 39,000,000 Repurchase of senior discount notes - (94,833,700) Repayment of vendor financing (2,200,721) (4,294,937) Proceeds from repayment of loan to stockholder - 1,605,615 						 ------------ ------------ Cash flows (used in) provided by financing activities (2,200,721) 35,476,978 						 ------------ ------------ Net decrease in cash and cash equivalents (40,349,318) (8,926,896) Cash and cash equivalents, beginning of period 73,190,771 10,639,366 						 ------------ ------------ Cash and cash equivalents, end of period $ 32,841,453 $ 1,712,470 						 ============ ============ Noncash investing and financing activities: Interest capitalized to fixed assets $ 4,444,074 $ 3,767,734 						 ============ ============ Fixed assets acquired through vendor financing $ 4,279,808 $ - 						 ============ ============ See notes to condensed consolidated financial statements. 				-5- DTI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the management of DTI Holdings, Inc. and subsidiaries (the "Company" or "DTI") the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the Company's financial information for the interim periods presented and have been prepared in accordance with accounting principles generally accepted in the United States of America. The interim results of operations are not necessarily indicative of results that may be expected for any other interim period or for the full year. The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the period ended December 31, 2000 included in the Company's Form 10-K for the same period filed with the Securities and Exchange Commission. Accordingly, note disclosures which would substantially duplicate the disclosures in the audited financial statements have been omitted. 2. TENDER OF SENIOR DISCOUNT NOTES AND OWNERSHIP EXCEEDING 80 PERCENT On February 1, 2001, the Company purchased 50.4 percent of its Senior Discount Notes for a purchase price of $94.8 million pursuant to a tender offer. KLT Telecom Inc. (KLTT), the indirect telecommunications subsidiary of Kansas City Power & Light Company ("KCP&L"), provided a demand loan ("Demand Loan") to the Company of $94 million at an annual interest rate of 10% in order to complete this transaction. The Demand Loan received from KLTT is in the form of a demand note in which all principal and interest is due upon demand and is secured by a pledge of all the outstanding stock of Digital Teleport, Inc. and Digital Teleport of Virginia, Inc. As a result of the purchase made pursuant to the completion of the tender offer the Company reduced the principal amount outstanding of its Senior Discount Notes, net of unamortized underwriter's discount, by approximately $193.5 million and Deferred Financing Costs by approximately $2.9 million. These reductions resulted in a net benefit to the Company of $95.6 million consisting of a net gain on early extinguishment of debt to the Company of $57.3 million and a tax benefit of $38.3 million as a result of an adjustment in the Company's deferred tax valuation allowance as of February 1, 2001. The purchase of the Senior Discount Notes also reduces the amount of cash interest that will be due with respect to the Senior Discount Notes by approximately $32 million annually starting in September 2003, when these payments begin, and replaced this interest with approximately $9.4 million in annual interest which will be payable in accordance with the Demand Loan. The consent solicitation made in connection with the tender offer authorized certain changes in the indenture associated with the Senior Discount Notes, including expanding the Company's allowable secured borrowings by an additional $194 million to a total of $294 million. These changes also permit the Demand Loan to be secured by the stock of the Company's subsidiaries and other financings to be secured by the assets of the Company and its subsidiaries. 				-6- On February 8, 2001, KLTT acquired an additional 30.7 percent of the fully diluted shares of the Company from Richard D. Weinstein, the former Chairman, President and CEO of the Company for $33.6 million in cash. An additional 5 percent of the fully diluted shares were purchased by KLTT through a tender offer for DTI's outstanding warrants issued in connection with the Senior Discount Notes and the purchase by KLTT of a separate warrant for 1 percent of the Company's common stock, that results in KLTT now owning 82.1 percent of DTI's fully diluted shares, excluding shares underlying stock options granted under the Company's 2001 Stock Option Plan. Shares underlying options granted under that plan are excluded from this calculation because each optionee, upon exercise of the options, is entitled only to receive cash in lieu of shares in an amount equal to the spread between the fair market of the shares and the exercise price in the event that such exercise would either (i) cause the Company to cease being a member of the affiliated group with KLTT for federal income tax purposes, or (ii) cause a change of control as defined in the Indenture, as amended, for the Senior Discount Notes. Under the purchase agreement, Mr. Weinstein has resigned as Chairman, President and CEO and will retain just over 15 percent of the fully diluted ownership and a seat on the DTI board. Paul Pierron was appointed the new President and CEO