SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________ to__________
Commission File Number 333-50049
DTI Holdings, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1674259
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11111 Dorsett Road
St. Louis, Missouri 63043
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (314) 253-6600
Check here whether the issuer (1) has filed all reports required to be filed by
Sections 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 [_] No [X]
As of May 14, 1998, the following shares of the Registrant's common stock were
issued and outstanding:
Common Stock ($.01 par value) 30,000,000
DTI HOLDINGS, INC.
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 (Unaudited) and June 30, 1997
1
Consolidated Statements of Operations for the Three and Nine Months Ended
March 31, 1998 and 1997 (Unaudited) 2
Consolidated Statement of Stockholders' Equity (Deficit) for the Nine
Months Ended March 31, 1998 (Unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months Ended March 31,
1998 and 1997 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-12
Item 3: Quantitative and Qualitative Disclosures About Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSDTI HOLDINGS, INC.
DTI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED) AND JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
March 31, 1998 June 30,
ASSETS (Unaudited) 1997
CURRENT ASSETS:
Cash and cash equivalents $263,231,384 $ 4,366,906
Accounts receivable, less allowance for doubtful accounts
of $167,000 and $48,000 708,477 159,268
Prepaid and other current assets 34,767 23,764
------ ------
Total current assets 263,974,628 4,549,938
NETWORK AND EQUIPMENT - At cost less accumulated
depreciation of $2,620,640 and $1,235,640 60,824,950 34,000,634
DEFERRED FINANCING COSTS - Net of amortization of $106,110 10,390,287 -
DEFERRED TAX ASSET 3,234,331 1,214,331
OTHER ASSETS 43,665 84,233
------ ------
TOTAL $338,467,861 $ 39,849,136
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 4,555,642 $ 5,086,830
Deferred revenues - current portion 366,000 259,680
Taxes payable (other than income taxes) 2,115,358 923,104
--------- -------
Total current liabilities 7,037,000 6,269,614
DEFERRED REVENUES 14,037,528 9,420,224
SENIOR DISCOUNT NOTES - Net 268,856,985 -
----------- -----------
Total liabilities 289,931,513 15,689,838
----------- ----------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE CONVERTIBLE SERIES A PREFERRED
STOCK - Preferred stock, $.01 par value, 30,000 shares
authorized, -0- and 18,500 shares issued and outstanding - 28,889,165
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,
30,000 shares authorized, 30,000 and -0- issued and
outstanding 300 -
-1-
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 44,013,063 -
Common stock warrants 10,421,336 450,000
Accumulated deficit (6,198,351) (5,479,867)
---------- ----------
Total stockholders'equity (deficit) 48,536,348 (4,729,867)
---------- ----------
TOTAL $338,467,861 $ 39,849,136
============ ============
See notes to unaudited consolidated financial statements.
-2-
DTI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
TELECOMMUNICATION
SERVICES REVENUES:
Carrier services $963,729 $236,397 $1,707,914 $488,931
End user services 140,314 130,184 414,660 380,914
------- ------- ------- -------
Total revenues 1,104,043 366,581 2,122,574 869,845
--------- ------- --------- -------
OPERATING EXPENSES:
Telecommunication services 460,206 268,513 1,024,578 563,791
Selling, general and
administrative 994,689 378,193 2,437,825 845,684
Depreciation and amortization 555,050 207,989 1,385,750 521,049
------- ------- --------- -------
Total operating expenses 2,009,945 854,695 4,848,153 1,930,524
--------- ------- --------- ---------
Loss from operations (905,902) (488,114) (2,725,579) (1,060,679)
OTHER INCOME (EXPENSES):
Interest income 1,438,751 25,226 1,558,898 58,403
Interest expense (3,547,605) (56,208) (3,697,605) (152,937)
Loan commitment fees (150,000) - - (784,500)
Equity in earnings of joint venture - 16,796 - 37,436
------- ------ ------ ------
Loss before provision for
income tax benefit (3,164,756) (502,300) (4,864,286) (1,902,277)
INCOME TAX BENEFIT 1,340,000 124,000 2,020,000 1,042,000
--------- ------- --------- ---------
NET LOSS ($1,824,756) ($378,300) ($2,844,286) ($860,277)
=========== ========= =========== =========
See notes to unaudited consolidated financial statements.
