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
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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
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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
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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
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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.
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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.
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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).
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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)