of the Company in April 2001. KLTT also acquired Mr. Weinstein's interest in the Company's St. Louis point-of-presence and switch facility, which now results in the Company making payments to KLTT for use of this facility. Additionally, as a part of the purchase agreement in February 2001, Mr. Weinstein repaid an outstanding loan to the Company in the amount of $1.6 million including interest, which had resulted from the settlement of certain litigation against the Company and Mr. Weinstein. Under the purchase agreement, KLTT had also committed to provide, or arrange for third party lenders to provide, a revolving credit facility ("Revolving Credit Facility") to the Company, to be made in 2001 in the amount of $75 million, the proceeds of which would be used for operations and capital expenditures as set forth in a reasonable capital budget to be established by the Company's Board of Directors. That commitment was implemented through a credit agreement, dated as of February 21, 2001, as amended, between the Company and KLTT (the "Credit Agreement") which contains the terms and conditions for making these bridge loans while KLTT and the Company sought a permanent revolving credit facility. Under the terms of the Credit Agreement KLTT had loaned the Company a total of $39 million at 9.5% interest through June 30, 2001 that is secured, to the extent permitted by law or agreement, by all of the Company's assets. One of the conditions to making advances under the Credit Agreement is that there has been no change since February 1, 2001 in the business, property, prospects, condition (financial or otherwise) or results of operations of the Company which could reasonably be expected to have a material adverse effect on any of the foregoing matters. The Company, with the assistance of KLTT, had obtained a contingent commitment from a major money-center bank to arrange a syndicate of bank lenders to provide a $100 million senior credit facility ("Senior Credit Facility") for the Company. KLTT and the Company were recently informed that it would not be possible to obtain this Senior Credit Facility due to, among other things, the downturn in the telecommunications industry. As a result of this development, the Company has determined to pursue a more focused expansion plan. In order to conserve capital and wait out the current downturn in the telecommunications industry, the Company will focus primarily on connectivity in secondary and tertiary markets in a five-state region. As a part of this refocus, the Company will not carry through with its contingent commitment to purchase $70 million in optical equipment from Cisco Systems. 				-7- KLTT subsequently provided an additional loan to the Company on July 26, 2001, of $5.5 million that is secured, to the extent permitted by law or agreement, by all of the Company's assets. However, KLTT and the Company's Board of Directors determined on July 19, 2001, after taking into account the recommendation of a special committee of one independent director which was advised by independent counsel, that KLTT is not obligated to make, or arrange, any future loans to the Company under its previous commitment, the Credit Agreement or otherwise. This determination was based, among other factors, on the fact that the material adverse change condition in the Credit Agreement for additional advances is not currently satisfied in view of the downturn in the telecommunications industry and the resulting decline in the Company's prospects and financial condition. However, KLTT has agreed to review the Company's revised business plan and to consider, in its sole judgment, lending up to the remaining $30.5 million contemplated by its original commitment. As a result of the above events, the Company is dependent upon KLTT's continued funding to enable it to operate and execute its refocused business plan. The Company is evaluating means to enhance its business by utilizing the significant metropolitan fiber assets that it has in its current regional network to provide metro access services, including high bandwidth services over an Ethernet based network targeted at enterprise customers (i.e., Gigabit Ethernet services). The Company is also actively exploring its strategic alternatives to address these developments which include a merger, sale of assets or some other type of recapitalization. 3. OTHER RECEIVABLES Included in other receivables in the accompanying condensed consolidated balance sheets is $5.0 million representing amounts due under an existing IRU agreement. DTI anticipates that this amount and other amounts due under the IRU agreement will be collected from the counter party in the first quarter of 2002. 4. NETWORK AND EQUIPMENT Network and equipment consists of the following as of: 				December 31,2001 June 30, 2001 				---------------- -------------- Land......................... $ 1,946,343 $ 2,188,018 Fiber optic cable plant...... 190,704,018 211,498,852 Fiber usage rights........... 137,436,763 141,204,046 Fiber optic terminal equipment.................... 46,766,492 49,399,357 Network buildings............ 11,040,794 13,165,077 Furniture, office equipment and other.................... 3,101,193 3,444,942 Leasehold improvements....... 601,406 655,981 				---------------- -------------- 				 391,597,009 421,556,273 Less - accumulated depreciation................. 