-3-
DTI HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
DTI HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
Convertible Additional Common Total
Preferred Common Paid-In Stock Accumulated Stockholders'
Stock Stock Capital Warrants Deficit Equity (Deficit)
BALANCE, JULY 1, 1997 $ - $300,000 $ - $450,000 ($5,479,867) ($4,729,867)
Accretion of redeemable
convertible preferred stock
to redemption price - - - - (4,985,442) (4,985,442)
Reclassification of redeemable
convertible series A preferred
stock to convertible series A
preferred stock and reversal of
related accretion 300 - 44,283,033 - 6,841,274 51,124,607
Reclassification to additional
paid-in capital of charge to
accumulated deficit to effect the
1,000 for 1 stock split - - (269,970) - 269,970 -
Allocation of proceeds from
senior discount notes offering
to the related warrants - - - 9,971,336 - 9,971,336
Net loss - - - - (2,844,286) (2,844,286)
------ -------- --------- --------- --------- ----------
BALANCE, MARCH 31, 1998 $ 300 $300,000 $44,013,063 $10,421,336 ($6,198,351) $48,536,348
==== ======== =========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
-4-
DTI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,844,286) ($860,277)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation and amortization 1,491,860 521,049
Accretion of discount on senior discount notes 3,604,801 -
Deferred income taxes (2,020,000) (1,042,000)
Loan commitment fees related to common stock warrants - 450,000
Changes in assets and liabilities:
Accounts receivable (549,209) (1,491,397)
Prepaid and other current assets (11,003) 543,300
Other assets 40,568 (36,945)
Accounts payable (531,188) 1,872,548
Other liabilities 606,178
Taxes payable (other than income taxes) 1,192,254 543,000
Deferred revenues 4,723,624 3,589,343
--------- ---------
Net cash flows provided by operating activities 5,097,421 4,694,799
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in network and equipment (28,210,066) (10,518,316)
Change in restricted cash - 459,522
------- -------
Net cash used in investing activities (28,210,066) (10,058,794)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior discount notes
and attached warrants 275,223,520 -
Proceeds from issuance of redeemable convertible
preferred stock including cash from
contributed joint venture of $-0- and $2,253,045 17,250,000 5,464,313
Repurchase of common stock warrants granted to a customer - (2,700,000)
Deferred financing costs (10,496,397) -
Proceeds from notes payable - 8,000,000
Payment of notes payable - (450,000)
Proceeds from credit facility 3,000,000 -
Principal payments on credit facility (3,000,000) -
---------- ----------
Net cash provided by financing activities 281,977,123 10,314,313
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 258,864,478 4,950,318
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,366,906 817,391
--------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $263,231,384 $5,767,709
============ ==========
-5-
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH ACTIVITIES:
Consideration for issuance of redeemable
convertible preferred stock:
Outstanding principal of KLT Loan $ - $14,000,000
Accrued interest payable on KLT Loan - 794,062
Assets of contributed joint venture - 1,816,043
Liabilities assumed of contributed joint venture - 69,088
See notes to unaudited consolidated financial statements.
-6-
DTI HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions of Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
In the opinion of the management of DTI Holdings, Inc. and subsidiary (the
"Company" or "DTI") the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's financial
information for the interim periods presented and have been prepared in
accordance with generally accepted accounting principles. 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 year ended
June 30, 1997 included in the Company's Form S-4 Registration Statement,
as amended, originally filed with the Securities and Exchange Commission
on April 14, 1998 (see Note 6). Accordingly, footnote disclosures which
would substantially duplicate the disclosures in the audited financial
statements have been omitted.
2. CONTINGENCIES
Litigation - On June 20, 1995, the Company and its President were named as
defendants in a suit which the plaintiff alleges that (i) the plaintiff
entered into an oral contract with the defendants pursuant to which the
plaintiff was to receive a percentage of the Company's common stock, (ii)
the plaintiff provided services to the Company for which the plaintiff was
not and should be compensated, and (iii) the defendants misrepresented
certain facts to the plaintiff in order to induce him to loan money and
provide services to the defendants. Based on these allegations, the
plaintiff is suing for breach of contract and fraud and is seeking actual
monetary damages, punitive damages and a percentage of the common stock of
the Company. Management believes the plaintiff's claims are without merit
and intends to vigorously defend the claims. It is not possible to
determine what impact, if any, the outcome of this litigation might have
on the financial condition, results of operations or cash flows of the
Company at this time. The President has agreed personally to indemnify the
Company against any and all losses resulting from any judgments and awards
rendered against the Company in this litigation. However, no guarantee can
be made as to the ability to satisfy all such amounts. The President has
also agreed to indemnify the holder of redeemable convertible preferred
stock from such losses, and has pledged his stock ownership in the Company
to secure such obligations to the Company and such holder.