30,282,764 39,745,924 				---------------- -------------- Network and equipment, net $ 361,314,245 $ 381,810,349 				================ ============== At December 31, 2000 and June 30, 2001, fiber optic cable plant, fiber usage rights, fiber optic terminal equipment and network buildings include $67 million and $63 million of construction in progress, respectively, that was not in service and, accordingly, has not been depreciated. 				-8- 5. COMMITMENTS AND CONTINGENCIES In June 2001, a group of six land owners filed suit in Macon County Court, Illinois seeking damages of $523,000, plus punitive damages in the same amount and costs. These suits arose out of the Company's alleged failure to obtain all of the necessary rights-of- way from these landowners on a segment of DTI's constructed network in Illinois. The Company does not have any IRU customers on this segment and does not currently intend to light this segment in the near term in view of its more focused expansion plan. The Company has also secured an alternate route which does not cross these plaintiffs' lands. Further, the Company believes it can exercise condemnation powers as a state utility to obtain these rights for fair compensation in the event that it is determined that additional rights-of-way are needed on this segment or other segments in Illinois. Two landowners in Tennessee have also filed suit against the Company, asserting that the Company did not obtain all of the necessary rights-of-way from the plaintiffs and seeking damages of $143,000. It is possible that similar claims might be asserted on these segments or other segments of the Company's network. The Company is unable to predict the amount of any damages that might be awarded in the Macon County or Tennessee suits, or in any other suit that might be filed alleging similar claims. The Company intends to review its network to determine what additional rights of way might be necessary or appropriate to obtain. The Company is unable to predict the extent to which additional rights of way may be needed, or the cost of obtaining such rights of way. In addition, from time to time the Company is named as a defendant in other routine lawsuits incidental to its business. The Company believes that none of these other current proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows. 				-9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenue Total revenue for the three and six months ended June 30, 2001 increased $2.3 million (91%) and $3.6 million (75%) from the comparable prior year period. This growth is primarily attributable to increased revenues from carrier's carrier services. Revenues from carrier's carrier services for the same periods were up 93% and 75%, respectively. The increase was due principally to additional sales of transport business on our in-service routes. Operating Expenses Total operating expenses increased $2.9 million and $5.3 million for the quarter and six-month period ended June 30, 2001 compared to the same periods in the prior year. Telecommunication services expenses increased $1.6 million for the quarter and $2.9 million for the six-month period ended June 30, 2001 compared to the same periods in the prior year. This increase primarily reflects the increase of costs related to accepted dark fiber segments, property taxes and personnel costs related to the growth of the operational infrastructure. Selling, general and administrative costs have remained relatively constant over all periods as the Company has worked to contain costs in these areas. Depreciation and amortization grew $2.3 million for the six month period ended June 30, 2001 in comparison to the same period in the prior year due to increasing amounts of our fiber optic network being placed into service. Depreciation and amortization will continue to grow as additional network routes are placed into service and as we move forward with our investment in capital assets in order to increase network capacity. Other Income (Expense) Net other income (expense) for the six-month period decreased $1.3 million to a net expense of $15.8 million in 2001. Net other income (expense) decreased between periods primarily due to the Company's repurchase of 50.4% of its Senior Discount Notes on February 1, 2001 using lower principal and interest financing from KLTT. As a result of the repurchase the Company has reduced the amount of accretion related to the Senior Discount Notes. This reduction in accretion related to the Senior Discount Notes is offset in part by a reduction in the interest income earned on the portion of the proceeds from the Senior Discount Notes invested in short-term investment-grade securities as the cash related to the Senior Discount Notes has been fully utilized, in connection with the implementation of our business strategy. Income Taxes The Company recognized an income tax benefit of $38.3 million as a result of the net gain on the early extinguishment of debt in February, 2001, which allowed us to adjust our deferred tax valuation allowance for the period ended June 30, 2001. A tax provision of $2.2 million was recorded in the same period in the prior year to reflect the recording of a valuation allowance against the Company's deferred tax asset. A valuation allowance is