The Company is involved in a dispute with a customer related to delays in
providing telecommunication services to the customer. Management contends
that the delays resulted from the customer's inability to provide access
and does not believe that ultimate settlement of this dispute will have a
material effect on the Company's financial position, results of operations
or cash flows.
-7-
Construction Agreements - DTI's construction agreements are with its major
network construction contractor and equipment supplier. DTI's remaining
aggregate commitment for construction and equipment under these agreements
at March 31, 1998 is approximately $20,085,000.
3. NETWORK AND EQUIPMENT
Network and equipment consists of the following:
March 31, June 30,
1998 1997
Fiber optic cable plant $ 49,141,905 $ 28,498,465
Fiber optic terminal equipment 11,646,390 5,757,270
Fiber optic network buildings 2,050,973 757,680
Leasehold improvements 292,951 131,611
Furniture, office equipment and other 313,371 91,248
-------- ------
63,445,590 35,236,274
Less - accumulated depreciation 2,620,640 1,235,640
---------------- ----------------
$ 60,824,950 $ 34,000,634
=============== =============
At March 31, 1998 and June 30, 1997, fiber optic cable plant, fiber optic
terminal equipment and fiber optic network buildings include $19,581,920
and $19,027,585 of construction in progress, respectively, that was not in
service and, accordingly, has not been depreciated. Also, during the nine
months ended March 31, 1998 and the year ended June 30, 1997, $182,000 and
$562,750, respectively, of interest costs were capitalized.
4. FINANCING ARRANGEMENTS
Credit Facility - In January 1998, DTI entered into a $30.0 million bank
credit facility (the "Credit Facility") with certain commercial lending
institutions and Toronto Dominion ("Texas'), Inc., as administrative agent
for the lenders ("TD ("Texas")"), to fund its working capital requirements
until completion of the Company's offering of senior discount notes
discussed below. In January 1998, Digital Teleport had drawn $3.0 million
principal amount under the Credit Facility which was repaid with the net
proceeds of the issuance and sale by the Company of its senior discount
notes and warrants discussed below. The credit facility was then
cancelled.
Senior Discount Notes - On February 23, 1998, the Company completed the
issuance and sale of 506,000 units consisting of $506 million aggregate
principal amount at maturity of 12 1/2% Senior Discount Notes due 2008
(the "Notes") and warrants to purchase 3,926,560 shares of common stock,
for which the Company received proceeds, net of underwriting discounts and
expenses, of approximately $264.8 million. No cash payments of interest
are required under the Notes prior to September 1, 2003. Commencing at
such time, the Company will be required to make semi-annual interest
payments on the Notes.
5. EQUITY TRANSACTIONS
Stock Split - On February 17, 1998, the Company approved a 1,000-for-1
stock split in the form of a stock dividend of 999 shares of common stock
-8-
for each one share of common stock outstanding. Effective February 18,
1998, the Company's Articles of Incorporation were amended to increase the
number of authorized shares of common stock to 100,000,000 and the stock
dividend was issued to the Company's stockholders. All common share
information included in the accompanying financial statements has been
retroactively adjusted to give effect to the stock split. In order to
effect the 1,000-for-1 stock split on February 17, 1998, $269,970 was
initially charged to accumulated deficit. The Company recorded an entry in
the third quarter of fiscal 1998 to reclassify this amount from
accumulated deficit to additional paid-in capital recorded in conjunction
with the reclassification of Series A Preferred Stock on February 13,
1998, as discussed below.
Preferred Stock - On February 13, 1998, the Company amended its Articles
of Incorporation amending the terms of the Series A Preferred Stock such
that the Series A Preferred Stock is no longer mandatorily redeemable.
Accordingly, the Series A Preferred Stock has been reclassified and
reported within stockholders' equity.
6. SUBSEQUENT EVENTS
The Company filed a Registration Statement on Form S-4 relating to an
offer to exchange the $506 million privately placed 12 1/2% Senior
Discount Notes due 2008. The Registration Statement was originally filed
on April 14, 1998 but has not yet been declared effective.
* * * * * *
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
OVERVIEW
DTI Holdings, Inc. ("DTI") is a facilities-based provider of long-haul and local
telecommunications services primarily to inter-exchange carriers ("IXCs") and
other communications entities on a wholesale basis, as well as directly to
business and governmental end users. DTI intends to expand its network (the "DTI
network") outward from Missouri into an additional 13 states in the Midwest
region. The Company is preparing to offer local switched services and data
transmission services to targeted end-user customers in Missouri in mid-1998.