being provided to reserve for significant deferred tax assets generated from net operating loss carryforwards and the nondeductible interest expense related to our Senior Discount Notes, issued in February 1998,that may not be realizable due to uncertainties surrounding income tax law changes and future 			 -10- operating income levels. Additionally,pursuant to the acquisition by KLTT on February 8, 2001, the Company has agreed to the allocation of, and use by, KLTT and/or its affiliates of the existing and future net operating losses of the Company to offset the taxable income of KLTT and/or its affiliates, except to the extent that the Company would otherwise have taxable income in the same tax year in which KLTT and/or its affiliate use such net operating losses. Gain on Early Extinguishment of Debt The Company recognized a gain on early extinguishment of debt, net of tax, of $57.3 million for the period ended June 30, 2001 as a result of the repurchase in February, 2001, of 50.4% of the Senior Discount Notes. Liquidity and Capital Resources We have funded our capital expenditures, working capital and debt requirements and operating losses through a combination of advance payments for future telecommunications services received from certain major customers, debt and equity financing and external borrowings. At June 30, 2001, we had a working capital deficiency of $153.7 million, which represents an increase in working capital of $67.6 million compared to the working capital deficit of $221.3 million at December 31, 2000. This increase is primarily attributable to the Company's repurchase of 50.4% of its outstanding Senior Discount Notes in February 2001. The net cash used in operating activities for the six-month period ended June 30, 2000 and 2001 totaled $4.0 million and $18.2 million, respectively. During 2001, net cash used in operating activities resulted primarily from payment of Accounts Payable of $17.5 million as we have completed various construction projects related to the build-out of our network. Our investing activities used cash of $26.2 million for the six- month period ended June 30, 2001 and $34.2 million for the six- month period ended June 30, 2000. During both periods, 100% of the investing activities were related to network and equipment. We expect the decreasing trend in investing activities to continue as the Company pursues a more focused expansion plan in order to conserve capital during the current generally capital constrained condition of the telecommunications industry. Cash used in financing activities was $2.2 million for the six- month period ended June 30, 2000 consisting primarily of amounts paid under our vendor financing agreement. During the six-month period ended June 30, 2001 cash flows generated from financing activities was $35.5 million and represented proceeds from loans from KLTT and repayment of our loan to stockholder, offset by payments made on our vendor financing agreement. We also repurchased 50.4% of the outstanding Senior Discount Notes in February, 2001, using the proceeds of a $94 million demand loan from KLTT and $.8 million of cash on hand. On February 1, 2001, the Company purchased 50.4 percent of its Senior Discount Notes for a purchase price of $94.8 million pursuant to a tender offer. KLTT provided the Demand Loan to the Company of $94 million at an annual interest rate of 10% in order to complete this transaction. The Demand Loan received from KLTT is in the form of a demand note in which all principal and interest is due upon demand and is secured by a pledge of all the outstanding stock of Digital Teleport, Inc. and Digital Teleport of Virginia, Inc. As a result of the purchase made pursuant to the completion of the tender offer the Company reduced the principal amount outstanding of its Senior Discount Notes, net of unamortized underwriter's discount, by approximately $193.5 million 			 -11- and Deferred Financing Costs by approximately $2.9 million. These reductions resulted in a net benefit to the Company of $95.6 million consisting of a net gain on early extinguishment of debt to the Company of $57.3 million and a tax benefit of $38.3 million as a result of an adjustment in the Company's deferred tax valuation allowance as of February 1, 2001. The purchase of the Senior Discount Notes also reduces the amount of cash interest that will be due with respect to the Senior Discount Notes by approximately $32 million annually starting in September 2003, when these payments begin, and replaced this interest with approximately $9.4 million in annual interest which will be payable in accordance with the Demand Loan. The consent solicitation made in connection with the tender offer authorized certain changes in the indenture associated with the Senior Discount Notes, including expanding the Company's allowable secured borrowings by an additional $194 million to a total of $294 million. These changes also permit the Demand Loan to be secured by the stock of the Company's subsidiaries and other financings to be secured by the assets of the Company and its subsidiaries. On February 8, 2001, KLTT acquired an additional 30.7 percent of the fully diluted shares of the Company from Richard D. Weinstein, the former Chairman, President and CEO of the Company for $33.6 million in cash. An additional 5 