DTI intends to provide local switched service capacity to its carrier's carrier
customers on a wholesale basis as it deploys its switches throughout its
network.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
REVENUE
Total revenue increased 201.2%, from $367,000 in 1997 to $1.1 million in 1998
due to increased revenue from carriers' carrier and end-user services. Revenue
from carrier's carrier services increased 307.7% from $236,000 in 1997 to
$964,000 in 1998. This increase resulted principally from the completion of
additional network segments, as well as from adding additional traffic on the
existing DTI network. End user revenues increased 7.8%, from $130,000 in 1997 to
$140,000 in 1998. This increase was attributable to the completion and
activation of additional sites under a deferred revenue contract, which caused
additional deferred revenues to be recognized.
OPERATING EXPENSES
Operating expenses increased 135.2%, from $855,000 in 1997 to $2.0 million in
1998 due primarily to increases in telecommunications services expenses,
selling, general and administrative expenses and depreciation and amortization.
Telecommunications services expenses increased 71.4% from $268,000 in 1997 to
$460,000 in 1998 due to increased personnel costs to support the expansion of
the DTI network, as well as increased costs related to property taxes and other
costs in connection with leasing capacity to support customers in areas not yet
reached by the DTI network. Selling, general and administrative expenses
increased 163.0% from $378,000 in 1997 to $995,000 in 1998, due principally to
an increase in administrative and sales personnel and the expenses of supporting
these personnel. Depreciation and amortization increased 166.9%, from $208,000
-10-
in 1997 to $555,000 in 1998 due to higher amounts of plant and equipment being
in service in 1998 versus 1997. The Company expects that significant additional
amounts of plant and equipment will be placed in service throughout the balance
of fiscal 1998 and fiscal 1999. As a result, depreciation and amortization is
expected to increase significantly in the future.
INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income (expense) increased from net expense of $14,000 in
1997 to net expense of $2.3 million in 1998. Interest income increased from
$25,000 in 1997 to $1.4 million in 1998 due to the investment of the proceeds
from the Senior Discount Notes. Similarly, as a result of the debt offering,
interest expense increased from $56,000 in 1997 to $3.7 million in 1998.
INCOME TAXES
An income tax benefit of $1.3 million and $124,000 was recorded in the three
month periods ended March 31, 1998 and 1997, respectively, as management
believes it is more likely than not that it will generate taxable income
sufficient to realize the tax benefit associated with future deductible
temporary differences and net operating loss carryforwards prior to their
expiration.
NET LOSS
Net loss for the three months ended March 31, 1998 was $1.8 million compared to
$378,000 for the three months ended March 31, 1997.
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1997
REVENUE
Total revenue increased 144.0% from $870,000 in 1997 to $2.1 million in 1998 due
to increased revenue from carrier's carrier and end-user services. Revenue from
carrier's carrier services increased 249.3%, from $489,000 in 1997 to $1.7
million in 1998. This increase resulted principally from the completion of
additional network segments, as well as from adding traffic on the existing DTI
network. End-user revenues increased 8.9% from $381,000 in 1997 to $415,000 in
1998. This increase was attributable to the completion and activation of
additional sites under a deferred revenue contract, which caused additional
deferred revenues to be recognized.
OPERATING EXPENSES
Operating expenses increased 151.1% from $1.9 million in 1997 to $4.8 million in
1998, due primarily to increases in telecommunications services, selling,
general and administrative expenses and depreciation and amortization.
Telecommunication services expenses increased 81.7% from $564,000 in 1997 to
$1.0 million in 1998 due to increased personnel to support the expansion of the
DTI network, as well as increased costs related to property taxes and other
costs in connection with leasing capacity to support customers in areas not yet
reached by the DTI network. Selling, general and administrative expenses
increased 188.3%, from $846,000 in 1997 to $2.4 million in 1998, in order to
support the expansion of the DTI network, which includes an increase in
administrative and sales personnel and the related expenses of supporting these
personnel, as well as increased legal fees. Depreciation and amortization
increased 166.0%, from $521,000 in 1997 to $1.4 million in 1998 due to higher
amounts of plant and equipment being in service in 1998 versus 1997. The Company
-11-
expects that significant additional amounts of plant and equipment will be
placed in service throughout fiscal 1998 and fiscal 1999. As a result,
depreciation and amortization is expected to increase significantly.
INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income (expense) increased from a net expense of $842,000
in 1997 to net expense of $2.1 million in 1998. Interest income increased from
$58,000 in 1997 to $1.6 million in 1998 due to the investment of the proceeds
from the Senior Discount Notes. Similarly, as a result of the debt offering,
interest expense increased from $153,000 in 1997 to $3.7 million in 1998. Loan
commitment fees decreased from $785,000 in 1997 to $-0- in 1998. These fees
represented a one-time charge for a loan commitment which was not used.
INCOME TAXES
An income tax benefit of $2,020,000 and $1,042,000 was recorded in the nine
month periods ended March 31, 1998 and 1997, respectively, as management
believes it is more likely than not that it will generate taxable income
sufficient to realize the tax benefit associated with future deductible
temporary differences and net operating loss carryforwards prior to their
expiration.
NET LOSS
Net loss for the nine months ended March 31, 1998 was $2.8 million compared to
$860,000 for the nine months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $263.2 million of cash and cash
equivalents. This balance was provided primarily through the issuance and sale
of 506,000 units consisting of $506.0 million aggregate principal amount at
maturity of 12 1/2% Senior Discount Notes due 2008 (the "Notes") and warrants to
purchase 3,926,560 shares of common stock, for which the Company received
proceeds, net of underwriting discounts and expenses, of approximately $264.8
million.
The net cash provided by operating activities for the nine months ended March
31, 1997 and 1998 totaled $4.7 million and $5.1 million, respectively. During
the nine months ended March 31, 1997, cash provided by operating activities came
principally from increases in accounts payable of $1.2 million, deferred
revenues of $3.6 million and taxes payable (other than income taxes) of
$606,000. The increase in accounts payable in fiscal 1997 reflects the increase
in liabilities under DTI's supply contracts in connection with the buildout of
the DTI network. Deferred revenues in fiscal 1997 principally reflect advance
payments received from carrier customers under agreements for the lease of both
dark fiber and wholesale network capacity. During the nine months ended March
31, 1998, net cash provided by operating activities resulted principally from an
increase in taxes payable (other than income taxes) of $1.9 million and an
increase in deferred revenues of $4.7 million relating to an advance payment
received under wholesale network capacity agreements and end-user agreements. As
of March 31, 1998, advance payments of approximately $20.2 million will become
due over the next five years under existing agreements with certain major
customers upon DTI's meeting its obligations under certain agreements, which
require the Company to provide telecommunications services or dark fiber
capacity.
-12-
The Company's investing activities used cash of $10.1 million for the nine
months ended March 31, 1997 and $28.2 million for the nine months ended March
31, 1998. During the nine months ended March 31, 1997, the Company invested
$10.5 million in network and equipment and reduced restricted cash by $460,000
to repay borrowings under DTI's former credit facility. During the nine months
ended March 31, 1998, the Company invested $28.2 million in network and
equipment.
Cash provided by financing activities was $10.3 million for the nine months
ended March 31, 1997 and $282.0 million for the nine months ended March 31,
1998. During the nine months ended March 31, 1997, the Company borrowed $8.0
million under a loan agreement with the holder of its preferred stock, bringing
the total borrowings under that agreement to $14.0 million. These total
borrowings were converted into Series A Preferred Stock, and additional cash
proceeds in the amount of $5.0 million were received pursuant to a stock
subscription agreement. Cash was used to make principal payments on a bank loan
of $450,000 and to repurchase common stock warrants granted to a customer in the
amount of $2.7 million. During the nine months ended March 31, 1998, the Company
received $17.3 million in proceeds from the issuance of Series A Preferred Stock
and $275.2 million from the issuance of the Notes. Deferred financing costs
related to the debt offering totaled $10.5 million. Prior to the Notes offering
the Company executed a credit facility under which the Company borrowed $3.0
million. A portion of the proceeds of the Notes offering were used to repay the
principal balance on the credit facility.
The proceeds from the Notes offering are expected to provide sufficient
liquidity to meet the Company's operating and capital requirements through
approximately the next twelve months. Subsequent to such date, the Company's
operating and capital requirements are expected to be funded, in large part, out
of advance payments under dark fiber leases and wholesale network capacity
agreements, borrowings under bank credit facilities, additional debt or equity
financings, and available cash flow from operations. The Company is in various
stages of discussions with potential customers for leases of dark fiber and
wholesale network capacity agreements. There can be no assurance, however, that
the Company will continue to obtain advance payments from customers prior to
commencing construction, that it will be able to obtain financing under any
credit facility or that other sources of capital will be available on a timely
basis or on terms that are acceptable to the Company and within the restrictions
under the Company's existing financing arrangements, or at all. If the Company
fails to obtain the capital required to complete the DTI network build-out, the
Company could modify, defer or abandon building certain portions of the DTI
network. The failure of the Company, however, to raise substantial capital
required to complete the DTI network construction could have a material adverse
effect on the Company. The actual amount and timing of DTI's capital
requirements may differ materially from those estimates depending on demand for
the Company's services, and the Company's ability to implement its current
business strategy as a result of regulatory, technological and competitive
developments (including market developments and new opportunities) in the
telecommunications industry.
The Company estimates that total capital expenditures, including the total cost
to construct and activate the DTI network will be approximately $526.4 million.
Of this amount, the Company has already expended approximately $63.3 million as
of March 31, 1998. The Company anticipates total capital expenditures of
approximately $30.0 million in the fourth quarter of fiscal 1998 and $210.0
million in fiscal 1999.
The Notes contain financial and operating covenants and restrictions on the
ability of the Company to incur indebtedness, make investments and take certain
other corporate actions.
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INFLATION
The Company does not believe that inflation has had a significant impact on the
Company's consolidated results of operations.
YEAR 2000
While the Company believes that its existing software applications are year 2000
compliant, there can be no assurance until the year 2000 that all of the
Company's systems then in place will function adequately . Further, if the
software applications of others on whose services the Company depends are not
year 2000 compliant, any loss of such services could have a material adverse
effect on the Company's business, financial condition and results of operations.
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. Factors that
could cause such materially different events or results include, but are not
limited to, the Company's failure to obtain substantial amounts of additional
capital and financing at reasonable costs and on satisfactory terms and
conditions, the Company's inability to manage effectively and cost-efficiently
the construction and expansion of the DTI network or to achieve substantial
traffic volumes on the DTI network, a continued increase in competition and
changes in general economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
On June 20, 1995, the Company and its President were named as defendants
in a suit which the plaintiff alleges that (i) the plaintiff entered into
an oral contract with the defendants pursuant to which the plaintiff was
to receive a percentage of the Company's common stock, (ii) the plaintiff
provided services to the Company for which the plaintiff was not and
should be compensated, and (iii) the defendants misrepresented certain
facts to the plaintiff in order to induce him to loan money and provide
services to the defendants. Based on these allegations, the plaintiff is
suing for breach of contract and fraud and is seeking actual monetary
damages, punitive damages and a percentage of the common stock of the
Company. Management believes the plaintiff's claims are without merit and
intends to vigorously defend the claims. It is not possible to determine
what impact, if any, the outcome of this litigation might have on the
financial condition, results of operations or cash flows of the Company at
this time. The President has agreed personally to indemnify the Company
against any and all losses resulting from any judgments and awards
rendered against the Company in this litigation. However, no guarantee can
be made as to the ability to satisfy all such amounts. The President has
also agreed to indemnify the holder of redeemable convertible preferred
stock from such losses, and has pledged his stock ownership in the Company
to secure such obligations to the Company and such holder.
Item 2. Changes in Securities and Use of Proceeds:
On February 23, 1998, the Company issued and sold 506,000 units consisting
of $506 million aggregate principal amount at maturity of 12 1/2% Senior
Discount Notes due 2008 and warrants to purchase an aggregate of 3,926,560
shares of Common Stock to Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and TD Securities (USA) Inc. (together, the
"Initial Purchasers"). The units were sold by the Company in reliance upon
the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"). The units were resold by
the Initial Purchasers to certain "qualified institutional buyers" (as
such term is defined under Rule 144A under the Securities Act) and to
certain purchasers under Regulation S. The Company received net proceeds,
after deducting the Initial Purchasers' discount and offering expenses, of
approximately $264.8 million. Each unit includes a warrant to purchase
1.552 shares of Common Stock at an exercise price of $0.01 per share of
Common Stock issuable upon exercise of the warrant. Each warrant may be
exercised on or after the first day after the "Separability Date" (as
defined below) that any of the following has occurred: (i) immediately
prior to a Change of Control (as such term is defined in the Indenture
pursuant to which the Notes were issued (the "Indenture")); (ii)(a) the
180th day (or such earlier date as determined by the Company in its sole
discretion) following the consummation of an Initial Public Equity
Offering (as such term is defined in the Indenture) or (b) upon the
consummation of an Initial Public Equity Offering, but only in respect of
warrants, if any, required to be exercised to permit the holders thereof
to sell the underlying warrant shares pursuant to their registration
rights pertaining to such shares; (iii) a class of equity securities of
the Company is listed on a national securities exchange or authorized for
quotation on the Nasdaq National Market or is otherwise subject to
registration under the Securities Exchange Act of 1934, as amended; or
(iv) September 1, 1999. As used herein, the term "Separability Date" means
the earliest of the following to occur: (1) September 1, 1998; (2) the
date on which a registration statement with respect to a registered
exchange offer for the Notes is declared effective under the Securities
Act; (3) the occurrence of any of the events described in clauses (i)
through (iv) above; (4) the occurrence of an Event of Default (as such
term is defined in the Indenture); or (5) such earlier date as determined
by Merrill Lynch in its sole discretion.