percent of the fully diluted shares were purchased by KLTT through a tender offer for DTI's outstanding warrants issued in connection with the Senior Discount Notes and the purchase by KLTT of a separate warrant for 1 percent of the Company's common stock, that results in KLTT now owning 82.1 percent of DTI's fully diluted shares, excluding shares underlying stock options granted under the Company's 2001 Stock Option Plan. Shares underlying options granted under that plan are excluded from this calculation because each optionee, upon exercise of the options, is entitled only to receive cash in lieu of shares in an amount equal to the spread between the fair market of the shares and the exercise price in the event that such exercise would either (i) cause the Company to cease being a member of the affiliated group with KLTT for federal income tax purposes, or (ii) cause a change of control as defined in the Indenture, as amended, for the Senior Discount Notes. Under the purchase agreement, Mr. Weinstein has resigned as Chairman, President and CEO and will retain just over 15 percent of the fully diluted ownership and a seat on the DTI board. Paul Pierron was appointed the new President and CEO of the Company in April 2001. KLTT also acquired Mr. Weinstein's interest in the Company's St. Louis point-of-presence and switch facility, which now results in the Company making payments to KLTT for use of this facility. Additionally, as a part of the purchase agreement in February 2001, Mr. Weinstein repaid an outstanding loan to the Company in the amount of $1.6 million including interest, which had resulted from the settlement of certain litigation against the Company and Mr. Weinstein. Under the purchase agreement, KLTT had also committed to provide, or arrange for third party lenders to provide, a revolving credit facility ("Revolving Credit Facility") to the Company, to be made in 2001 in the amount of $75 million, the proceeds of which would be used for operations and capital expenditures as set forth in a reasonable capital budget to be established by the Company's Board of Directors. That commitment was implemented through a Credit Agreement, dated as of February 21, 2001, as amended, between the Company and KLTT which contains the terms and conditions for making these bridge loans while KLTT and the Company sought a permanent revolving credit facility. Under the terms of the Credit Agreement KLTT had loaned the Company a total of $39 million at 9.5% interest through June 30, 2001 that is secured, to the extent permitted by law or agreement, by all of the Company's assets. One of the conditions to making advances under the Credit Agreement is that there has been no change since February 1, 2001 in the business, property, prospects, condition (financial or otherwise) or results of 			 -12- operations of the Company which could reasonably be expected to have a material adverse effect on any of the foregoing matters. The Company, with the assistance of KLTT, had obtained a contingent commitment from a major money-center bank to arrange a syndicate of bank lenders to provide a $100 million senior credit facility ("Senior Credit Facility") for the Company. KLTT and the Company were recently informed that it would not be possible to obtain this Senior Credit Facility due to, among other things, the downturn in the telecommunications industry. KLTT subsequently provided an additional loan to the Company on July 26, 2001, of $5.5 million that is secured, to the extent permitted by law or agreement, by all of the Company's assets. However, KLTT and the Company's Board of Directors determined on July 19, 2001, after taking into account the recommendation of a special committee of one independent director which was advised by independent counsel, that KLTT is not obligated to make, or arrange, any future loans to the Company under its previous commitment, the Credit Agreement or otherwise. This determination was based, among other factors, on the fact that the material adverse change condition in the Credit Agreement for additional advances is not currently satisfied in view of the downturn in the telecommunications industry and the resulting decline in the Company's prospects and financial condition. However, KLTT has agreed to review the Company's revised business plan and to consider, in its sole judgment, lending up to the remaining $30.5 million contemplated by its original committment. As a result of the above events, the Company is dependent upon KLTT's continued funding to enable it to operate and execute its refocused business plan. The Company is evaluating means to enhance its business by utilizing the significant metropolitan fiber assets that it has in its current regional network to provide metro access services, including high bandwidth services over an Ethernet based network targeted at enterprise customers (i.e., Gigabit Ethernet services). The Company is also actively exploring its strategic alternatives to address these developments which include a merger, sale of assets or some other type of recapitalization. As a result of this development, the Company has determined to pursue a more focused expansion plan, in order to conserve capital and wait out the current downturn in the telecommunications industry. We anticipate our capital expenditure priorities during the balance of calendar 2001 will be focused principally on connectivity in secondary and tertiary markets in a five-state region and the metro access strategy. We estimate that the total additional cash funding requirements of the Company subsequent to June 30, 2001, necessary to implement this strategy, and to fund existing commitments and payables, will be approximately $33 million over the next 18 months. This $33 million estimated funding requirement consists of (i) approximately $25 million related to five-state region strategy and, (ii) approximately $8 million to fund the metro access strategy. As a part of this refocus, the Company will not carry through with its contingent commitment to purchase $70 million in optical equipment from Cisco Systems. In the event we do not meet our projections under the revised business plan, or elect to modify the plan, we also may require additional capital in the future to fund operating deficits and net losses and for potential strategic alliances, joint ventures, debt service requirements. Because of the downturn in the telecommunication industry, an impairment analysis was performed on the Company's assets in accordance with FASB 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) which requires that long-lived 			 -13- assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The analysis indicated there was no impairment at this time. In November 1999, we entered into an IRU agreement with Adelphia Business Solutions ("ABS") for over 4000 route miles on our network initially valued at between $27 to $42 million to DTI depending on the number of options for additional routes of fiber strands exercised by the parties. ABS paid $10 million in advance cash payments under the terms of the Agreement. In August 2000, ABS cancelled five routes or portions thereof, which will result in approximately $4.2 million in reduced future cash collections under the Agreement, plus the repayment to ABS of approximately $1.6 million previously paid to DTI by ABS, which was repaid in September 2000. In addition to providing for certain rights to cancel delivery of route segments not delivered to them by agreed upon dates, the Agreement also provides for monthly financial penalties for late deliveries. Subsequent to December 31, 2000, the Company reached an agreement with ABS to amend the Agreement between the parties. Under the terms of the Amendment, all penalties accruing to ABS as a result of the Company's failure to deliver routes by the contractual due dates ceased as of December 31, 2000. In addition, the Amendment allows ABS to terminate four additional routes or portions thereof. The route cancellations will not require the repayment to ABS of any prepayments received by the Company for those cancelled routes. Those prepayments will be credited against amounts owed to the Company when the remaining routes are accepted by ABS. ABS will be allowed to defer all remaining route acceptances until January 2002, along with the payment of the remaining net approximately $9.6 million due to DTI. The amounts payable to DTI upon route delivery will accrue interest at 11% from the actual dates of delivery of the routes until their acceptance in January 2002, or their earlier acceptance at the option of ABS. As of June 30, 2001, the Company has recorded a receivable of $5.0 million related to the delivery of various routes under this agreement. We have a swap agreement with a counter party under which both DTI and the counter party did not deliver their respective routes by the contracted due date. The counter party to the agreement has delivered both of its routes and we have delivered one of our two routes. As the counter party delivers their routes and we accept them we are required to make annual cash payments to them totaling approximately $1.4 million, plus quarterly building and maintenance fees, in advance of their making payments to us for our routes. Additionally, we may be required to accrue penalties for late delivery of $100,000 per route per month. We have received notice from the counter party that they intend to exercise their rights to cancel delivery of our routes due to late delivery which would result in our not receiving approximately $1.3 million annually in lease payments over the twenty year term of the agreements plus quarterly maintenance, building space and other quarterly and annual payments due under the terms of the agreements. The Company believes that the counter party's notice of intent to terminate is subject to challenge and is in the process of reviewing its potential remedies under the contract. DTI has a swap agreement with a counter party under which both DTI and the counter party did not deliver their respective routes by the contracted due date. DTI and the counter party are in the process of reviewing the agreement regarding the late delivery by both parties. In another swap agreement, if DTI does not settle an obligation by providing the counter party with additional DTI fiber acceptable to that party by December 31, 2001, DTI will be required to pay an additional $7 million in cash to the counter party. Additionally, DTI is in preliminary discussions with the counter party regarding a proposed amendment to the agreement that would allow for a 			 -14- reduction