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Item 3. Defaults Upon Senior Securities: Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders: Not applicable
Item 5. Other Information: Not applicable
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Second Restated Articles of Incorporation of the Registrant.
3.2 Second Restated Bylaws of the Registrant.
4.1 Indenture by and between the Registrant and The Bank of New York, as
Trustee, for the Registrant's 12 1/2% Senior Discount Note due 2008,
dated February 23, 1998 (the "Indenture") (including form of the
Company's 12 1/2% Senior Discount Note due 2008 and 12 1/2% Series B
Senior Discount Note due 2008) incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-4 (File
No. 333-50049) (the "Form S-4").
4.2 Note Registration Rights Agreement by and among the Registrant and the
Initial Purchasers named therein, dated as of February 23, 1998
incorporated herein by reference to Exhibit 4.2 to the Form S-4.
4.3 Warrant Agreement by and between the Registrant and The Bank of New
York, as Warrant Agent, dated February 23, 1998 incorporated herein by
reference to Exhibit 4.3 to the Form S-4.
4.4 Warrant Registration Rights Agreement by and among the Registrant and
the Initial Purchases named therein, dated February 23, 1998
incorporated herein by reference to Exhibit 4.4 to the Form S-4.
4.5 Digital Teleport, Inc. Shareholders' Agreement between Richard D.
Weinstein and KLT Telecom, Inc., dated March 12, 1997 incorporated
herein by reference to Exhibit 4.5 to the Form S-4.
4.6 Amendment No. 1 to the Digital Teleport, Inc. Shareholders' Agreement,
dated November 7, 1997 incorporated herein by reference to Exhibit 4.6
to the Form S-4.
4.7 Amendment No. 2 to the Digital Teleport, Inc. Shareholders' Agreement,
dated December 18, 1997 incorporated herein by reference to Exhibit
4.7 to the Form S-4.
4.8 Amendment No. 3 to the Digital Teleport, Inc. Shareholders' Agreement,
dated February 12, 1998 incorporated herein by reference to Exhibit
4.8 to the Form S-4.
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4.9 Stock Pledge Agreement between Richard D. Weinstein and KLT Telecom,
Inc., dated March 12, 1997, securing the performance of Digital
Teleport, Inc.'s obligations under that certain Stock Purchase
Agreement dated as of December 31, 1996, as amended incorporated
herein by reference to Exhibit 4.9 to the Form S-4.
4.10 Amendment No. 1 to Stock Pledge Agreement between Richard D. Weinstein
and KLT Telecom, Inc., dated December 18, 1997 incorporated herein by
reference to Exhibit 4.10 to the Form S-4.
4.11 Amendment No. 2 to Stock Pledge Agreement between Richard D. Weinstein
and KLT Telecom, Inc., dated February 12, 1998 incorporated herein by
reference to Exhibit 4.11 to the Form S-4.
4.12 Subordination Agreement, by and among the Registrant, Digital
Teleport, Inc., KLT Telecom, Inc. and Richard D. Weinstein, dated
February 12, 1998 incorporated herein by reference to Exhibit 4.12 to
the Form S-4.
10.1 Employment Agreement between Digital Teleport, Inc. and Richard D.
Weinstein, dated December 31, 1996 incorporated herein by reference to
Exhibit 10.1 to the Form S-4.
10.2 Director Indemnification Agreement between the Registrant and Richard
D. Weinstein, dated December 23, 1997 incorporated herein by reference
to Exhibit 10.2 to the Form S-4.
10.3 Director Indemnification Agreement between the Registrant and Jerome
W. Sheehy, dated December 23, 1997 incorporated herein by reference to
Exhibit 10.3 to the Form S-4.