in the amount of fiber to be received by DTI and thus a reduction in the amount of the outstanding liability. An agreement dating back to October 1994, between AmerenUE and ourselves requires us to construct a fiber optic network linking AmerenUE's 86 sites throughout the states of Missouri and Illinois in return for cash payments to DTI and the use of various rights-of- way including downtown St. Louis. As of June 30, 2001, we had completed approximately 78% of the sites required for AmerenUE and expect to complete all such construction by the end of calendar 2001. AmerenUE has set off against amounts payable to us up to $90,000 per month as damages and penalties under our contract with them due to our failure to meet certain construction deadlines, and AmerenUE has reserved its rights to seek other remedies under the contract which could potentially include reclamation of the rights- of-way granted to DTI. We are behind schedule with respect to such contract. Upon completion and turn-up of services, AmerenUE is contractually required to pay us a remaining lump sum expected to be approximately $1.3 million for their telecommunications services over our network. On February 23, 1998, we completed the issuance and sale of the Senior Discount Notes, from which we received proceeds, net of underwriting discounts and expenses, totaling approximately $265 million. As a result of the completion of the Company's tender offer for its Senior Discount Notes on February 1, 2001, the amount of Senior Discount Notes has been reduced by 50.4 percent and certain changes have been made to the indenture including expanding the Company's allowable secured borrowings by an additional $194 million to a total of $294 million, permitting the tender offer indebtedness, and permitting the acquisition of any or all of the Senior Discount Notes at any time. These changes permitted the tender offer financing and credit facility to be secured by the assets and stock of the Company and its subsidiaries. We have used the net proceeds (i) to fund additional capital expenditures required for the completion of the our network, (ii) to expand our management, operations and sales and marketing infrastructure and (iii) for additional working capital and other general corporate purposes. We may incur significant and possibly increasing operating losses and expect to generate negative net cash flows after capital expenditures during at least the next year as we continue to invest substantial funds to develop and expand our telecommunications services and customer base. Subject to the Indenture provisions that limit restrictions on the ability of any of our Restricted Subsidiaries to pay dividends and make other payments to us, future debt instruments of Digital Teleport may impose significant restrictions that may affect, among other things, the ability of Digital Teleport to pay dividends or make loans, advances or other distributions to us. The ability of Digital Teleport to pay dividends and make other distributions also will be subject to, among other things, applicable state laws and regulations. Although the Senior Discount Notes do not require cash interest payments until September 1, 2003, at such time the Senior Discount Notes will require annual cash interest payments of approximately $31 million, after giving effect to the repurchase of the Senior Discount Notes. In addition, the Senior Discount Notes mature on March 1, 2008. We currently expect that the earnings and cash flow, if any, of Digital Teleport will be retained and used by such subsidiary in its operations, including servicing its own debt obligations. We do not anticipate that we will receive any material distributions from Digital Teleport prior to September 1, 2003. Even if we determine to pay a dividend on or make a distribution in respect of the capital stock of Digital Teleport, there can be no assurance that Digital Teleport will generate sufficient cash flow to pay such a dividend or distribute such funds to us or that applicable state law and contractual restrictions, including negative covenants contained in any future debt instruments of Digital Teleport, will permit such dividends or distributions. The failure of Digital Teleport to pay or to generate sufficient earnings or cash flow to distribute any cash dividends or 			 -15- make any loans, advances or other payments of funds to us would have a material adverse effect on our ability to meet our obligations on the Senior Discount Notes. Further, there can be no assurance that we will have available, or will be able to acquire from alternative sources of financing, funds sufficient to repurchase the Senior Discount Notes in the event of a Change of Control as defined in the Indenture. Accordingly, if we cannot achieve operating profitability or positive cash flows from operating activities, we may not be able to service the Senior Discount Notes or to meet our other debt service or working capital requirements, which would have a material adverse effect on us. Forward Looking Statements Certain statements throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks, uncertainties and other factors that may cause actual events or results to differ materially from those expressed or implied by the forward looking statements. These statements describe our attempt to predict future events. We use the words "believe," "anticipate," "expect," "well" and "estimated completion" similar expressions to identify forward- looking statements. You should be aware that these forward-looking statements are subject to a number of risks, assumptions, and uncertainties, such as: - - Risks associated with our capital requirements and existing debt; - - Risks associated with increasing competition in the telecommunications industry, including industry over- capacity and declining prices; - - Changes in laws and regulations that govern the telecommunications industry; - - Risks related to obtaining significant revenue increases; - - Risks related to continuing our network expansion without delays, including the need to obtain permits and rights-of-way and performance penalties for failure to meet delivery deadlines; and - - Other risks discussed in the Company's Form 10K under "Risk Factors" filed with the Securities and Exchange Commission for the period ended December 31, 2000. This list is only an example of some of the risks that may affect our forward-looking statements. If any of these risks or uncertainties materialize (or if they fail to materialize), or if the underlying assumptions are incorrect, then our results may differ materially from those we have projected in the forward- looking statements. The Company does not intend to update these statements to reflect future events or circumstances, except to the extent, if any, required by law. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of June 30, 2001, the Company had $200.6 million of 12 1/2% Senior Discount Notes, due 2008, $39.0 million in revolving credit facility from KLTT and $94 million demand loan from KLTT. The Company's short-term and long-term obligations are principally fixed interest rate, and as a result, the Company is less sensitive to market rate fluctuations. The Company currently does not use derivative financial instruments to manage its interest rate risk and has no cash flow exposure due to general interest rate changes for its fixed interest rate long-tem debt. All of the Company's revenue is derived from domestic operations, so risk related to foreign currency exchange rates is considered minimal. 			 -16- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In June 2001, a group of six land owners filed suit in Macon County Court, Illinois seeking damages of $523,000, plus punitive damages in the same amount and costs. These suits arose out of the Company's alleged failure to obtain all of the necessary rights-of- way from these landowners on a segment of DTI's constructed network in Illinois. The Company does not have any IRU customers on this segment and does not currently intend to light this segment in the near term in view of its more focused expansion plan. The Company has also secured an alternate route which does not cross these plaintiffs' lands. Further, the Company believes it can exercise condemnation powers as a state utility to obtain these rights for fair compensation in the event that it is determined that additional rights-of-way are needed on this segment or other segments in Illinois. Two landowners in Tennessee have also filed suit against the Company, asserting that the Company did not obtain all of the necessary rights-of-way from the plaintiffs and seeking damages of $143,000. It is possible that similar claims might be asserted on these segments or other segments of the Company's network. The Company is unable to predict the amount of any damages that might be awarded in the Macon County or Tennessee suits, or in any other suit that might be filed alleging similar claims. The Company intends to review its network to determine what additional rights of way might be necessary or appropriate to obtain. The Company is unable to predict the extent to which additional rights of way may be needed, or the cost of obtaining such rights of way. In addition, from time to time the Company is named as a defendant in other routine lawsuits incidental to its business. The Company believes that none of these other current proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows. 			 -17- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits 10.35 DTI Holdings, Inc., 2001 Stock Option Plan Amended and Restated, effective April 1, 2001 filed herewith. 10.36 Amendment 2 to Credit Agreement between Digital Teleport, Inc. and KLT Telecom Inc. dated June 4, 2001 filed herewith 10.37 Security Agreement between Digital Teleport, Inc. and KLT Telecom Inc. dated July 26, 2001 filed herewith. 10.38 Emergency Term Promissory Note between Digital Teleport, Inc. and KLT Telecom Inc. dated July 26, 2001 filed herewith. (b) Reports on Form 8-K During second-quarter 2001, the Company filed the following current reports on Form 8-K: (1) Form 8-K Filed April 9, 2001 was filed pursuant to Item 5 (Other Events). (2) Form 8-K Filed July 25, 2001 was filed pursuant to Item 5 (Other Events). 			 -18- 			 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 				 DTI HOLDINGS, INC. Date: August 9, 2001 /S/Gary W. Douglass ---------------------- ----------------------------- 				 Gary W. Douglass, Senior Vice 				 President Finance and 				 Administration and 				 Chief Financial Officer 				 (Principal Financial and 				 Accounting Officer)