10.4 Director Indemnification Agreement between the Registrant and Bernard
J. Beaudoin, dated December 23, 1997 incorporated herein by reference
to Exhibit 10.4 to the Form S-4.
10.5 Director Indemnification Agreement between the Registrant and Ronald
G. Wasson, dated December 23, 1997 incorporated herein by reference to
Exhibit 10.5 to the Form S-4.
10.6 Director Indemnification Agreement between the Registrant and James V.
O'Donnell, dated December 23, 1997 incorporated herein by reference to
Exhibit 10.6 to the Form S-4.
10.7 Director Indemnification Agreement between the Registrant and Kenneth
V. Hager, dated December 18, 1997 incorporated herein by reference to
Exhibit 10.7 to the Form S-4.
10.8 1997 Long-Term Incentive Award Plan of the Registrant incorporated
herein by reference to Exhibit 10.8 to the Form S-4.
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10.9 Employment Agreement between Digital Teleport, Inc. and Robert F.
McCormick, dated September 9, 1997 incorporated herein by reference to
Exhibit 10.9 to the Form S-4.
10.10Amendment No. 1 to the Employment Agreement between Digital Teleport,
Inc. and Robert F. McCormick, dated January 28, 1998 incorporated
herein by reference to Exhibit 10.10 to the Form S-4.
10.11Amendment No. 2 to the Employment Agreement between Digital Teleport,
Inc. and Robert F. McCormick, dated January 28, 1998 incorporated
herein by reference to Exhibit 10.11 to the Form S-4.
10.12(++) Product Attachment - Carrier Networks Products Agreement between
Digital Teleport, Inc. and Northern Telecom, Inc., effective October
23, 1997 incorporated herein by reference to Exhibit 10.12 to the Form
S-4.
10.13Agreement re: Fiber Optic Cable on Freeways in Missouri, between the
Missouri Highway and Transportation Commission and Digital Teleport,
Inc., effective July 29, 1994 incorporated herein by reference to
Exhibit 10.13 to the Form S-4.
10.14First Amendment to agreement re: Fiber Optic Cable on Freeways in
Missouri, between the Missouri Highway and Transportation Commission
and Digital Teleport, Inc., effective September 24, 1994 incorporated
herein by reference to Exhibit 10.14 to the Form S-4.
10.15Second Amendment to Agreement re: Fiber Optic Cable on Freeways in
Missouri, between the Missouri Highway and Transportation Commission
and Digital Teleport, Inc., effective November 7, 1994 incorporate
herein by reference to Exhibit 10.15 to Form S-4.
10.16Third Amendment to Agreement re: Fiber Optic Cable on Freeways in
Missouri, between the Missouri Highway and Transportation Commission
and Digital Teleport, Inc., effective October 9, 1996 incorporated
herein by reference to Exhibit 10.16 to the Form S-4.
10.17Contract Extension to Agreement re: Fiber Optic Cable on Freeways in
Missouri, between the Missouri Department of Transportation (as
successor to the Missouri Highway and Transportation Commission) and
Digital Teleport, Inc., dated February 7, 1997 incorporated herein by
reference to Exhibit 10.17 to the Form S-4.
10.18Fiber Optic Cable Agreement, between the Arkansas State Highway and
Transportation Department and Digital Teleport, Inc. dated May 12,
1997 incorporated herein by reference to Exhibit 10.18 to the Form
S-4.
10.19Commercial Lease between Richard D. Weinstein and Digital Teleport,
Inc., dated December 31, 1996 incorporated herein by reference to
Exhibit 10.27 to the Form S-4.
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10.20Commercial Lease Extension Agreement between Richard D. Weinstein and
Digital Teleport, Inc., dated December 31, 1997 incorporated herein by
reference to Exhibit 10.28 to the Form S-4.
10.21Purchasing Agreement by and between the Registrant and the Initial
Purchasers named therein, dated as of February 13, 1998 incorporated
herein by reference to Exhibit 10.29 to the Form S-4.
27.1 * Financial Data Schedule.
(++) Confidential treatment has been requested with respect to certain
portions of this Exhibit.
* To be filed by amendment
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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: May 14 , 1998 /S/Richard D. Weinstein
----------------------------- -----------------------
Richard D. Weinstein
President and Chief
Executive Officer and Secretary
Date: May 14 , 1998 /S/Robert F. McCormick
----------------------------- ----------------------
Robert F. McCormick
Chief Financial Officer